-----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, IgVOIIXW+3zbDMktAnayI6gE1NT3vYsqI3W5gqx0hDlREspvz18GLbjjGUDtBUl5 IdAOFYk4omdQnKgWpTxWDA== 0001047469-97-001400.txt : 19971023 0001047469-97-001400.hdr.sgml : 19971023 ACCESSION NUMBER: 0001047469-97-001400 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971022 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYBRID NETWORKS INC CENTRAL INDEX KEY: 0000900091 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770250931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-36001 FILM NUMBER: 97699161 BUSINESS ADDRESS: STREET 1: 10161 BUBB RD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087253250 MAIL ADDRESS: STREET 1: 10161 BUBB RD CITY: CUPERTINO STATE: CA ZIP: 95014 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997 REGISTRATION NO. 333-36001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- HYBRID NETWORKS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3661 77-02520931 (State or other jurisdiction (Primary standard industrial (I.R.S. employer of classification code number) identification incorporation or organization) no.)
-------------------------- 10161 BUBB ROAD CUPERTINO, CA 95014 (408) 725-3250 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------------- CARL S. LEDBETTER PRESIDENT AND CHIEF EXECUTIVE OFFICER 10161 BUBB ROAD CUPERTINO, CA 95014 (408) 725-3250 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: DENNIS R. DEBROECK, ESQ. PATRICK J. SCHULTHEIS, ESQ. ROBERT A. FREEDMAN, ESQ. ROBERT G. DAY, ESQ. TYLER R. COZZENS, ESQ. MATTHEW MACKENZIE, ESQ. FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, TWO PALO ALTO SQUARE PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306 650 PAGE MILL ROAD (650) 494-0600 PALO ALTO, CA 94304 (650) 493-9300 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ______ -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 22, 1997 2,700,000 SHARES [LOGO] COMMON STOCK ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY HYBRID NETWORKS, INC. ("HYBRID" OR THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $12.00 AND $14.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK OF THE COMPANY HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HYBR" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (1) COMPANY (2) - -------------------------------------------------------------------------------- PER SHARE.......................... $ $ $ TOTAL (3).......................... $ $ $ - --------------------------------------------------------------------------------
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE UNDERWRITERS AND OTHER MATTERS. (2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $850,000. (3) CERTAIN OF THE COMPANY'S STOCKHOLDERS (THE "SELLING STOCKHOLDERS") HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 405,000 ADDITIONAL SHARES OF COMMON STOCK, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE PROCEEDS TO SELLING STOCKHOLDERS WILL TOTAL $ . SEE "UNDERWRITING." THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM, AND SUBJECT TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT , 1997. ------------------- NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES , 1997 FRONT OF GATEFOLD [PHOTO OF HYBRID MODEM] Modems SERIES 2000 A FULLY INTEGRATED BROADBAND ACCESS SYSTEM [PHOTO OF HYBRID HEADEND SYSTEM] Headend System INSIDE GATEFOLD HIGH SPEED INTERNET AND INTRANET ACCESS OVER BROADBAND NETWORKS [DIAGRAM OF CORPORATE CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] CORPORATE - Secure high speed Internet and intranet access for corporate telecommuters and remote offices - Allows corporations to expand their intranet using broadband networks - Multi-user modem supports up to 20 PCs in a networked environment - Corporate MIS manages remote workers from behind the firewall for privacy [PHOTO OF COMPUTER SCREEN, KEYBOARD AND HYBRID MODEM] [DIAGRAM OF CABLE SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] CABLE [DIAGRAM OF WIRELESS SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] WIRELESS - Downstream speeds up to 10Mbps - Flexible system that operates well with most cable, wireless, and telephone networks - Proprietary mixed-media technology enhances performance of asymmetric networks - Modular architecture allows separate upstream and downstream paths - Multi-user modem supports up to 20 PCs - Encryption available ------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." CyberManager-Registered Trademark- and CyberMaster-Registered Trademark- are registered trademarks of the Company. Hybrid Networks-TM- and CyberCommuter-TM- are trademarks of the Company. This Prospectus also includes trade names and trademarks of other companies. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE OUTCOME OF THE EVENTS DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Hybrid Networks, Inc. ("Hybrid" or the "Company") is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. The Company is currently generating, and expects to continue to generate in the near term, substantially all of its net sales from its Series 2000 product line and related support and networking services. Hybrid's Series 2000 product line consists of secure headend routers, cable or wireless modems and management software for use with either cable TV or wireless transmission facilities. The Series 2000 system also features a router to provide corporate telecommuters and others in remote locations secure access to their files on corporate intranets. The Series 2000 is capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, providing system operators with flexible, scalable and upgradeable solutions that interoperate with a range of third party networking products allowing system operators to offer cost-effective broadband access to their subscribers. The Internet has become an increasingly important source of information for businesses and consumers. The Internet's importance results from a variety of factors, including increased email usage, the emergence of the World Wide Web and the proliferation of multimedia content, such as graphics, images, video and audio, which can be accessed online. In particular, businesses are demanding high speed access to the Internet and their corporate intranets for their employees, including telecommuters. In 1997, an American Management Association International and Tierney & Partners survey indicated that 27% of businesses surveyed reported moderate to heavy Internet usage. This number is expected to increase to 64% by 1999. In addition, the 1997 American Internet Users Survey, conducted by FIND/SVP, estimated that the number of telecommuters in the United States has grown to 11 million. According to a November 1996 Jupiter Communications report, the consumer market is also growing rapidly. Jupiter Communications projects the number of houses in the United States with Internet access will grow from 14.7 million in 1996 to 36.0 million by 2000 (a compound annual growth rate of 34.8%). Demand for bandwidth-intensive content, combined with the inherent technical difficulties of delivering large amounts of data over existing copper wire telephone infrastructure, has resulted in slow response times and increasing frustration for many Internet and corporate intranet users. While cable system operators and broadband wireless system operators seek alternatives to provide high speed, cost-effective broadband access, currently these operators do not possess the enabling technology over the last mile to provide such access to their end-users. In addition, Internet service providers ("ISPs"), which have traditionally provided Internet access, will face increasing pressure to provide improved broadband access to their subscribers. Hybrid's objective is to be a leader in providing cost-effective, high speed Internet and intranet access solutions to cable system operators, broadband wireless system operators, ISPs and other businesses. Hybrid markets and sells its products through its direct sales force and a network of original equipment manufacturers ("OEMs"), value added resellers ("VARs") and distributors. The Series 2000 product line allows cable and wireless operators to conserve scarce bandwidth and to utilize a variety of data return paths, including the public switched telephone network. The Series 2000 product line enables cable system operators to offer Internet access via either one-way or two-way cable systems, thus minimizing the operators' capital investment and time-to-market pressures. The Series 2000 also facilitates the entrance of broadband wireless system operators into the high speed Internet access market. The Series 2000 has been designed to utilize an array of wireless frequencies, ranging from UHF to MMDS frequencies, and to minimize commonly experienced interference problems. Hybrid was incorporated in Delaware in June 1990. The Company's principal executive offices are located at 10161 Bubb Road, Cupertino, California 95014-4167. The Company's telephone number is (408) 725-3250. 3 THE OFFERING Common Stock offered by the Company............. 2,700,000 shares Common Stock to be outstanding after this offering...................................... 9,973,311 shares(1) Use of proceeds................................. For the repayment of approximately $6.9 million of debt, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... HYBR
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ----------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 ---------- ----------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Net sales.............................................. $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Loss from operations................................... (2,826) (5,131) (8,744) (6,256) (9,886) Net loss............................................... (2,897) (5,269) (8,515) (6,132) (10,082) Pro forma net loss per share(2)........................ $ (1.24) $ (1.33) Pro forma number of shares used in per share calculation(2)....................................... 6,873 7,607
SEPTEMBER 30, 1997 --------------------------- ACTUAL AS ADJUSTED(4) ----------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................................... $ 5,314 $ 30,225 Working capital...................................................................... 3,565 35,108 Total assets......................................................................... 16,190 41,101 Long-term debt(3).................................................................... 6,223 6,223 Total stockholders' equity (deficit)................................................. (3) 31,540
- ------------------------------ (1) Based on shares outstanding as of September 30, 1997. Does not include (i) 1,974,242 shares of Common Stock issuable upon exercise of stock options outstanding as of September 30, 1997, at a weighted average exercise price of $2.72 per share, (ii) 2,046,213 shares of Common Stock available for future grant or issuance as of September 30, 1997 under the Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan, Executive Officer Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of Common Stock issuable upon the exercise of warrants outstanding as of September 30, 1997 at a weighted average exercise price of $6.38 per share, (iv) 513,423 shares of Common Stock issuable as of September 30, 1997 upon the conversion of a debenture with an outstanding aggregate principal amount of $5.5 million (the "$5.5 Million Debenture") or (v) a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share issued in October 1997 in connection with obtaining a credit facility for $4.0 million (the "Credit Facility"). See "Capitalization," "Management--Director Compensation," "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of the pro forma number of shares used to compute pro forma net loss per share. (3) Includes the $5.5 Million Debenture, which is convertible into an aggregate of 513,423 shares of Common Stock at the option of the holder at any time and which automatically converts if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least $166.5 million divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the $5.5 Million Debenture) prior to this offering (the "Minimum Price") and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. See Note 6 of Notes to Financial Statements. (4) Adjusted to reflect (i) the sale and issuance of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses and the application of the estimated proceeds therefrom and (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering. See "Use of Proceeds" and "Capitalization." ------------------------------ EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE COMPANY INTO SHARES OF COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, (II) REFLECTS A 1-FOR-2.7 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND (IV) ASSUMES REPAYMENT OF APPROXIMATELY $6.9 MILLION OF SUBORDINATED NOTES (THE "SUBORDINATED NOTES") IMMEDIATELY FOLLOWING THE CLOSING OF THIS OFFERING AND THE ISSUANCE OF WARRANTS FOR THE PURCHASE OF 252,381 SHARES OF COMMON STOCK IN CONNECTION THEREWITH. 4 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OF THE COMPANY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. LIMITED OPERATING HISTORY; HISTORY OF LOSSES The Company was organized in 1990 and has experienced operating losses each year since that time. As of September 30, 1997, the Company had an accumulated deficit of approximately $27.4 million. Because the Company and the market for broadband access through cable modems is still in an emerging stage, there can be no assurance that the Company will ever achieve profitability on a quarterly or an annual basis or will sustain profitability once achieved. The Company began shipment of its first products, the Series 1000 product line in 1994 and sold only minimal quantities before replacing them with its Series 2000 product line, which was first shipped in October 1996. The revenue and profit potential of the Company's business and the industry is unproven, and the Company's limited operating history makes its future operating results difficult to predict. The Company believes that its growth and future success will be substantially dependent upon cable system operators, broadband wireless system operators and ISPs adopting its technologies, purchasing its products and selling its client modems to cable, wireless and ISP subscribers. The Company has had limited experience selling its products to cable system operators, broadband wireless system operators, ISPs and other businesses, and there are many impediments to its being able to do so. See "--Inexperience in Emerging Market." The market for the Company's products has only recently begun to develop, is rapidly changing and is characterized by an increasing number of competitors and competing technologies. Certain competitors of the Company currently offer more price competitive products. In the event that the Company's current or future competitors release new products or technologies with more advanced features, better performance or lower prices than the Company's current and future products, demand for the Company's products would decline. See "--Competition." Failure of the Company's products to achieve market acceptance could have a material adverse effect on the Company's business, operating results and financial condition. Although the Company has experienced significant growth in net sales in recent periods, the Company does not believe that this growth rate is sustainable or indicative of future operating results. In addition, the Company has had negative gross margins in past periods, and there can be no assurance that any continued growth in net sales will result in positive gross profits or operating profits. Future operating results will depend on many factors, including the growth of the cable and wireless modem system markets, demand for the Series 2000 and future product lines, purchasing decisions by cable and wireless companies and their subscribers, the level of product and price competition, market acceptance of competing technologies to deliver high speed Internet access, evolving industry standards, the ability of the Company to develop and market new products and control costs, general economic conditions and other factors. The Company believes that it will continue to experience net losses for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING DECLINE OF AVERAGE SELLING PRICES The Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. Historically, the Company's quarterly net sales 5 have been unpredictable due to a number of factors. Factors that have influenced and will continue to influence the Company's results of operations in a particular period include: the size and timing of customer orders and subsequent shipments, particularly with respect to the Company's headend equipment; customer order deferrals in anticipation of new products or technologies; timing of product introductions or enhancements by the Company or its competitors; market acceptance of new products; technological changes in the cable, wireless and telecommunications industries; competitive pricing pressures; the effects of extended payment terms, promotional pricing, service, marketing or other terms offered to customers; accuracy of customer forecasts of end-user demand; changes in the Company's operating expenses; personnel changes; quality control of products sold; regulatory changes; customer's capital spending; delays of orders by customers; customers' delay in or failure to pay accounts receivable; and general economic conditions. In addition, the inability to obtain components from suppliers or manufacturers has adversely affected the Company's operating results in the past and may materially adversely affect the Company's operating results in the future. For example, in the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp Corporation, its primary modem manufacturer, because of technical delays in product integration. As a result, the Company was unable to fill all customer orders for the second quarter. While such problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future with respect to Sharp or any other supplier or manufacturer. The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require delivery of products within 30 days, thus a substantial majority of the Company's net sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders, and net sales for any future quarter are difficult to predict. Further, sales are generally made pursuant to purchase orders, which can be rescheduled, reduced or cancelled with little or no penalty. Historically, a substantial majority of the Company's net sales in a given quarter have been recorded in the third month of the quarter, with a concentration of such net sales in the last two weeks of the quarter. Because of the relatively large dollar size of the Company's typical transaction, any delay in the closing of a transaction can have a significant impact on the Company's operating results for a particular period. See "--Lengthy Sales Cycle." Historically, average selling prices ("ASPs") in the cable and wireless systems industry have decreased over the life of individual products and technologies. In the past, the Company has experienced decreases in unit ASPs of each of its products. The Company anticipates that unit ASPs of its products will continue to decrease, which would cause continuing downward pressure on the gross margins for these products. The Company's gross margins are also impacted by the sales mix of points of presence headend equipment ("PoPs" or "headends") and modems. The Company's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than the Company's headends. Due to current customer demand, the Company anticipates that the sales mix of modems will continue to be weighted toward lower-margin single-user modems in the foreseeable future. See "--Need to Reduce Cost of Client Modems" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LENGTHY SALES CYCLE The sale of the Company's products typically involves a significant technical evaluation and commitment of capital and other resources, with the delays frequently associated with customers' internal procedures to approve large capital expenditures, to engineer deployment of new technologies within their networks and to test and accept new technologies that affect key operations. For these and other reasons, the sales cycle associated with the Company's products is typically lengthy, generally lasting three to nine months and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond the Company's control. Because of the lengthy sales cycle and the large size of customers' orders, if orders forecasted for a specific customer for a particular quarter are 6 not realized in that quarter, the Company's operating results for that quarter could be materially adversely affected. See "--Fluctuations in Quarterly Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE The market for high speed Internet access products is characterized by rapidly changing technologies and short product life cycles. Prior to October 1996, substantially all of the Company's product sales were attributable to its Series 1000 product line. In October 1996, the Company introduced its Series 2000 product line (which replaced the Series 1000 product lines). The Company is currently generating, and expects to continue to generate in the near term, substantially all of its net sales from its Series 2000 product line and related support and networking services. To date, substantially all products sold have been for telephone return based systems and have involved single-user modems. Since the Series 2000 products have been subject to only limited single-user testing, the reliability, performance and market acceptance of the Company's products are uncertain, and there is increased risk that the products will be affected by problems beyond those that are generally associated with new products. The failure of the current generation of products to perform acceptably in certain beta test situations has caused the Company to make engineering changes to such products, and the Company continues to modify the designs of its products in an attempt to increase their reliability and performance. There can be no assurance that the Company's engineering and product design efforts will be successful. The Company's future success will depend in part upon its ability to develop, introduce and market new products or enhancements to existing products in a timely manner and to respond to competitive pressures, changing industry standards or technological advances. For example, the Company is currently developing products for two-way cable transmission using QPSK technology which the Company believes its customers will require. In addition, the Company is developing products for two-way broadband wireless transmission. There can be no assurance that the Company will successfully develop or introduce new products, or that any new products will achieve market acceptance. Any failure to release new products or to fix, upgrade or redesign existing products on a timely basis could have a material adverse effect on the Company's business, operating results and financial condition. In addition, as the Company introduces new products that cause existing products to become obsolete, the Company could experience inventory writeoffs, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Products, Technology and Services" and "Business--Research and Development." INEXPERIENCE IN EMERGING MARKET Cable system operators, broadband wireless system operators, distributors and other customers may prefer to purchase products from larger, more established manufacturing companies, including certain of the Company's competitors, that can demonstrate the capability to supply large volumes of products on short notice. In addition, many cable system operators, broadband wireless system operators and other customers may be reluctant to adopt technologies that have not gained wide acceptance among their industry peers. Certain competitors of the Company have already established relationships in the market, further limiting the Company's ability to sell products to such potential customers. While the Company has sold products to certain cable system operators, broadband wireless system operators and other customers, most of these sales are not based on long-term contracts and such customers may terminate their relationships with the Company at any time. Further, the Company's contracts generally do not contain significant minimum purchase requirements. In addition, in order to address the needs and competitive factors facing the broadband access market sales the Company has and in the future may need to offer extended payment, pricing, service, marketing or other promotional terms which could have a material adverse effect on the Company's business, operating results and financial condition. If the Company is unable to market and sell its products to a significant number of cable system operators, broadband wireless system operators and other customers, or if such entities should cease doing business with the Company, the Company's business, operating results and financial condition could be materially adversely affected. See "Business--Customers." 7 LIMITED PENETRATION OF TWO-WAY CABLE; DEPENDENCE ON CABLE OPERATOR INSTALLATIONS Although wired cable systems pass a significant percentage of U.S. households, very few of those households are currently served by cable plants that support two-way data access. Further, a limited number of businesses, a major target market for the Company, currently have cable access. To support upstream data on existing hybrid fiber coax ("HFC") cable plants, a cable operator must install two-way amplifiers in the cable network to use the portion of the cable spectrum allocated for upstream use. There can be no assurance that cable system operators will choose to upgrade existing cable systems or provide new cable systems with two-way capability. In particular, certain large cable system operators have announced their intention to slow or halt plans to upgrade existing cable systems. Adding upstream capabilities to new or existing cable systems is expensive and generally requires portions of existing systems to be unavailable during the installation process. Cable system operators may decide to wait for the next generation of wired infrastructure, such as optical fiber, before deciding whether to provide two-way communication. The Federal Communications Commission ("FCC") has required cable system operators to dedicate the frequency spectrum from 5 MHz to 42 MHz for upstream transmissions, but because this portion of spectrum is small in comparison to the downstream portion, it is more susceptible to ingress noise and other impairments and it can support a more limited bandwidth. Due to a scarcity of channels, cable system operators have been and may continue to be reluctant to dedicate a portion of their frequency spectrum to new uses such as those for which the Company's products are designed. Consequently, the Company expects that upstream data traffic on cable systems will be limited to narrow or congested parts of the spectrum, thus limiting the number of potential simultaneous users. If cable system operators do not install two-way capability on their cable systems in a timely fashion or if such operators do not dedicate sufficient frequency spectrum for upstream traffic, the use of cable for upstream data traffic will be limited. Any such limitation could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background" and "Business--Customers." DEPENDENCE ON CABLE SYSTEM OPERATORS The Company depends on cable system operators to purchase its cable modem systems and to sell its client cable modems to end-users. Cable system operators have a limited number of programming channels over which they can offer services, and there can be no assurance that they will choose to provide Internet access. Even if cable system operators choose to provide Internet access, there can be no assurance that they would provide such access over anything other than that portion of their cable system that has two-way cable transmission capabilities. In addition, there can be no assurance that if such cable system operators provide Internet access, they would use the Company's products. The Company is currently developing a two-way cable transmission solution utilizing the QPSK technology required by cable system operators, but there can be no assurance that the Company will be successful in such efforts or that once introduced such products will gain market acceptance. While many cable system operators are in the process of upgrading, or have announced their intention to upgrade, their HFC cable infrastructures to provide increased quality and speed of transmission and, in certain cases, two-way transmission capabilities, some cable operators have delayed their planned upgrades indefinitely. Cable system operators have limited experience with these upgrades, and investments in upgrades have placed a significant strain on the financial, managerial, operational and other resources of the cable system operators, most of which are already highly leveraged and facing intense competition from telephone companies ("telcos"), satellite TV and broadband wireless system operators. Because of the substantial capital cost of upgrading cable systems for higher quality and two-way data transmission, it is uncertain whether such cable upgrades and additional services, such as Internet access, will be offered in the near term, or at all. For example, to increase television programming capacity to compete with other modes of multichannel entertainment delivery systems, cable system operators may choose to roll out digital set-top boxes, which do not support high speed Internet access. Cable system operators may not have the capital required to upgrade their infrastructure or to offer new services that require substantial start-up costs. In addition, the Company is highly dependent on cable system operators to continue to maintain their cable infrastructure in such a 8 manner that the Company will be able to provide consistently high performance and reliable service. Therefore, the success and future growth of the Company's business is subject to economic and other factors affecting the cable television industry generally, particularly the industry's ability to finance substantial capital expenditures. See "Business--Industry Background" and "Business--Customers." DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS The Company depends on broadband wireless system operators to purchase its wireless modem products and to sell its client wireless modems to end-users. Many broadband wireless system companies are in the early stage of development or are in need of capital to upgrade and expand their services in order to compete effectively with cable system operators, satellite TV and telcos. Accordingly, to address the needs of and competitive factors facing these customers, the Company on occasion has provided certain broadband wireless system operators and other customers extended payment, promotional pricing or other terms which could have a material adverse effect on the Company's business, operating results and financial condition. The principal disadvantage of wireless cable is that it requires a direct line of sight between the wireless cable system operator's antenna and the customer's location. Therefore, despite a typical range of up to 35 miles, a number of factors, such as buildings, trees or uneven terrain, can interfere with reception, thus limiting broadband wireless system operators' customer bases. It is estimated that there are only approximately 1.0 million wireless cable customers in the United States today. In addition, current technical and legislative restrictions have limited the number of analog channels that wireless cable companies can offer to 33. In order to better compete with cable system operators, satellite TV and telcos, broadband wireless system operators have begun to examine the implementation of both digital TV and Internet access to create new revenue streams. To the extent that such operators choose to invest in digital TV, such decision will limit the amount of capital available for investment in deploying other services, such as Internet access. Broadband wireless system operators will require substantial capital to introduce and market Internet access products. There can be no assurance that broadband wireless system operators will have the capital to supply Internet services in a competitive environment. In addition, there can be no assurance that the broadband wireless system operators' current customer bases have significant interest in high speed Internet connectivity at a price greater than that offered by telcos or that broadband wireless system operators can attract customers, particularly in the business community, which have not traditionally subscribed to wireless cable services. While broadband wireless system operators are currently utilizing telephone return for upstream data transmission, the Company believes that wireless operators will demand two-way wireless transmission as more of these entities obtain licenses for additional frequencies. Currently, the Company is developing its products to satisfy the two-way transmission needs of the broadband wireless system operators. There can be no assurance that the Company will be successful in such development efforts. The failure of the Company's products to gain market acceptance could have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition." CUSTOMER CONCENTRATION To date, a small number of customers has accounted for a substantial portion of the Company's net sales. The Company expects that net sales from the sale of its Series 2000 products to a small number of customers will continue to account for a substantial portion of its net sales for the foreseeable future. The Company expects that its largest customers in future periods could be different from its largest customers in prior periods due to a variety of factors, including customers' deployment schedules and budget considerations. As a result, the Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and annual basis. Because limited numbers of cable system operators and broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, the Company's future success will depend upon its ability to establish and maintain relationships with these companies. In addition, as the market for high speed Internet and corporate intranet access over cable and broadband wireless systems continues to evolve, the composition of companies participating in this market will continue to change. For instance, in 9 1994, 1995 and 1996, Intel accounted for 59.6%, 51.6% and 20.7%, respectively, of the Company's net sales. From 1994 to 1996, Intel manufactured certain products based on the Company's design and jointly marketed the Company's products with its own. However, in 1996 Intel stopped purchasing products from the Company as it scaled back its direct participation in the cable and wireless market, though it continues to be a significant stockholder of the Company and maintains certain licensing and manufacturing rights to certain of the Company's products. Should Intel decide to purchase or support designs or products from competitors of the Company it could have a material adverse effect on the Company's business, operating results and financial condition. The loss of any one of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs of and competitive factors facing the emerging broadband access markets, the Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 10.2% of the Company's net sales for the nine months ended September 30, 1997, has recently been provided extended payment terms and accounted for 12% of the Company's accounts receivable as of September 30, 1997. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success will depend in significant part upon the decision of the Company's current and prospective customers to continue to purchase products from the Company. There can be no assurance that the Company's current customers will continue to place orders with the Company or that the Company will be able to obtain orders from new customers. If orders from current customers are cancelled, decreased or delayed, or the Company fails to obtain significant orders from new customers, or any significant customer delays payment or fails to pay, the Company's business, operating results and financial condition could be materially adversely affected. Further, the Company's headend equipment does not operate with other companies' modems and, accordingly, the Company is typically a sole source provider to its customers. As a result, the Company's operating results could be materially and adversely affected if a major customer were to implement other technologies that impact the future utilization of the Company's products. See "Business--Customers." COMPETITION The market for high speed network connectivity products and services is intensely competitive. The principal competitive factors in this market include product performance and features (including speed of transmission and upstream transmission capabilities), reliability, price, size and stability of operations, breadth of product line, sales and distribution capability, technical support and service, relationships with cable and broadband wireless system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of the Company's control. The existing conditions in the high speed network connectivity market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for the Company's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put the Company at a disadvantage in relation to its competitors. The Company's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of the Company's competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources, as well as greater name recognition and access to customers than the Company. In addition, many of the Company's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of the Company's competitors have established relationships with cable system operators and telcos and, based on these relationships, may have more direct access to the decision-makers of such cable system operators and telcos. In addition, the Company could face potential competition from certain of its suppliers, such as Sharp if it were to develop or license modems for sale to others. In addition, suppliers such as Cisco Systems, which 10 manufactures routers, and Stanford Telecom, which manufactures QPSK components, could become competitors should they decide to enter the Company's market directly. There can be no assurance that the Company will be able to compete effectively in its target markets. The principal competitors in the cable modem market include Bay Networks, Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics, as well as a number of smaller, more specialized companies. Certain competitors have entered into partnerships with computer networking companies that may give such competitors greater visibility in this market. Certain of the Company's competitors have already introduced or announced high speed connectivity products that are priced lower than the Company's, and certain other competitors are more focused on and experienced in selling and marketing two-way cable transmission products. There can be no assurance that additional competitors will not introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than the Company's products. The Company's principal competitors in the wireless modem market, Bay Networks, Harmonic Lightwaves through its proposed acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are providing wireless Internet connectivity over wireless cable and LMDS frequencies. To be successful, the Company's Series 2000 products must achieve market acceptance and the Company must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. The Company must continue to develop products with improved performance over two-way cable transmission facilities and with the ability to perform over two-way wireless transmission facilities. There can be no assurance that the Company will meet these challenges, that it will be able to compete successfully against current or future competitors, or that the competitive pressures faced by the Company will not materially and adversely affect the Company's business, operating results and financial condition. Further, as a strategic response to changes in the competitive environment, the Company may make certain promotional pricing, service, marketing or other decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, operating results or financial condition. Cable and broadband wireless system operators face competition from providers of alternative high speed connectivity systems. In the wireless high speed access market, broadband wireless system operators compete with satellite TV providers. In telephony networks, Digital Subscriber Line ("xDSL") technology enables digitally compressed video signals to be transmitted through existing telephone lines to the home. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, the Company's business, operating results and financial condition would be materially adversely affected. See "Business--Competition." COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS The market for high speed Internet access products is characterized by competing technologies, evolving industry standards and frequent new product introductions. Market acceptance of alternative wired technologies, such as Integrated Services Digital Network ("ISDN") or xDSL, or wireless technologies, such as DBS, could decrease the demand for the Company's products or render such products obsolete if such alternatives are viewed as providing faster access, greater reliability or improved cost-effectiveness. In particular, it is possible that the perceived high speed access advantage provided by cable and broadband wireless systems may be undermined by the need to share bandwidth, which results in the reduction in individual throughput speeds. In addition, the emergence or evolution of industry standards, through either adoption by official standards committees or widespread use by cable system operators, broadband wireless system operators or telcos, could require the Company to redesign its products, resulting in delays in the introduction of such products. For instance, the Company's products are not in full compliance with the DAVIC specifications that are supported in Europe or the recently announced preliminary versions of the MCNS specifications or IEEE standards. If such standards do become 11 widespread and the Company's products are not in compliance, the Company's customers and potential customers may refuse to purchase the Company's products, materially adversely affecting its business, operating results and financial condition. Further, the Company's products are not compatible with headend equipment and modems of other suppliers of broadband Internet access products. As a result, potential customers who wish to purchase broadband Internet access products from multiple suppliers may be reluctant to purchase the Company's products. The rapid development of new competing technologies and standards increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. Market acceptance of new technologies or the failure of the Company to develop and introduce new products or enhancements directed at new industry standards could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background" and "Business--Competition." NEED TO REDUCE COST OF CLIENT MODEMS The list prices for the Series 2000 client modems currently range from approximately $450 to $900, depending upon features and volume. Customers wishing to purchase client modems generally must also purchase an Ethernet adapter for their computer. These prices make the Company's products relatively expensive for the consumer electronics and the small office or home office markets. Market acceptance of the Company's products, and the Company's future success, will depend in significant part on reductions in the unit cost of the Company's client modems. Certain of the Company's competitors currently offer products at prices lower than those for the Company's modems. While the Company has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will continue to keep pace with competitive pricing pressures or lead to improved gross margins. If the Company is unable to continue to obtain cost reductions, its gross margins and profitability will be adversely affected. To address continuing competitive and pricing pressures, the Company expects that it will have to continue to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning the Company's products to utilize more highly integrated components and more automated manufacturing techniques. The Company has entered into high-volume purchase and supply agreements with Sharp and Itochu Corporation ("Itochu") and may evaluate the use of low-cost third party suppliers and manufacturers to further reduce costs. There can be no assurance that the Company will be successful in redesigning its products or using more automated manufacturing techniques, that a redesign can be made on a timely basis and without introducing significant errors and product defects or that a redesign will result in sufficient cost reductions to allow the Company to reduce the list price of its client modems. Moreover, there can be no assurance that additional volume purchase or manufacturing agreements will be available to the Company on terms that the Company considers acceptable. To the extent that the Company enters into a high-volume or long-term purchase or supply agreement and then decides that it cannot use the products or services provided for in the agreement, the Company's business, operating results and financial condition could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Manufacturing." LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING The Company's future success will depend, in significant part, on its ability to manufacture, or have others manufacture, its products successfully, cost-effectively and in sufficient volumes. The Company maintains a limited in-house manufacturing capability at its headquarters in Cupertino for performing system integration and testing on all headend products and for manufacturing small quantities of modems. The Company entered into an agreement pursuant to which Sharp to date has been the exclusive OEM supplier through Itochu of certain of the Company's client modems, including the substantial majority of those utilized in the Series 2000. In the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp because of technical delays in product integration. While these problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future from Sharp or any other manufacturer. 12 The Company is exploring the possibility of entering into supply arrangements with other manufacturers to provide additional or alternative sources of supply for certain of the Company's products, although there can be no assurance that such arrangements will be entered into or that they will provide for the prompt manufacture of products or subassemblies in quantities or on terms required to meet the needs of the Company's customers. The Company has had only limited experience manufacturing its products to date, and there can be no assurance that the Company or Sharp or any other manufacturer of the Company's products will be successful in increasing the volume of its manufacturing efforts. The Company may need to procure additional manufacturing facilities and equipment, adopt new inventory controls and procedures, substantially increase its personnel and revise its quality assurance and testing practices, and there can be no assurance that any of these efforts will be successful. See "Business--Manufacturing." DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS The Company is dependent upon certain key suppliers for a number of the components for its products. For example, the Company currently only has one vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are used in the Company's server and client modem products, and in past periods these semiconductors have been in short supply. Recently, BroadCom announced a program to develop with certain of the Company's competitors high-speed cable data modems and headend equipment based on BroadCom's MCNS compliant semiconductor. As a result of such program, certain of BroadCom's technological and product enhancements may be made available to certain of the Company's competitors before making them available to the Company. This could have the effect of putting the Company at a competitive disadvantage with regard to time to market or cause the Company to have to redesign its products if competitors influence changes in BroadCom's products. Hitachi is the sole supplier of the processors used in certain of the Company's modems. In addition, certain other components for products that the Company has under development are currently only available from a single source. There can be no assurance that delays in key components or product deliveries will not occur in the future due to shortages resulting from a limited number of suppliers, the financial or other difficulties of such suppliers or the possible limitation in component product capacities due to significant worldwide demand for such components. Any significant interruption or delay in the supply of components for the Company's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on the Company's ability to manufacture its products and, therefore, could have a material adverse effect on its business, operating results and financial condition. See "Business--Manufacturing." DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT The commercial market for products designed for the Internet and the TCP/IP networking protocol has only recently begun to develop, and the Company's success will depend in large part on increased use of the Internet. Critical issues concerning the commercial use of the Internet, including security, reliability, cost, ease of access and quality of service, remain unresolved and are likely to affect the development of the market for the Company's products. The adoption of the Internet for commerce and communications, particularly by enterprises that have historically relied upon alternative means of commerce and communications, generally requires the acceptance of a new way of conducting business and exchanging information. In addition, the Company is dependent on the growth of the use of the Internet by businesses, particularly for applications that utilize multimedia content and thus require high bandwidth. If the Internet as a commercial or business medium fails to develop or develops more slowly than expected, the Company's business, operating results and financial condition could be materially adversely affected. The recent growth in the use of the Internet has caused frequent periods of performance degradation, requiring the upgrade of routers, telecommunications links and other components forming the infrastructure of the Internet by ISPs and other organizations with links to the Internet. Any perceived degradation in the performance of the Internet as a whole could undermine the benefits of the Company's products. Potentially increased performance provided by the products of the Company and others is ultimately limited by and reliant upon the speed and reliability of the Internet backbone itself. Consequently, the emergence and growth of the market for the Company's products is dependent on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. See "Business-- Industry Background." 13 DEPENDENCE ON ACCEPTANCE OF ASYMMETRIC NETWORKING The Company's products are designed to transmit data from the Internet in the downstream direction (i.e., to the end-user) much more quickly than data is transmitted in the upstream direction (i.e., from the end-user). This "asymmetric" architecture has not been widely used and is relatively unproven in computer networking. Certain networking protocols and standards, including the TCP/IP protocol, were designed with the expectation that the network would be symmetric, and the Company has spent considerable engineering resources to enable its products to work with such protocols. There can be no assurance that the Company's current or future products will be compatible with symmetric standards or that errors will not occur in connecting the symmetric protocols with the Company's asymmetric design. Because of this asymmetric design, certain applications do not benefit from the connection to a high bandwidth cable system. Computer applications that need to transmit data as quickly to the Internet as from the Internet will not exhibit the performance improvements that are only available to downstream data traffic, particularly if the upstream traffic is sent via Plain Old Telephone Service ("POTS"). Certain applications will not run fast enough in the upstream direction to be acceptable for some users. As a result, some end-users may not perceive a significant benefit from the greater downstream performance of the Company's products. There can be no assurance that potential customers will consider the downstream performance benefits sufficient to justify the purchase and installation costs of the Company's asymmetric products. Failure of asymmetric networking to gain market acceptance, or any delay in such acceptance, could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background." POSSIBLE NEED FOR ADDITIONAL FINANCING In the past, the Company has required substantial amounts of capital to design, develop, market and manufacture its products. The Company's future capital requirements will depend on many factors, including, but not limited to, the evolution of the market for broadband access systems, the market acceptance of the Company's products, competitive pressure on the price of the Company's products, the levels at which the Company maintains inventory, the levels of promotion and marketing required to launch such products and attain a competitive position in the marketplace, the extent to which the Company invests in new technology and improvements on its existing technology, and the response of competitors to the Company's products. While the Company believes that the net proceeds of this offering, available bank borrowings, existing cash balances and funds generated from operations, if any, will provide the Company with sufficient funds to repay the Subordinated Notes and to finance its operations for at least the next 12 months, to the extent that the funds generated by this offering, together with existing resources, are insufficient to fund the Company's activities over the long-term, the Company may need to raise additional funds through public or private equity or debt financing or from other sources. The sale of additional equity or convertible debt may result in additional dilution to the Company's stockholders and such securities may have rights, preferences or privileges senior to those of the Common Stock. To the extent that the Company relies upon debt financing, the Company will incur the obligation to repay the funds borrowed with interest and may become subject to covenants and restrictions that restrict operating flexibility. No assurance can be given that additional equity or debt financing will be available or that, if available, it can be obtained on terms favorable to the Company or its stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY Products as complex as those offered by the Company frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. In the past, such errors have occurred in the Company's products and there can be no assurance that errors will not be found in the Company's current and future products. The occurrence of such errors, defects or failures could result in 14 product returns and other losses to the Company or its customers. Such occurrence could also result in the loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's products generally carry a one year warranty which includes factory and on-site repair services as needed for replacement of parts. Due to the relatively recent introduction of the Series 2000 products, the Company has limited experience with the problems that could arise with this generation of products. In addition, the Company's purchase agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of the Company's products entails the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. See "Business-- Manufacturing." DEPENDENCE ON KEY PERSONNEL The Company's success depends in significant part upon the continued services of its key technical, sales and senior management personnel, including the Company's President and Chief Executive Officer, Carl S. Ledbetter. Mr. Ledbetter is a party to an employment agreement with the Company, and the Company carries a $1.5 million "key man" life insurance policy on him. See "Management--Employment Agreement." Any officer or employee of the Company can terminate his or her relationship with the Company at any time. The Company's future success will also depend on its ability to attract, train, retain and motivate highly qualified technical, marketing, sales and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract and retain key personnel. The loss of the services of one or more of the Company's executive officers or key employees or the Company's failure to attract additional qualified personnel could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Employees" and "Management." MANAGEMENT OF GROWTH The Company is currently experiencing a period of rapid growth in net sales. This growth has placed, and if it continues is expected to continue to place, a significant strain on the Company's financial, management, operational and other resources. There can be no assurance that the Company's management, personnel, systems, procedures and controls will be adequate to support the Company's existing and future operations. The Company's ability to manage its growth effectively will require it to continue to expand its operating, manufacturing and financial procedures and controls, to replace or upgrade its operational, financial and management information systems and to attract, train, motivate, manage and retain key employees. The Company has hired many key employees and officers only recently, including its Chief Financial Officer, Vice President, Engineering and Controller, and as a result, the Company's entire management team has worked together for only a brief time. If the Company's executives are unable to manage growth effectively, the Company's business, operating results and financial condition could be materially adversely affected. See "Management." REGULATION OF THE COMMUNICATIONS INDUSTRY The Company and its customers are subject to varying degrees of federal, state and local regulation. For instance, the jurisdiction of the Federal Communications Commission (the "FCC") extends to high speed Internet access products such as those of the Company. The FCC has promulgated regulations that, among other things, set installation and equipment standards for communications systems. Further, regulation of the Company's customers may adversely impact the Company's business, operating results 15 and financial condition. For example, FCC regulatory policies affecting the availability of cable, wireless and telco services, and other terms on which cable, wireless and telco companies conduct their business, may impede the Company's penetration of certain markets. Changes in current or future laws or regulations which negatively impact the Company's products and technologies, in the United States or elsewhere, could materially and adversely affect the Company's business, operating results and financial condition. PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS The Company relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company currently has two patents issued in the United States, as well as pending patent applications in the United States, Europe and Japan that relate to its network and modem technology and the communication processes implemented in those devices. In the future, the Company intends to seek additional United States and foreign patents on its technology. There can be no assurance any of these patents will issue from any of the Company's pending applications or applications in preparation or that any claims allowed will be of sufficient scope or strength, or issue in sufficient countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Moreover, any patents that have been or may be issued might be challenged. Any such challenge could result in time consuming and costly litigation and result in the Company's patents being held invalid or unenforceable. Furthermore, even if the patents are not challenged or are upheld, third parties might be able to develop other technologies or products without infringing any such patents. The Company has entered into confidentiality and invention assignment agreements with its employees, and non-disclosure agreements with certain of its suppliers, distributors and customers in order to limit access to and disclosure of its proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by the Company to protect its intellectual property will prove sufficient to prevent misappropriation of the Company's technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States. In the past, the Company has received, and in the future may receive, notices from third parties claiming that the Company's products or proprietary rights infringe the proprietary rights of third parties. The Company expects that developers of cable and wireless modems will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has and in the future may license its patents or proprietary rights for commercial or other reasons, to parties who are or may become competitors of the Company. Further the Company may also elect to initiate claims or litigation against third parties for infringement of the Company's patents or proprietary rights or to establish the validity of the Company's patents or proprietary right. The Company has sent notices to certain third parties offering to license the Company's patents for products that may be infringing the Company's patent rights. The Company has not yet determined if it will assert any claims against these parties or others. There can be no assurance that such notifications will not lead to potential litigation initiated by the Company or related countersuits by third parties seeking to challenge the Company's patents or asserting infringement by the Company. Such litigation could be time consuming and costly and have a material adverse effect on the Company's business, operating results and financial condition. 16 RISKS OF INTERNATIONAL SALES To date, sales of the Company's products outside of the United States have represented an insignificant portion of net sales. While the Company intends to expand its operations in North America and Europe, this will require significant management attention and financial resources. In order to gain market acceptance internationally, the Company's products will have to be designed to meet industry standards of foreign countries, such as the DAVIC specifications that are supported in Europe. The Company has committed and continues to commit resources to developing international sales and support channels. International sales are subject to a number of risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, the burden of complying with a variety of foreign laws, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations and political and economic instability. Additionally, the protection of intellectual property may be more difficult to enforce outside of the United States. In the event the Company is successful in expanding its international operations, the imposition of exchange or price controls or other restrictions on foreign currencies could materially adversely affect the Company's business, operating results and financial condition. If the Company increases its international sales, its net sales may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world. CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS Upon completion of this offering, the Company's current executive officers, directors and greater than 5% stockholders (and their affiliates) will, in the aggregate, beneficially own approximately 56.8% of the Company's outstanding Common Stock. As a result, such persons, acting together, will have the ability to control all matters submitted to stockholders of the Company for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Company's assets) and to control the management and affairs of the Company. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have an adverse effect on the market price of the Company's Common Stock. See "Management" and "Principal Stockholders." RESTRICTIVE DEBT COVENANTS Under the terms of the outstanding $5.5 Million Debenture, the Company is subject to certain restrictive covenants which could adversely affect the Company's operations. Under the $5.5 Million Debenture the Company is subject to limitations on the amount of capital expenditures it may incur in any 12 month period and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder as long as the $5.5 Million Debenture remains outstanding. The $5.5 Million Debenture is collateralized by substantially all the Company's assets. In September 1997, the Company entered into the Subordinated Notes which have restrictive covenants that limit the amount of capital expenditures it may incur in any 12 month period and the borrowing of additional funds and prohibit the Company from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are outstanding. In addition, in October 1997, the Company entered into the Credit Facility, which prohibits the Company from declaring dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operation," "Certain Transactions," "Description of Capital Stock--Convertible $5.5 Million Debenture" and "--Subordinated Notes" and Notes 5, 6 and 16 of Notes to Financial Statements. 17 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of the Company's Common Stock (including shares issued upon the exercise of outstanding options and warrants and upon the conversion of the $5.5 Million Debenture) in the public market after this offering could adversely affect the market price of the Common Stock prevailing from time to time and could impair the Company's ability to raise capital through the sale of equity or debt securities. In addition to the 2,700,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the date of this Prospectus, there will be 7,273,311 shares of Common Stock outstanding, all of which are restricted shares ("Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). As of such date, no Restricted Shares will be eligible for sale in the public market. The 7,273,311 Restricted Shares will be available for sale in the public market following the expiration of 180-day lock-up agreements. In addition, under certain circumstances, the $5.5 Million Debenture could automatically convert into 513,423 shares of Common Stock and the holders of warrants for 1,163,217 shares of Common Stock can exercise such warrants at any time, but such shares could not be sold until the expiration of the 180-day lock-up period following the date of the Prospectus. See "Description of Capital Stock--Convertible $5.5 Million Debenture" and "Description of Capital Stock--Warrants." NationsBanc Montgomery Securities, Inc. also may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, beginning six months after the date of this Prospectus the holders of 6,257,827 Restricted Shares, the holders of warrants for 1,148,949 shares of Common Stock and the holder of the $5.5 Million Debenture are entitled to certain rights with respect to registration of such shares for sale in the public market, assuming no exercise of the Underwriters' over-allotment option. If such holders sell in the public market, such sales could have a material adverse effect on the market price of the Company's Common Stock. Immediately after this offering, the Company intends to file a registration statement covering shares of Common Stock subject to outstanding options under the Company's Executive Officer Incentive Plan (the "Executive Officer Plan"), 1993 Equity Incentive Plan (the "1993 Plan") and 1996 Equity Incentive Plan (the "1996 Plan") and reserved for issuance under the Company's 1997 Equity Incentive Plan (the "1997 Incentive Plan"), the 1997 Directors Stock Option Plan (the "Directors Plan") and the 1997 Employee Stock Purchase Plan (the "Purchase Plan"). Based on the number of shares subject to outstanding options at June 30, 1997 and currently reserved for issuance under all such plans, such registration would cover approximately 4,244,935 shares. Such registration statement will automatically become effective upon filing, but optionholders are subject to 180-day lock-up agreements. See "Shares Eligible for Future Sale." BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discount and offering expenses, are estimated to be approximately $31,793,000. The primary purposes of this offering are to repay the approximately $6.9 million principal amount of the Subordinated Notes, obtain additional capital, create a public market for the Common Stock and facilitate future access to public markets. Other than repayment of the Subordinated Notes, the Company expects to use the net proceeds primarily for working capital and other general corporate purposes. A portion of the net proceeds also may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. Accordingly, the Company's management will retain broad discretion as to the allocation of the proceeds of this offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, operating results and financial condition. See "Use of Proceeds." 18 ANTI-TAKEOVER PROVISIONS Upon completion of this offering, the Company's Board of Directors will have the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. The Company is also subject to certain provisions of Delaware law which could have the effect of delaying, deterring or preventing a change in control of the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. In addition, the Company's certificate of incorporation and bylaws contain certain provisions that, together with the ownership position of the officers, directors and their affiliates, could discourage potential takeover attempts and make more difficult attempts by stockholders to change management, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." The Company's Board of Directors is classified into three classes of directors serving staggered, three-year terms and has the authority, without action by the Company's stockholders, to fix the rights and preferences and issue shares of the Preferred Stock, and to impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. Any vacancy on the board of directors may be filled only by vote of the majority of directors then in office. NO PRIOR MARKET FOR COMMON STOCK Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market will develop or be sustained after this offering or that investors will be able to sell the Common Stock should they desire to do so. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade upon completion of this offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the shares of Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in the Company's results of operations, announcements of technological innovations, new products introduced by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, changes in financial estimates by securities analysts, conditions and trends in the Internet and modem systems industries, general market conditions and other factors. Further, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect price earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price earnings ratios will be sustained. These broad market factors may adversely affect the market price of the Company's Common Stock. These market fluctuations, as well as general economic, political and market conditions such as recessions, interest rates or international currency fluctuations, may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's 19 securities, securities class action litigation has often been instituted against such company. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, operating results and financial condition. NO DIVIDENDS The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The terms of the $5.5 Million Debenture prevent the Company from paying any cash dividends for so long as the $5.5 Million Debenture remains outstanding. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the Common Stock in this offering will suffer immediate and substantial dilution of $9.92 per share in the net tangible book value of the Common Stock from the initial public offering price. To the extent that outstanding options or warrants to purchase the Company's Common Stock are exercised or that the $5.5 Million Debenture is converted into Common Stock, there may be further dilution. See "Dilution." 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,700,000 shares of Common Stock offered hereby are estimated to be $31,793,000 at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders if the over-allotment option is exercised. The primary purposes of this offering are to repay the approximately $6.9 million principal amount of the Subordinated Notes, obtain additional capital, create a public market for the Common Stock and facilitate future access to public markets. Other than repayment of the Subordinated Notes the Company expects to use the net proceeds primarily for working capital and other general corporate purposes. See "Risk Factors--Broad Management Discretion in Allocation of Proceeds." A portion of the proceeds may also be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. In the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. However, the Company has no present understandings, commitments or agreements with respect to any acquisition of businesses, products or technologies. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The terms of the $5.5 Million Debenture and the Subordinated Notes prohibit the Company from paying any cash dividends for so long as the $5.5 Million Debenture or the Subordinated Notes, as the case may be, remain outstanding. In addition, the Credit Facility prohibits the Company from paying any cash dividends. 21 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of September 30, 1997 and (ii) the actual capitalization as adjusted to reflect the sale and issuance of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discount and offering expenses, the application of the estimated proceeds therefrom and the automatic conversion of all outstanding shares of Preferred Stock into Common Stock upon closing of this offering.
SEPTEMBER 30, 1997 ----------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) Long-term debt(1)........................................................................ $ 6,223 $ 6,223 ---------- ----------- Stockholders' equity (deficit)(2): Convertible Preferred Stock, $0.001 par value per share: 18,000,000 shares authorized, actual; 5,000,000 shares authorized, as adjusted; 12,562,868 shares issued and outstanding, actual; no shares issued or outstanding, as adjusted.................... 13 -- Common Stock, $0.001 par value per share: 34,000,000 shares authorized, actual; 100,000,000 shares authorized, as adjusted; 2,619,726 shares issued and outstanding, actual; 9,973,311 shares issued and outstanding, as adjusted............................................................. 2 18 Additional paid-in capital............................................................. 27,406 59,196 Accumulated deficit.................................................................... (27,424) (27,674) ---------- ----------- Total stockholders' equity (deficit)................................................. (3) 31,540 ---------- ----------- Total capitalization............................................................... $ 6,220 $ 37,763 ---------- ----------- ---------- -----------
- ------------------------------ (1) Includes the $5.5 Million Debenture, which is convertible into an aggregate of 513,423 shares of Common Stock at the option of the holder at any time and which automatically converts if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least equal to the Minimum Price and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. See Note 6 of Notes to Financial Statements. (2) Does not include (i) 1,974,242 shares of Common Stock issuable upon exercise of stock options outstanding as of September 30, 1997 at a weighted average exercise price of $2.72 per share, (ii) 2,046,213 shares of Common Stock available for future grant or issuance as of September 30, 1997 under the Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan, Executive Officer Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of Common Stock issuable upon the exercise of warrants outstanding as of September 30, 1997 at a weighted average exercise price of $6.38 per share, (iv) 513,423 shares of Common Stock issuable as of September 30, 1997 upon the conversion of the $5.5 Million Debenture or (v) a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share issued in October 1997 in connection with obtaining a credit facility for $4.0 million (the "Credit Facility"). See "Management--Director Compensation," "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. 22 DILUTION The pro forma net tangible book deficit of the Company as of September 30, 1997, assuming the conversion of all outstanding shares of Preferred Stock into shares of Common Stock, was $(870,000), or $(0.12) per share of Common Stock. "Pro forma net tangible book deficit per share" is determined by dividing the number of outstanding shares of Common Stock into the net tangible book deficit of the Company (total tangible assets less total liabilities). After giving effect to the sale by the Company of the 2,700,000 shares of Common Stock offered hereby (based upon an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses), and the repayment of approximately $6.9 million in Subordinated Notes, the pro forma net tangible book value of the Company as of September 30, 1997 would have been approximately $30,673,000, or $3.08 per share. This represents an immediate increase in pro forma net tangible book value of $3.20 per share to existing stockholders and an immediate dilution of $9.92 per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution: Assumed initial public offering price per share............................. $ 13.00 Pro forma net tangible book deficit per share as of September 30, 1997...... $ (0.12) Increase per share attributable to new investors............................ 3.20 --------- Pro forma net tangible book value per share after offering.................. 3.08 --------- Dilution per share to new investors......................................... $ 9.92 --------- ---------
The following table summarizes, on a pro forma basis as of September 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the investors purchasing shares of Common Stock in this offering, based upon an assumed initial public offering price of $13.00 per share (before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ----------- ------------- ----------- ----------- Existing stockholders(1)........... 7,273,311 72.9% $ 27,171,000 43.6% $ 3.74 New investors(1)................... 2,700,000 27.1 35,100,000 56.4 13.00 ---------- ----- ------------- ----- Total............................ 9,973,311 100.0% $ 62,271,000 100.0% ---------- ----- ------------- ----- ---------- ----- ------------- -----
- ------------------------ (1) If the Underwriters' over-allotment option is exercised in full, the number of shares held by existing stockholders will be reduced by 405,000 shares to 6,868,311, or 68.9% of the total shares of Common Stock to be outstanding after this offering, and the number of shares held by new investors will be increased to 3,105,000, or 31.1% of the total shares of Common Stock to be outstanding after this offering. As of September 30, 1997, there were options outstanding to purchase a total of 1,974,242 shares of Common Stock at a weighted average exercise price of $2.72 per share, warrants outstanding to purchase a total of 1,160,558 shares of Common Stock at a weighted average exercise price of $6.38 per share and 513,423 shares of Common Stock issuable upon the conversion of the $5.5 Million Debenture. In addition, in October 1997 the Company issued a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share in connection with obtaining the Credit Facility. To the extent that any of these options or warrants is exercised or the $5.5 Million Debenture is converted, there will be further dilution to new investors. See "Capitalization," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. 23 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The statement of operations data for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997 and the balance sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived from financial statements of the Company that have been audited by Coopers & Lybrand LLP, independent accountants, and are included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from unaudited financial statements not included herein. The statements of operations data for the nine months ended September 30, 1996 are derived from unaudited financial statements of the Company that include all adjustments consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the period. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997 or any future period. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- ---------------------- STATEMENTS OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ----------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................................... $ 436 $ 1,010 $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Cost of sales................................ 294 746 1,362 761 3,130 1,602 8,214 --------- --------- --------- --------- --------- ----------- --------- Gross profit (loss)...................... 142 264 (694) (131) (168) (349) 938 --------- --------- --------- --------- --------- ----------- --------- Operating expenses: Research and development................... 5 271 1,251 3,862 5,076 3,757 5,170 Sales and marketing........................ 67 133 348 390 1,786 954 3,138 General and administrative................. 154 250 533 748 1,714 1,196 2,516 --------- --------- --------- --------- --------- ----------- --------- Total operating expenses................. 226 654 2,132 5,000 8,576 5,907 10,824 --------- --------- --------- --------- --------- ----------- --------- Loss from operations................... (84) (390) (2,826) (5,131) (8,744) (6,256) (9,886) Interest income and other expense, net....... 3 5 30 166 257 146 183 Interest expense............................. -- -- (101) (304) (28) (22) (379) --------- --------- --------- --------- --------- ----------- --------- Net loss............................... $ (81) $ (385) $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- Net loss per share(1)........................ $ (0.04) $ (0.14) $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12) Shares used in per share calculation(1)...... 1,886 2,748 2,880 2,877 3,189 3,196 3,229 --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- Pro forma net loss per share(1).............. (1.24) (1.33) --------- --------- --------- --------- Pro forma shares used in per share calculation(1)............................. 6,873 7,607 --------- --------- --------- ---------
DECEMBER 31, ----------------------------------------------------- SEPTEMBER 30, BALANCE SHEET DATA: 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- ---------------------- (IN THOUSANDS) Cash, cash equivalents and short-term investments..................................... $ 545 $ 1,031 $ 1,426 $ 3,353 $ 6,886 $ 5,314 Working capital................................... 361 484 1,129 3,149 6,944 3,565 Total assets...................................... 677 1,353 1,892 4,586 10,539 16,190 Long-term debt.................................... -- 604 2,108 228 472 6,223 Total stockholders' equity (deficit).............. 369 1 (708) 3,661 7,709 (3)
- -------------------------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used to compute net loss per share and pro forma net loss per share. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." OVERVIEW Hybrid is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. Hybrid's Series 2000 product line consists of secure headend routers, cable and wireless modems and management software for use with either cable TV or wireless transmission facilities. From its inception in June 1990 until September 1996, the Company focused on the design, development, manufacturing and market introduction of the first two generations of Hybrid's Series 1000 ("Series 1000") product line. These product generations offered 5 and 10 Mbps access speeds for downstream data. In October 1996, the Company introduced its third generation product line, the Series 2000, which provides 30 Mbps downstream access speeds. During the three years ended December 31, 1996 and nine months ended September 30, 1997, the Company sold a limited number of PoPs and cable modems from both product series, which generated an aggregate of $13,412,000 in net sales. The Company expects to generate substantially all of its future sales from its Series 2000 products, enhancements to these products, new products and related support and networking services. The Company recognizes revenue upon shipment of products and accrues for warranty costs at the time of shipment. To date, net sales include principally product sales and, to a lesser extent, support and networking services. The Company sells its products primarily in the United States, and markets its products to a variety of customers, including cable system operators, broadband wireless system operators, ISPs and certain communications equipment resellers. Historically, a small number of customers has accounted for a substantial portion of the Company's net sales. Although the Company has expanded its customer base, the Company expects that a limited number of customers will continue to account for a substantial portion of the Company's net sales for the foreseeable future. As a result, the Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. If orders from significant customers are delayed, cancelled or otherwise fail to materialize in any particular period, or any significant customer delays payment or fails to pay, the Company could experience significant operating losses in such period. Further, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs and competitive factors facing the emerging broadband access market, the Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 10.2% of the Company's net sales for the nine months ended September 30, 1997, has recently been provided extended payment terms and accounted for 12% of the Company's accounts receivable as of September 30, 1997. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Inexperience in Emerging Market," "Risk Factors--Customer Concentration," "Risk Factors-- Dependence on Broadband Wireless System Operators" and "Risk Factors--Competition." 25 The market for high speed network connectivity products and services is intensely competitive and is characterized by rapid technological change, new product development and product obsolescence, evolving industry standards and significant price erosion over the life of a product, and the Company has experienced and expects to continue to experience pressure on its unit average selling prices ("ASPs"). While the Company has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will continue to keep pace with competitive price pressures or lead to improved gross margins. If the Company is unable to continue to reduce costs, its gross margins and profitability will be adversely affected. The Company's gross margins are also impacted by the sales mix of PoPs and modems. The Company's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than the Company's headends. Due to current customer demand, the Company anticipates that the sales mix of modems will be weighted toward lower-margin single-user modems in the foreseeable future. As a result, gross margins could be adversely affected in the near term. See "Risk Factors--Need to Reduce Cost of Client Modems," "Risk Factors-- Competition" and "Risk Factors--Limited Manufacturing Experience; Sole Source Manufacturing." The Company incurred net losses for the years ended December 31, 1994, 1995 and 1996 and the first nine months of 1997 of $2,897,000, $5,269,000, $8,515,000 and $10,082,000, respectively. As a result, the Company had an accumulated deficit of $27,424,000 as of September 30, 1997. The Company expects to increase its capital expenditures, as well as its research and development and other operating expenses, in order to support and expand the Company's operations. As a result, the Company expects to incur losses for the foreseeable future. See "Risk Factors--Limited Operating History; History of Losses," "Risk Factors--Fluctuations in Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices" and "Risk Factors--Lengthy Sales Cycle." As of September 30, 1997, the Company had approximately $12,516,000 in gross deferred tax assets comprised primarily of net operating loss carryforward and research and development tax credits. The Company believes that, based on a number of factors, there is sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of net losses since its inception and the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology. The Company believes that, based on the current available evidence, it is more likely than not that the Company will not generate taxable income through 1997 and accordingly, will not realize any portion of its deferred tax assets through 1997. In addition, the utilization of net operating loss carry forwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. See Note 11 of Notes to Financial Statements. 26 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in the Company's statements of operations for the periods indicated:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ---------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ----------- (UNAUDITED) Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.......................................... 203.9 120.8 105.7 127.9 89.8 --------- --------- --------- ----------- --------- Gross margin....................................... (103.9) (20.8) (5.7) (27.9) 10.2 --------- --------- --------- ----------- --------- Operating expenses: Research and development............................. 187.3 613.0 171.4 299.8 56.5 Sales and marketing.................................. 52.1 61.9 60.3 76.1 34.2 General and administrative........................... 79.8 118.7 57.8 95.5 27.5 --------- --------- --------- ----------- --------- Total operating expenses........................... 319.2 793.6 289.5 471.4 118.2 --------- --------- --------- ----------- --------- Loss from operations............................. (423.1) (814.4) (295.2) (499.3) (108.0) Interest income and other expense, net............... 4.5 26.3 8.7 11.7 2.0 Interest expense..................................... (15.1) (48.2) (1.0) (1.8) (4.2) --------- --------- --------- ----------- --------- Net loss......................................... (433.7)% (836.3)% (287.5)% (489.4)% (110.2)% --------- --------- --------- ----------- --------- --------- --------- --------- ----------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES. Net sales increased to $9,152,000 for the first nine months of 1997, compared to net sales of $1,253,000 for the same period in 1996. The significant growth in net sales was primarily due to increased unit shipments as a result of the introduction of the Series 2000 product line in October 1996 offset in part by price declines on certain products in connection with volume purchases. For the first nine months of 1997, broadband wireless system operators accounted for 62.2% of net sales, cable systems operators accounted for 24.5% of net sales and ISPs accounted for 13.3% of net sales. For the first nine months of 1996, cable system operators accounted for 80.3% of net sales, ISPs accounted for 11.8% of net sales and broadband wireless system operators accounted for 7.9% of net sales. International sales accounted for 10.8% and 13.2% of net sales for the first nine months of 1997 and 1996, respectively. The Company had one customer that accounted for 10.2% of net sales during the first nine months of 1997. The Company had two customers that accounted for 48.9% and 11.8%, respectively, of net sales during the first nine months of 1996. GROSS PROFIT. Gross margin was 10.2% and negative 27.9%, for the first nine months of 1997 and 1996, respectively. The improvement in gross margin was primarily due to the shift in sales mix from the lower margin Series 1000 products to the higher margin Series 2000 products, lower per unit manufacturing costs and greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing headend, software and cable modem development expenses, as well as design expenditures associated with product cost reduction programs and improving the ability to manufacture its existing products. Research and development expenses were $5,170,000 and $3,757,000 during the first nine months of 1997 and 1996, respectively, representing 56.5% and 299.8% of net sales, respectively. Research and development expenses grew in absolute dollars as a result of increased staffing and associated engineering costs related to new and existing product development. The Company intends to continue to increase its investment in research and 27 development programs in future periods, focusing on cost improvement, software enhancements and wireless technologies. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and related payroll costs of sales and marketing personnel, commissions, advertising, promotions and travel. Sales and marketing expenses were $3,138,000 and $954,000 during the first nine months of 1997 and 1996, respectively, representing 34.2% and 76.1% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increased headcount and related payroll costs, increased commissions as a result of higher net sales and increased costs for marketing and promoting the Company's Series 2000 product line. The Company expects sales and marketing expenses to increase in the future. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, travel expenses, legal fees and costs of outside services. General and administrative expenses were $2,516,000 and $1,196,000 during the first nine months of 1997 and 1996, respectively, representing 27.5% and 95.5% of net sales, respectively. The increase in absolute dollars was due to increased charges to the provision for doubtful accounts headcount, increased legal costs to support the reissuance of the Company's Patents and related payroll costs. INTEREST INCOME (EXPENSE). The Company incurred net interest expense during the first nine months of 1997 of $196,000 and earned interest income of $124,000 during the first nine months of 1996. Net interest expense incurred during the first nine months of 1997 was the result of the Company's use of capital lease financing to fund a majority of its capital expenditures, as well as loans obtained to support working capital requirements. Net interest income earned during the first nine months of 1996 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in December 1995 and June 1996, offset in part by the interest expense incurred on outstanding capital lease obligations. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales were $2,962,000 and $630,000 in 1996 and 1995, respectively. The increase in net sales was due primarily to the increase in unit sales due to the introduction of the Series 2000 product line in October 1996. GROSS PROFIT. Gross margin improved to negative 5.7% in 1996 compared to negative 20.8% in 1995. The improvement in gross margin was primarily attributable to the introduction of the Series 2000 product line, which generally has higher gross margins than the Series 1000 product line, and to the increase in net sales, which allowed for greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses were $5,076,000 and $3,862,000 for 1996 and 1995, respectively, representing 171.4% and 613.0% of net sales, respectively. The increase in research and development expenses in absolute dollars during 1996 was due to increased headcount and related labor costs, increased cost of development material to support product development and depreciation expenses associated with capital purchases for product testing. SALES AND MARKETING. Sales and marketing expenses were $1,786,000 and $390,000 for 1996 and 1995, respectively, representing 60.3% and 61.9% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars during 1996 was principally due to increased headcount for staff level positions, the hiring of the Company's vice presidents of sales and marketing, increased commissions as a result of higher net sales and increased costs for marketing and promoting the Company's products. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,714,000 and $748,000 for 1996 and 1995, respectively, representing 57.8% and 118.7% of net sales, respectively. The increase in general and administrative expenses in absolute dollars during 1996 was due to increased allowances for 28 doubtful accounts, higher legal costs to prosecute patents, and increased headcount and related personnel costs. INTEREST INCOME (EXPENSE). During 1996, the Company had net interest income of $229,000 compared to net interest expense of $138,000 in 1995. The increase in 1996 compared to 1995 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in June 1996. The interest income earned during 1996 was offset in part by interest expense incurred on outstanding capital lease obligations. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales decreased slightly to $630,000 for 1995 as compared to $668,000 for 1994. Sales in both years consisted principally of sales of the Series 1000 products. The Company's customers initially deployed these products in trials in order to assess the Company's technology for use in cable or wireless applications. GROSS PROFIT. Gross margin improved to negative 20.8% in 1995 compared to negative 103.9% in 1994. The improvement in gross margin was primarily attributable to increased units sold which allowed for greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses were $3,862,000 and $1,251,000 in 1995 and 1994, respectively, representing 613.0% and 187.3% of net sales, respectively. The increase in research and development expenses in absolute dollars was primarily due to increased personnel costs and materials costs related to the acceleration of the design and development of the Series 2000 products. SALES AND MARKETING. Sales and marketing expenses were $390,000 and $348,000 in 1995 and 1994, respectively, representing 61.9% and 52.1% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increased commissions as a result of higher sales, and increased headcount. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $748,000 and $533,000 in 1995 and 1994, respectively, representing 118.7% and 79.8% of net sales, respectively. The increase in general and administrative expenses was primarily due to increased use of outside consultants, higher legal expenses to prosecute patents and higher payroll costs related to increased staffing. INTEREST INCOME (EXPENSE). The Company incurred interest expenses in 1995 and 1994 of $138,000 and $71,000, respectively. The amounts incurred for both periods were a result of the Company's use of capital lease financing to fund a majority of it capital expenditures, as well as loans obtained to support working capital requirements. 29 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statements of operations data for the seven quarters ended September 30, 1997, as well as such data expressed as a percentage of net sales. The unaudited data has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information for the periods presented. Such statement of operations data should be read in conjunction with the Financial Statements of the Company and related Notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not indicative of the operating results for any future period.
QUARTER ENDED ---------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................ $ 303 $ 455 $ 495 $ 1,709 $ 1,852 $ 3,053 $ 4,247 Cost of sales........................................ 408 528 666 1,528 1,974 2,715 3,525 -------- -------- --------- -------- -------- -------- --------- Gross profit (loss).............................. (105) (73) (171) 181 (122) 338 722 -------- -------- --------- -------- -------- -------- --------- Operating expenses: Research and development........................... 1,102 1,167 1,488 1,319 1,726 1,653 1,791 Sales and marketing................................ 103 286 565 832 1,274 990 874 General and administrative......................... 308 437 451 518 1,233 569 714 -------- -------- --------- -------- -------- -------- --------- Total operating expenses......................... 1,513 1,890 2,504 2,669 4,233 3,212 3,379 -------- -------- --------- -------- -------- -------- --------- Loss from operations........................... (1,618) (1,963) (2,675) (2,488) (4,355) (2,874) (2,657) Interest income and other expense, net............... 34 19 93 111 87 48 48 Interest expense..................................... (5) (17) -- (6) (12) (147) (220) -------- -------- --------- -------- -------- -------- --------- Net loss....................................... $(1,589) $(1,961) $(2,582) $ (2,383) $(4,280) $(2,973) $(2,829) -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- --------- Net loss per share(1)................................ $ (0.50) $ (0.61) $ (0.81) $ (0.75) $ (1.33) $ (0.92) $ (0.87) -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- --------- Shares used in per share calculations(1)............. 3,182 3,209 3,191 3,172 3,214 3,228 3,245 -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- ---------
QUARTER ENDED ---------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........................................ 134.7 116.0 134.5 89.4 106.6 88.9 83.0 -------- -------- --------- -------- -------- -------- --------- Gross margin....................................... (34.7) (16.0) (34.5) 10.6 (6.6) 11.1 17.0 -------- -------- --------- -------- -------- -------- --------- Operating expenses: Research and development........................... 363.7 256.5 300.6 77.2 93.2 54.2 42.2 Sales and marketing................................ 34.0 62.9 114.2 48.7 68.8 32.4 20.6 General and administrative......................... 101.6 96.0 91.1 30.3 66.6 18.6 16.8 -------- -------- --------- -------- -------- -------- --------- Total operating expenses......................... 499.3 415.4 505.9 156.2 228.6 105.2 79.6 -------- -------- --------- -------- -------- -------- --------- Loss from operations........................... (534.0) (431.4) (540.4) (145.6) (235.2) (94.1) (62.6) Interest income and other expense, net............... 11.2 4.2 18.8 6.7 4.7 1.6 1.1 Interest expense..................................... (1.6) (3.8) -- (0.6) (0.7) (4.8) (5.2) -------- -------- --------- -------- -------- -------- --------- Net loss....................................... (524.4)% (431.0)% (521.6)% (139.5)% (231.2)% (97.3)% (66.7)% -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- ---------
- -------------------------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used to compute net loss per share. 30 The decrease in gross margin for the quarter ended March 31, 1997 compared to the quarter ended December 31, 1996 was due to lower ASPs in the first quarter of 1997 and increased allocation of service costs associated with expanded sales of the Series 2000 products to cost of sales to support sales of Series 2000 products. The increase in operating expenses for the quarter ended March 31, 1997 was primarily due to higher charges to the provision for doubtful accounts, increased promotion costs and higher engineering material costs. The Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. Historically, the Company's quarterly net sales have been unpredictable due to a number of factors. Factors that have influenced and may continue to influence the Company's results of operations in a particular period include the size and timing of customer orders and subsequent shipments, particularly with respect to the Company's headend equipment, customer order deferrals in anticipation of new products or technologies, timing of product introductions or enhancements by the Company or its competitors, market acceptance of new products, technological changes in the cable, wireless and telecommunications industries, competitive pricing pressures, accuracy of customer forecasts of end-user demand, changes in the Company's operating expenses, personnel changes, quality control of products sold, regulatory changes, capital spending, delays of payments by customers and general economic conditions. In addition, the inability to obtain components from suppliers or manufacturers has adversely affected the Company's results in the past, and may adversely affect the Company's results of operations in the future. For example, in the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp, its primary modem manufacturer, because of technical delays in product integration. As a result, the Company was unable to fill all customer orders for the second quarter. While such problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future with respect to Sharp or any other supplier or manufacturer. The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require delivery of products within 30 days. A substantial majority of the Company's net sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders and net sales for any future quarter are difficult to predict. Further, sales are generally made pursuant to standard purchase orders, which can be rescheduled, reduced or cancelled with little or no penalty. Historically, a substantial majority of the Company's net sales in a given quarter have been recorded in the third month of the quarter, with a concentration of such net sales in the last two weeks of the quarter. Because of the relatively large dollar size of the Company's typical transaction, any delay in the closing of a transaction can have a significant impact on the Company's operating results for a particular period. See "Risk Factors--Lengthy Sales Cycle." Historically, ASPs in the cable and broadband wireless systems industry have decreased over the life of individual products and technologies. In the past, the Company has experienced decreases in unit ASPs of each of its products. The Company anticipates that ASPs of its products will continue to decrease, which will cause continuing downward pressure on the gross margins for these products. The Company currently believes that it is likely to experience net losses for the foreseeable future. The Company's gross margins are also impacted by the sales mix of PoPs and modems. Sales of the Company's single-user modems generally have lower margins than the multi-user modems, both of which are lower than margins on the Company's PoPs. The Company anticipates that in the near term, the sales mix of modems will be heavily weighted towards single-user modems. See "Risk Factors--Need to Reduce Cost of Client Modems." LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations primarily through a combination of private debt and equity and equipment lease financing. As of September 30, 1997, the Company had working capital of $3,565,000, including $5,314,000 in cash and cash equivalents, as compared to working capital of $6,944,000 and $6,886,000 in cash and cash equivalents as of December 31, 1996. The decrease in cash and cash equivalents during the first nine months of 1997 was primarily due to support for the growth in accounts receivable and increased operating expenditures. The decrease in working capital during the first nine months of 1997 was due to the Subordinated Notes entered into in September 1997 and net losses incurred. 31 The Company has had significantly negative cash flows from operating activities in each quarterly period to date. Cash used in operating activities during 1994, 1995 and 1996 and for the first nine months of 1997 was $2,642,000, $3,339,000, $8,577,000 and $14,822,000, respectively. Cash used in operating activities during 1994, 1995 and 1996 was primarily the result of net losses. For the first nine months of 1997, cash used in operating activities was the result of operating losses of $10,082,000, the increase in accounts receivable of $5,257,000 as a result of higher net sales made late in the quarter and extended payment terms given to certain customers and the increase in inventories of $1,125,000 to support higher sales volumes. Cash used in investing activities during 1994 and 1995 and for the first nine months of 1997 was $417,000, $608,000 and $434,000, respectively. Cash used in investing activities during 1994 and 1995 was a result of purchases of short term investments and purchases of property and equipment. During the first nine months of 1997, cash used in investing activities resulted principally from purchases of property and equipment. Cash provided by investing activities during 1996 was $143,000 and was primarily due to proceeds from short-term investments offset in part by purchases of equipment. Aggregate capital expenditures for property and equipment, primarily for computers, furniture, fixtures and engineering test equipment, during 1994, 1995 and 1996 and the first nine months of 1997 were $218,000, $295,000, $321,000 and $400,000, respectively. The Company has funded and expects to continue to fund a substantial portion of its property and equipment expenditures from a variety of sources including direct vendor leasing programs and third party commercial leasing arrangements. As of September 30, 1997, the Company has no material commitments for capital expenditures but expects capital expenditures for the next twelve months to be between $1.0 million to $1.5 million. Cash provided by financing activities during 1994, 1995 and 1996 and the first nine months of 1997 was $3,255,000, $5,583,000, $12,457,000 and $13,684,000, respectively. During 1994 and 1996, cash provided by investing activities resulted principally from net proceeds from the issuance of convertible debentures, notes payable, and the sale of Preferred Stock. Cash provided by financing activities during 1995 resulted principally from net proceeds from the sale of Preferred Stock. During the first nine months of 1997, cash provided by financing activities resulted primarily from net proceeds from the sale of Preferred Stock, the $5.5 Million Debenture and the sale of $6.9 million of Subordinated Notes. The Company's principal source of liquidity at September 30, 1997 was cash and cash equivalents of $5,314,000. In October 1997, the Company also entered into a commitment for a $4.0 million Credit Facility. The Credit Facility, which expires in October 1998, will bear interest at the prime rate and will be collateralized by substantially all of the Company's assets. To date, the Company has no borrowings outstanding under the Credit Facility. The Company believes that the net proceeds of this offering, available bank borrowings, existing cash balances and funds generated from operations, if any, will provide the Company with sufficient funds to repay the Subordinated Notes and to finance its operations for at least the next 12 months. However, the Company may require additional funds to support its working capital requirements or for other purposes, and may seek to raise such additional funds through the sale of public or private equity or debt financing or from other sources. The sale of additional equity or convertible debt securities may result in additional dilution to the Company's stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to the Company or its stockholders. See "Risk Factors--Possible Need for Additional Financing." Under the $5.5 Million Debenture, the Company is subject to limitations on the amount of capital expenditures it may incur in any 12 month period and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder so long as the $5.5 Million Debenture remains outstanding. Under the Subordinated Notes, the Company is limited in the amount of capital expenditures it may incur in any 12 month period and in the borrowing of additional funds, and is prevented from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are outstanding. In addition, under the Credit Facility, the Company may not declare dividends. The $5.5 Million Debenture and the Credit Facility are collateralized by substantially all of the Company's assets. See "Risk Factors--Restrictive Debt Covenants" and Notes 5, 6 and 16 of Notes to Financial Statements. 32 BUSINESS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY Hybrid Networks, Inc. is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. The Company's customers consist primarily of cable system operators, broadband wireless system operators, ISPs and other companies that provide broadband networking systems or services to business and residential users. Hybrid's Series 2000 product line consists of secure headend routers, cable or wireless modems and management software for use with either cable TV or wireless transmission facilities. Because the substantial majority of cable and wireless transmission facilities are not capable of two-way transmissions, the Series 2000 has been designed to utilize a variety of return paths, including the public switched telephone network. The Series 2000 system also features a router to provide corporate telecommuters and others in remote locations secure access to their files on the corporate intranet. The Series 2000 is capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, providing system operators with flexible, scalable and upgradeable solutions that allow them to offer cost-effective broadband access to their subscribers. INDUSTRY BACKGROUND GROWTH OF THE INTERNET AND INTRANETS AND DEMAND FOR HIGHER SPEED ACCESS The Internet has become an increasingly important source of information for businesses and consumers. The Internet's importance results from a variety of factors, including increased email usage, the emergence of the World Wide Web and the proliferation of multimedia content, such as graphics, images, video and audio, that can be accessed online. Demand for bandwidth-intensive content, combined with the inherent technical difficulties of delivering large amounts of data over existing copper wire telephone infrastructure, has resulted in slow response times and increasing frustration for many users of the Internet. Demand for higher bandwidth connections to the Internet is continuing to grow as the Internet becomes a more attractive outlet for commercial applications utilizing multimedia content and as the number of Internet users increases. A rapidly growing segment of the Internet user market is the business community. In a 1997 survey conducted by American Management Association International and Tierney & Partners, 27% of businesses surveyed reported moderate to heavy Internet usage. This number is expected to increase to 64% by 1999. Businesses of all sizes, including small offices/home offices ("SOHOs"), are using the Internet and corporate intranets to communicate with co-workers and customers via email, gather information, collaborate with others and provide support. Larger companies are increasingly using the Internet and intranets to provide telecommuters, traveling employees and employees in remote offices with a means of improved communication and remote access to corporate networks. In the 1997 American Internet Users Survey, FIND/SVP estimated that the number of workers telecommuting has grown to 11 million in 1997. Despite this growth, many companies do not provide Internet and intranet access as a business tool for their employees because of concerns regarding speed, cost of broadband access and security of the transmission and databases. The consumer market also constitutes a large segment of potential individual Internet end-users for broadband access providers. According to a report released in November 1996 by Jupiter Communications, there were approximately 14.7 million households with Internet access in the United States in 1996, and 33 this number is expected to increase to 36.0 million by 2000. While the consumer market segment represents a potentially large number of subscribers for an Internet access provider, this market is generally more price-sensitive than the business community. However, an emerging segment of the consumer market is comprised of technologically savvy consumers who desire high speed Internet access and are willing to pay more than the typical residential end-user to obtain these benefits. ACCESS OVER TRADITIONAL TELEPHONE INFRASTRUCTURE Telcos and ISPs have been delivering Internet and intranet access over the existing copper telephone wire infrastructure for many years through symmetrical technologies such as POTS, Integrated Services Digital Network ("ISDN") and "T1". Even though providers of Internet service have been improving the speed and quality of their connections to the Internet, the "last mile" connection to the end-user still predominantly consists of low speed analog transmissions. Improvements in modem chip technology have to date driven the increase in the rate at which data is transmitted over analog POTS copper wire. Currently, most new computers contain pre-installed 28.8 or 33.6 Kbps modems. The new generation of 56 Kbps modems, which was recently introduced, but has not yet been standardized, does not perform consistently at 56 Kbps and remains insufficient for rapid downloading of bandwidth-intensive multimedia content from the Internet. ISDN service, which requires special equipment at both the user's location and the telephone network, can achieve digital transmission at rates up to 128 Kbps over copper wire. However, despite ISDN's introduction in the early 1980s, the complexity of installing ISDN has limited its deployment to date. Historically, telcos have also deployed another digital service known as "T1" which provides data rates of 1.5 Mbps. However, T1 connections can suffer from distance limitations, are dependent on expensive conditioning of the copper wire, carry costly monthly charges for the end-user and generally have been limited to use by businesses. The newest technologies introduced to increase bandwidth over copper wire are grouped by the generic acronym "xDSL" (Digital Subscriber Line). In its various forms, xDSL will be capable of data transmission speeds over copper wire of 1.5 to 9 Mbps (excluding IDSL) downstream and 16 Kbps to 2 Mbps upstream (excluding VDSL, which requires very short loop lengths). The downstream data rate of xDSL is limited by the length of the copper wire (i.e. the distance between a user and the telco central office) and the diameter of the copper wire. xDSL is a point-to-point circuit technology, which currently limits its scalability, and xDSL systems perform poorly on badly degraded copper wire or in a noisy environment (because of crosstalk interference). xDSL is still expensive for telcos to implement, and only limited deployments of xDSL service have been made to date. BROADBAND ACCESS Broadband access technology enables cable system operators and broadband wireless system operators to offer a cost-effective high speed Internet access solution. Broadband access systems can deliver data at up to 30 Mbps through a standard cable or wireless TV channel. Depending on the system design, a subscriber shares access with others and typically receives data at speeds ranging from 1.5 Mbps up to a maximum of 10 Mbps, depending upon the number and activity level of concurrent users. In the last few years, certain cable system operators and broadband wireless system operators have begun conducting limited broadband modem trials, and commercial deployments are currently underway in several markets. Paul Kagan Associates forecast that residential penetration of cable modems will reach 200,000 subscribers in the United States by the end of 1997 and grow at a compounded annual growth rate of 120% to 4.7 million subscribers by the end of 2001. Wired cable systems in the United States pass by approximately 95% of households and approximately 40% of businesses. At the end of 1996, approximately 90% of these cable systems were built primarily utilizing coaxial cable that can deliver only downstream transmission from the cable headend to the end-user. In order for such one-way cable systems to provide broadband Internet access, a separate return path, such as a telephone line, is required to transmit data upstream to the Internet. Upgrading the existing one- 34 way cable infrastructure to hybrid fiber coax ("HFC") to enable two-way data transmission is possible but expensive. Although many large cable system operators have communicated aggressive schedules to upgrade their systems to enable two-way transmission, only 10% of wired cable systems in the United States had been upgraded to two-way by the end of 1996. As a result, the majority of cable networks require an alternative upstream path. The combination of a fast downstream path and a slow upstream path, representing an asymmetric network, conforms to the typical pattern for Internet usage, which involves small amounts of data flowing from the user to the network (e.g., key strokes, mouse clicks and packet acknowledgments) followed by much larger amounts of data being delivered from the network to the user (e.g., web pages with graphics, images, audio and video). Because asymmetric networks enable service providers to optimize frequency usage, these networks are well suited for both telephone and two-way cable configurations. To date, the principal cable modem specifications or standards under development (MCNS, DAVIC and IEEE) are based upon asymmetric systems. Wireless cable system operators, operating in the MDS and MMDS frequencies, historically have served rural and other areas where it is not economical to install coaxial or HFC cable, although there are wireless cable system operators licensed in metropolitan areas. These operators, who are in competition with direct broadcast satellite ("DBS") and cable TV providers, are in search of new revenue streams and have been investigating high speed Internet access as a potential new area for business. Wireless cable systems, which require an unimpeded line of sight from the transmitting antenna to the receiver, usually comprise an omni-directional transmitting antenna placed on top of a tall building or mountain. One advantage of wireless systems is that they are able to reach a higher percentage of businesses than residences because businesses tend to have taller buildings with fewer line of sight obstructions, such as foliage. In addition to providing wireless cable television, wireless system operators are moving towards becoming broadband Internet service providers. Educational institutions with instructional TV fixed service ("ITFS") licenses, low power TV ("LPTV") broadcasters (UHF or VHF frequencies), licensees of the recently auctioned Wireless Communications Services ("WCS") frequencies and future potential licensees of LMDS are evaluating the possibility of using a portion of their spectrum for high speed Internet access. As with wired cable, asymmetric systems are well suited for wireless systems which currently are authorized to transmit digital content only in the downstream direction. As demand for Internet access over cable and broadband wireless systems increases, ISPs are also seeking alternatives for providing broadband access, as well as enhancing their product offerings and additional revenue streams. Traditional ISPs face competition from new high speed service ISPs, such as At Home Corporation. To address this competition, many ISPs are seeking to offer high speed, cost-effective Internet access service to business and residential users through strategic relationships with cable and wireless system operators. Further, businesses are increasingly demanding high speed broadband access in order to facilitate access to their corporate intranets and networks by telecommuters and employees in remote offices. The following table provides a comparison of the minimum time for downloading typical web content over various types of technology currently available (See Note 1).
CABLE POTS ISDN T1 XDSL MODEMS CONTENT FILE SIZE 28.8 KBPS 128 KBPS 1.5 MBPS 1.5-9MBPS 10MBPS - ------------------------------------------------------------------------------------------------------------- Typical Web Page 64 Kbytes 17.8 sec 4.0 sec 0.3 sec 0.1-0.3 sec 0.1 sec Audio Clip 1.0 Mbytes 4.6 min 1.0 min 5.3 sec 0.9-5.3 sec 0.8 sec Video Clip 3.2 Mbytes 14.8 min 3.3 min 17.1 sec 2.8-17.1 sec 2.6 sec Full Screen Video 11.0 Mbytes 50.9 min 11.5 min 58.7 sec 9.8-58.7 sec 8.8 sec
(1) All of the download calculations were determined assuming the entire bandwidth is available for data and does not include overhead. Actual download times will vary. 35 Internet and intranet access services currently provided by telephone companies are generally slow, expensive or not widely available. Further, due to increased competition, cable and wireless system operators are seeking new revenue opportunities provided by broadband Internet access. Currently, ISPs, cable operators and broadband wireless operators possess the basic infrastructure but lack the enabling technology necessary to provide cost-effective broadband access. THE SOLUTION Hybrid provides cost-effective, high speed Internet and intranet access solutions to cable system operators, broadband wireless system operators, ISPs and other businesses. The Company's products remove the bottleneck over the "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. Hybrid's Series 2000 product line consists of hardware and software components capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, and interoperates with a range of third party networking products. The Series 2000 system also features a router to provide telecommuters and others in remote locations secure access to their files on corporate intranets. The Series 2000 provides cable and wireless system operators and ISPs with a flexible, scalable, upgradeable solution that allows them to offer cost-effective broadband access to their subscribers. By doing this, the Company's products also allow cable and wireless operators to conserve scarce bandwidth and utilize a variety of data return paths, including the public switched telephone network. The Company's products enable cable system operators to offer Internet access on either one-way or two-way cable systems, thus minimizing the operators' capital investment and time-to-market pressures. The Series 2000 also facilitates the entrance of broadband wireless system operators into the high speed Internet access market. The Series 2000 has been designed to utilize an array of wireless frequencies, ranging from UHF to MMDS frequencies, and to minimize commonly experienced interference problems. STRATEGY The Company's objective is to be a leader in providing broadband access products that are reliable, secure and scalable to cable system operators, broadband wireless system operators, ISPs and other businesses. Key elements of the Company's strategy include: SATISFY BROADBAND ACCESS NEEDS OF GROWING BUSINESS MARKET. The Company's products address the needs of business users that require cost-effective and secure high speed broadband Internet and intranet access in order to obtain bandwidth-intensive multimedia information and to communicate with customers, suppliers, telecommuters and employees in remote locations. The Series 2000 line of products provides secure, high speed access for telecommuters and remote parties and enables multiple users to be linked to one modem, reducing costs for operators and users. The Company will continue its efforts to increase the scalability and performance of its current broadband systems for the growing business market. OFFER FLEXIBLE PRODUCTS FOR CABLE AND WIRELESS SYSTEM OPERATORS. The Company currently provides, and intends to continue to provide, products that operate with existing cable, wireless and telephony networks interchangeably and interoperably, making use of the numerous types of transmission media available to operators. The Series 2000 supports downstream options, including cable and wireless systems, ranging from low power TV ("LPTV") to WCS frequencies. In the upstream direction, the Series 2000 currently supports cable, POTS and router return. The Series 2000 product line enables cable and wireless system operators to offer broadband access service by utilizing their existing cable or wireless infrastructure for the downstream path and the existing telephone network for the upstream path. The Series 2000 allows migration to two-way cable systems utilizing the same Series 2000 headend equipment. Two-way transmission over a wireless system is currently under development. ADDRESS THE NEEDS OF WIRELESS SYSTEM OPERATORS. The Company has focused, and intends to continue to focus, on the needs of wireless system operators to leverage their infrastructure, expand their customer 36 base and enhance their revenues by providing high speed Internet access to businesses and consumers. The Series 2000 has been tested and deployed in wireless cable (MDS, MMDS, ITFS) and low power TV (LPTV) operations and is under evaluation by WCS licensees. The Series 2000 addresses the product requirements of broadband wireless system operators by providing support for business users, utilizing 2 MHz sub-channels that fit into a variety of different sized frequency blocks and providing better resistance to interference. ENHANCE RELATIONSHIP WITH ISPS. The Company seeks to enhance its relationship with ISPs by providing them with the enabling technology to offer a broadband solution. Due to the competitive nature of the traditional ISP marketplace and the emergence of newer, high speed services, many ISPs are seeking a cost-effective solution for providing broadband access. The Series 2000 enables ISPs to offer broadband access services through strategic relationships with either cable or broadband wireless system operators. Because of its flexibility in supporting both cable and wireless transmission, the Series 2000 enhances the partnering potential for an ISP. The Company intends to continue to devote engineering and marketing efforts to support these relationships. LEVERAGE TECHNOLOGICAL ADVANTAGE. The Company's proprietary technology allows it to create high quality, reliable products with an array of features. The Company seeks to leverage its intellectual property position by capitalizing on its proprietary asymmetric networking and media independent technologies, by offering a range of broadband Internet access solutions to customers and, where appropriate, by sharing its technology with other parties. The Company intends to continue to devote significant resources to enhancing its existing proprietary technologies and to developing new products. PRODUCTS, TECHNOLOGY AND SERVICES Hybrid's Series 2000 product line provides cable system operators, broadband wireless system operators, ISPs and other businesses with a cost-effective, high speed Internet and intranet access solution. The Company's products include secure headend routers, cable and wireless modems and management software for use with either cable TV transmission facilities or wireless transmission facilities. The Company's headend products are used by cable system operators, broadband wireless system operators and other customers to transmit and receive data across networks and to manage networks and modems. Hybrid's client modems and routers are used by subscribers of the Company's customers and can be used as single-user devices or in multi-user local area networks ("LANs"). The Company's products incorporate proprietary technology that enables the same system to be deployed in either cable or broadband wireless systems and supports both one-way downstream transmission accompanied by upstream transmission via modem and router return or two-way cable transmission. See "Risk Factors--Dependence on Recently Introduced Products and Products under Development; Rapid Technological Change." 37 The following diagram illustrates a typical deployment of the Company's products for high speed Internet access: HIGH SPEED INTERNET ACCESS [SCHEMATIC DIAGRAM OF A TYPICAL DEPLOYMENT OF THE COMPANY'S PRODUCTS FOR CABLE AND WIRELESS SYSTEMS] 38 PRODUCTS The following table outlines the primary components of the Company's Series 2000: HEADEND EQUIPMENT(1)(2) PRODUCT DESCRIPTION CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid software that provides subscriber and network management. CyberMaster Downstream Router (CMD-2000) High speed downstream RF router that supports up to 60 Mbps aggregate throughput in 12 MHz of spectrum. CyberMaster Upstream Router, Telephone Return Performs the functions of an analog (CMU-2000-8T) modem bank and terminal server in a telephone return configuration. Supports up to 64 telephone modems. FSK Demodulator and Terminal Server Upstream receiver and demodulator for (OEX-020-7 and OLP-330) two-way cable configuration.
SINGLE-USER EQUIPMENT(1)(3) CyberCommuter 2000 Secure Router (CSM-2000) Workstation with proprietary Hybrid software that provides subscriber management to the corporate MIS director in a secure telecommuting configuration. Multi-User Modem/Router (CCM-201) Client modem and router that can be used in either cable or wireless systems. Supports up to 20 users. Single-User Modem/Router (N-201) Client modem that can be used in either cable or wireless systems. Supports a single user.
(1) All products are available for use with cable or wireless systems, except for the FSK Demodulator & Terminal Server, which is currently only available for use with cable systems. (2) Headend equipment typically ranges in price from $60,000 to $90,000 for a single system. (3) Modem list prices range from approximately $450 to $900 depending on features. HEADEND EQUIPMENT CYBERMANAGER 2000. The CyberManager 2000 (CMG-2000) is a proprietary subscriber and network management workstation built on a Sun Microsystems Sparc 5. Running proprietary Hybrid software, the CMG-2000 operates as the system administrator interface to the upstream and downstream routers and other third party headend equipment. The CMG-2000 has a 10BaseT interface to connect to a fast Ethernet switch in the headend. Currently, the CMG-2000 supports up to 5,000 subscribers. CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router (CMD-2000) is a rack-mounted, Pentium based, PCI/ISA bus industrial microcomputer. It supports SIF and QAM cards, which are used for downstream routing and for 64QAM downstream modulation. The CMD-2000 has a 100BaseT interface to connect to a fast Ethernet switch within the headend. The CMD-2000 supports up to six independent 10 Mbps downstream channels. Each 10 Mbps channel occupies 2 MHz of either cable or wireless spectrum. CYBERMASTER UPSTREAM ROUTER, TELEPHONE RETURN. The CyberMaster Upstream Router, Telephone Return (CMU-2000-8T) is a rack-mounted, Pentium based, PCI/ISA bus industrial microcomputer. It 39 houses up to 64 analog modems that can handle speeds of up to 33.6 Kbps for the telephone return path. The CMU-2000-8T has a 10/100BaseT interface that connects to a fast Ethernet switch within the headend. A typical installation supports multiple CMU-2000-8Ts. FSK DEMODULATOR AND TERMINAL SERVER. The FSK Demodulator (OEX-020-7) and Terminal Server (OLP-330) includes a rack-mounted FSK upstream demodulator that supports up to seven upstream channels. The demodulator output connects to a terminal server which converts the demodulated data stream into Ethernet packets. A typical installation supports multiple FSK Demodulators and Terminal Servers. END-USER EQUIPMENT CYBERCOMMUTER 2000 SECURE ROUTER. The CyberCommuter 2000 Secure Router (CSM-2000) is a proprietary subscriber management workstation built on a Sun Microsystems Sparc 5 with a special encryption board. This optional component is used to provide secure, high speed telecommuting and remote access to businesses. The CSM-2000 is placed at the location of a corporate MIS director or LAN administrator and provides the ability to administer and manage secure telecommuter access to the corporate intranet. MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router (CCM-201) supports 10 Mbps, 64QAM downstream data transmission on both cable and wireless systems and upstream transmission via analog modem, router or cable return. Each CCM-201 includes routing capability to support up to 20 networked devices (PC, Macintosh or workstation). The CCM-201 has a number of security features including system authentication, user ID and password protection, public and private key management and optional DES encryption. SINGLE-USER MODEM. The Single-User Modem (N-201) supports 10 Mbps, 64QAM downstream data transmission on both cable and wireless systems and upstream transmission via analog modem, router, and cable return. Each N-201 supports one client device which can be a PC, Macintosh or workstation. TECHNOLOGY The Series 2000 product line is an integrated broadband access system. The Series 2000 is media independent, allowing the same system components to be deployed in either cable or wireless systems. It utilizes proprietary asymmetric networking technology that allows for optimal use of available frequencies. The Series 2000 supports both asymmetric two-way transmission on a cable system and asymmetric telephone- or router-return on either a cable or broadband wireless system. The Company is currently developing asymmetric two-way transmission over a broadband wireless system. The Series 2000 provides for downstream transmission over wired cable in the interference prone "rolloff" channels that are unsuitable for video broadcast, preserving scarce channels for the cable system operator. The Company's proprietary sub-channelization technology splits a standard 6 MHz channel into three 2 MHz slices for downstream transmission, providing greater flexibility and minimizing multipath interference in wireless systems. By providing 2 MHz sub-channelization, the Company's products are also positioned to serve the newly auctioned WCS frequencies, which are only 5 MHz wide. The Series 2000 is expandable from an entry-level system supporting up to 5,000 subscribers to serve more than 20,000 subscribers. The modular architecture also accommodates changes to the transport medium, such as upgrades from one-way coaxial cable plant to two-way HFC plant. SERVICES The Company generally performs all consulting, systems engineering, systems integration, installation, training and technical support for its products. Network operations engineers, who combine radio frequency ("RF") and TCP/IP networking expertise, provide network consulting to support the sales force, assisting sales representatives and customers in defining the specifications for the system to be installed. The Company's network operations group also works with the customer during site preparation to aid in systems engineering, system integration, installation and acceptance testing to ensure a successful system 40 start-up. Services are provided on a time and materials basis. Each customer is required to enroll, for a fee, at least one person in the Company's one-week training course; enrollment for multiple employees from the customer organization is encouraged and supported with a discounted fee schedule. These training courses are tailored to specific implementations of the Company's products and cover the installation, operation and maintenance of the Company's headend and client modem products in a network operating environment. The Company typically provides a one-year warranty on its products that includes factory and on-site repair service as needed. Customer support also includes telephone support, maintenance releases and technical bulletins covering all of the Company's software and firmware products that contain application code. The Company intends to extend support after expiration of the warranty period as a purchase option, including on-site field support. CUSTOMERS The Company's customers include cable system operators, broadband wireless system operators, ISPs, resellers and other businesses. The following table sets forth certain customers of the Company who have purchased at least $100,000 of products from the Company in the last 18 months.
BROADBAND WIRELESS CABLE SYSTEM OPERATORS SYSTEM OPERATORS ISPS RESELLERS AND OTHERS - ---------------------- ------------------------- ----------------------- ------------------------- Comcast Cable CAI Wireless Systems, AT&T and AT&T WorldNet Alcatel Telecom and Communication, Inc. Inc. DirectNet, Inc. Alcatel Bell N.V. RCN Corporation CS Wireless Systems, Inc. InterjetNet, Inc. Itochu Corporation Jones Intercable, Inc. Digital Scientific Inc. Internet Ventures, Inc. Lucent Technologies, Inc. CableNet Corporation People's Choice TV Media City World, Inc. Network Systems Corporation Warp Drive Networks LLC Technologies, Inc. Sioux Valley Rural TV World-wide Wireless, Inc.
To date, a small number of customers has accounted for a substantial portion of the Company's net sales. The Company expects that net sales from the sale of its products to a limited number of customers will continue to account for a high percentage of its net sales in the foreseeable future. The Company expects that its largest customers in future periods could be different from its largest customers in prior periods due to a variety of factors, including customers' deployment schedules and budget considerations. A limited number of cable system operators and broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, and the Company's success will be dependent upon its ability to establish and maintain relationships with these companies. In 1994, Intel Corporation ("Intel"), AT&T Corporation ("AT&T") and Advanced Research Project Agency ("ARPA") accounted for 59.6%, 24.2% and 11.7%, respectively, of the Company's net sales; in 1995, Intel and AT&T accounted for 51.6% and 28.2%, respectively, of the Company's net sales; in 1996, AT&T and Intel accounted for 41.0% and 20.7%, respectively, of the Company's net sales; and in the first nine months of 1997, Internet Ventures, Inc. accounted for 10.2% of the Company's net sales. The Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 12% of the Company's accounts receivable as of September 30, 1997, has recently been provided extended payment terms. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. From 1994 to 1996, Intel manufactured certain products based on the Company's design, and jointly marketed the Company's products with its own. While Intel no longer purchases products from the Company, it remains a stockholder of the Company, and maintains certain licensing and manufacturing rights to certain Hybrid products. See "Risk Factors--Inexperience in Emerging Market," "Risk Factors--Dependence on Cable System Operators," "Risk Factors--Dependence on Broadband Wireless System Operators and "Risk Factors--Customer Concentration." 41 The following examples illustrate how customers use Hybrid products to deliver network access: JONES INTERCABLE, INC. Jones Intercable, Inc. ("Jones Intercable"), one of the 10 largest cable television operators in the United States, has purchased the Series 2000 for its high speed Internet access service provided by Jones Internet Channel-TM-. An affiliate of Jones Intercable, Jones Internet Channel is an Internet programming network which offers high-speed connections to the Internet via fiber and coaxial cable. The service features electronic mail, news groups and World Wide Web access, as well as local information on government, schools, restaurants and entertainment, among other topics. Jones Intercable selected Hybrid through a careful evaluation process emphasizing technology, pricing and vendor service and support. Jones was particularly interested in a platform that would provide high-speed Internet access for its customers, regardless of their individual computing hardware and software choice. Jones is purchasing Series 2000 single-user modems and installing them in a telco-return configuration. INTERNET VENTURES, INC. Internet Ventures, Inc. ("IVI") is offering high speed cable Internet and intranet access in partnership with small to medium sized cable operators in selected markets. IVI offers cable operators a way to generate new revenue without having to invest heavily in plant upgrades or equipment. IVI purchases and installs the Series 2000, brings Internet service provider experience, markets the high speed service under its own PeRKInet brand, and gives the cable operator a percentage of the resulting revenue. IVI chose the Series 2000 because it was a third generation product that works with existing cable infrastructure. Many of IVI's cable partners have not upgraded to two-way cable and need a product that supports telephone return. The Series 2000 supports several telephone return options for consumer and business use. IVI's PeRKInet made its commercial debut on Avenue TV Cable in Ventura, California in March 1997. In June 1997, IVI announced it would make the high speed service available in several of Sun Country Cable's 45 systems. WARP DRIVE NETWORKS. Warp Drive Networks ("Warp Drive") launched a commercial wireless Internet access service in the Silicon Valley in June 1997, offering services from ISDN to fractional T3 speeds, using the Company's Series 2000 system on a low power UHF television system. Warp Drive is targeting the business, SOHO and telecommuter markets with service for 128Kbps priced at $150/month. Warp Drive has begun offering service in Seattle over MDS frequencies. Warp Drive plans to open the San Francisco, Portland, Los Angeles and San Diego markets by mid-1998. SALES, MARKETING AND DISTRIBUTION The Company markets and sells its products in the United States through its domestic field sales force and sales support organization. The sales and marketing organizations are comprised of 16 sales and marketing professionals with experience in the cable, telephone and router markets. The Company also sells its products through a network of OEMs, VARs and distributors. The Company's sales and marketing, senior management and technical staff work closely with existing and potential customers to help them develop the market potential of high speed Internet access services and to help them develop relationships with other companies that have the facilities and expertise necessary to deliver Internet access services. Field sales offices are located in San Francisco, Atlanta, Chicago and Tinton Falls, New Jersey. The sale of the Company's products typically involves a significant technical evaluation and commitment of capital and other resources, with the delays frequently associated with customers' internal procedures to approve large capital expenditures and to test and accept new technologies that affect key operations. For these and other reasons, the sales cycle associated with the Company's products is typically lengthy, generally lasting three to nine months, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond the Company's control. Because of the lengthy sales cycle and the large size of customers' orders, if orders forecasted for a specific customer for a particular quarter are not realized in that quarter, or any significant customer delays 42 payment or fails to pay, the Company's operating results for that quarter could be materially adversely affected. In addition, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs and competitive factors facing the emerging broadband access markets serviced by the cable system operators, broadband wireless system operators and ISPs, the Company on occasion has provided customers extended payment, promotional pricing or other terms which could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Fluctuations in Quarterly Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices," "Risk Factors--Lengthy Sales Cycle," "Risk Factors--Inexperience in Emerging Markets," "Risk Factors-- Dependence on Broadband Wireless System Operators" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require prompt delivery of products and a substantial majority of the Company's sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders. Further, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or cancelled with little or no penalty. The Company believes that its backlog at any given time is not a meaningful indicator of future sales. See "Risk Factors--Fluctuations in Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices." The Company's marketing efforts are targeted at cable system operators, broadband wireless system operators and existing ISPs. The Company devotes considerable time and effort to educating potential customers on the business opportunity of providing high speed Internet and intranet access. It accomplishes this through white papers, prototype customer business models, industry speaking engagements and direct customer presentations. The Company also attempts to facilitate introductions and strategic relationships between ISPs and wireless or cable system operators. These strategic relationships bring together the capabilities needed to offer high speed access service. The Company maintains its industry presence by exhibiting at wireless and cable tradeshows and speaking at conferences and seminars. In order to market and sell the Company's products internationally, the Company is seeking to enter into distribution relationships. Alcatel Standard Electrica S.A. has worldwide nonexclusive distribution rights for the Company's products and is the Company's main distributor in Europe. Itochu is a stockholder in the Company and has nonexclusive worldwide distribution rights for the Company's products. MANUFACTURING The Company's manufacturing strategy is to perform system integration, testing and quality inspection internally and to outsource the manufacturing of the product modules to multiple third parties where it is more cost-effective. The Company's future success will depend, in significant part, on its ability to successfully manufacture its products cost-effectively and in sufficient volumes. The Company maintains a limited in-house manufacturing capability for performing system integration and testing on all headend products and for manufacturing small quantities of modems at its headquarters in Cupertino. The Company's in-house manufacturing capability, however, is largely used for pilot production of new modem designs and sample testing of products received from volume modem manufacturers, as well as for developing the manufacturing process and documentation for new products in preparation for outsourcing. The Company's future success will depend, in significant part, on its ability to obtain high volume manufacturing at low costs. The Company entered into an agreement pursuant to which Sharp has been the exclusive OEM supplier through Itochu of certain of the Company's client modems, including the substantial majority of those utilized in the Series 2000. During the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp because of technical delays in product integration. While these problems have since been resolved, there 43 can be no assurance that the Company will not experience similar supply problems in the future at Sharp or any other manufacturer. The Company has had only limited experience manufacturing its products to date, and there can be no assurance that the Company, Sharp or any other manufacturer of the Company's products will be successful in increasing the volume of its manufacturing efforts. The Company may need to procure additional manufacturing facilities and equipment, adopt new inventory controls and procedures, substantially increase its personnel and revise its quality assurance and testing practices. There can be no assurance that any of these efforts will be successful. The Company anticipates the need to reduce the manufacturing costs of its cable modem and will continue to evaluate the use of low cost third party suppliers and manufacturers. See "Risk Factors--Need to Reduce Cost of Client Modems" and "Risk Factors--Limited Manufacturing Experience; Sole Source Manufacturing." Subcontractors supply both standard components and subassemblies manufactured to the Company's specifications. Standard components include the Sun Microsystems Sparc5 workstation and its Sun Operating System (OS); Intel's Ethernet cards and Pentium-based PCI processor cards; and NextLevel Systems' Upconverter. The CyberManager 2000 and CyberCommuter 2000 Secure Router are built on the Sparc5/Sun OS platform by installing the Company's proprietary network subscriber and network management software, HybridWare. The CyberMaster Downstream Router (CMD) and CyberMaster Upstream Router, Telephone Return (CMU) are built on Intel's Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted backplanes from Industrial Computer Source (ICS) that are configured to the Company's specification. The Company's proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU. The Company is dependent upon certain key suppliers for a number of the components for its products. For example, the Company currently only has one vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are used in the Company's server and client modem products, and in past periods these semiconductors have been in short supply. Recently, BroadCom announced a program whereby certain of its technological and product enhancements may be made available to certain of the Company's competitors before making them available to the Company. This could have the effect of putting the Company at a competitive disadvantage with regard to time to market or cause the Company to have to redesign its products if competitors influence changes in BroadCom's products. Hitachi is the sole supplier of the processors used in certain of the Company's modems. In addition, certain other components for products that the Company has under development are currently only available from a single source. There can be no assurance that delays in key components or product deliveries will not occur in the future due to shortages resulting from a limited number of suppliers, the financial or other difficulties of such suppliers or the possible limitation in component product capacities due to significant worldwide demand for such components. Any significant interruption or delay in the supply of components for the Company's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on the Company's ability to manufacture its products and, therefore, could have a material adverse effect on its business, operating results and financial condition. Products as complex as those offered by the Company frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. Such errors have occurred in the past in the Company's products, and there can be no assurance that, despite testing by the Company and use by current and potential customers, errors will not be found in the Company's current and future products. The occurrence of such errors, defects or failures could result in product returns and other losses to the Company or its customers. Such occurrence could also result in the loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's products generally carry a one-year warranty for replacement of parts. Due to the relatively recent introduction of the Series 2000 products, the Company has limited experience with the problems that could arise with this generation of products. The Company's purchase agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of 44 liability provisions contained in the Company's purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of the Company's products may entail the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Risks of Product Defects, Product Returns and Product Liability." RESEARCH AND DEVELOPMENT As of September 30, 1997, the Company's research and development staff consisted of 35 full-time employees. The Company's total research and development expenses for 1994, 1995 and 1996 and the first nine months of 1997 were $1,251,000, $3,862,000, $5,076,000 and $5,170,000, respectively. The Company will continue its efforts to increase the scalability and performance of its current broadband systems, to enhance the systems for broadband wireless system operators and to migrate toward standards compliance. The Company expects to increase scalability by developing an optional relational database that will handle subscriber bases of up to 20,000 per system and new SNMP-based network management capabilities that will allow operators to manage their network centrally. The Company is optimizing its product's radio frequency (RF) tuners for the currently targeted wireless-cable and WCS frequency bands, 2-3 GHz and LPTV (400-800 MHz), and expects to add LMDS products to its offerings. The Company is developing a new two-way product utilizing QPSK modulation in place of the current FSK return product. This QPSK product will utilize standards-compliant chipsets and a cost-effective channel sharing algorithm. It will support both cable and wireless return. In addition, the Company is developing a prototype system targeted for ISP customers consisting of a broadband downstream router that can be installed in existing ISP networks and will interoperate with standard ISP equipment and operational procedures. See "Risk Factors--Competing Technologies and Evolving Industry Standards." To address competitive and pricing pressures, the Company expects that it will have to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning the Company's products to utilize more highly integrated components and more automated manufacturing techniques. There can be no assurance that the Company will be successful in these efforts, that a redesign can be made on a timely basis and without introducing significant errors and product defects or that a redesign will result in sufficient cost reductions to allow the Company to reduce the list price of its client cable modems significantly. See "Risk Factors--Need to Reduce Cost of Client Modems." In addition, from time to time, the Company considers collaborative relationships with other entities to gain access to certain technologies that could enhance the Company's product offerings, broaden the market for the Company's products or accelerate time to market. In connection with such collaborative relationships, the Company may seek to jointly develop products, share its technology with other entities and license technology from such entities. The market for high speed Internet access products is characterized by rapidly changing and competing technologies, evolving industry standards and frequent new product introductions leading to short product life cycles. As standards evolve in the market, such as the recently announced MCNS specifications, the Company will work toward complying with such standards. There can be no assurance that the Company's engineering and product design efforts will be successful or that the Company will be successful at developing new products in the future. Any failure to release new products or to fix, upgrade or redesign old products on a timely basis could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Dependence on Recently Introduced Products and Products under Development; Rapid Technological Change." 45 COMPETITION The market for high speed network connectivity products and services is intensely competitive. The principal competitive factors in this market include product performance and features (including speed of transmission and upstream transmission capabilities), reliability, price, size and stability of operations, breadth of product line, sales and distribution capability, technical support and service, relationships with cable and broadband wireless system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of the Company's control. The existing conditions in the high speed network connectivity market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for the Company's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put the Company at a disadvantage in relation to its competitors. The Company's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of the Company's competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources, as well as greater name recognition and access to customers than the Company. In addition, many of the Company's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of the Company's competitors have established relationships with cable system operators and telcos and, based on these relationships, may have more direct access to the decision-makers of such cable system operators and telcos. In addition, the Company could face potential competition from certain of its suppliers, such as Sharp, if it were to develop or license modems for sale to others. In addition, suppliers such as Cisco Systems, which manufactures routers, and Stanford Telecom, which manufactures QPSK components, could become competitors should they decide to enter the Company's markets directly. There can be no assurance that the Company will be able to compete effectively in its target markets. The principal competitors in the cable modem market include Bay Networks, Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics, as well as a number of smaller, more specialized companies. Certain competitors have entered into partnerships with computer networking companies that may give such competitors greater visibility in this market. Certain of the Company's competitors have already introduced or announced high speed connectivity products that are priced lower than the Company's, and certain other competitors are more focused on and experienced in selling and marketing two-way cable transmission products. There can be no assurance that additional competitors will not introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than the Company's products. The Company's principal competitors in the wireless modem market, Bay Networks, Harmonic Lightwaves through its proposed acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are providing wireless Internet connectivity over wireless cable and LMDS frequencies. To be successful, the Company's Series 2000 products must achieve market acceptance and the Company must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. The Company must continue to develop products with improved performance over two-way cable transmission facilities and with the ability to perform over two-way wireless transmission facilities. There can be no assurance that the Company will meet these challenges, that it will be able to compete successfully against current or future competitors, or that the competitive pressures faced by the Company will not materially and adversely affect the Company's business, operating results and financial conditions. Further, as a strategic response to changes in the competitive environment, the Company may make certain extended payment, pricing, 46 service, marketing or other promotional decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, operating results or financial conditions. Cable and broadband wireless system operators face competition from providers of alternative high speed connectivity systems. In the wireless high speed access market, broadband wireless system operators are in competition with satellite TV providers. In telephony networks, xDSL technology enables digitally compressed video signals to be transmitted through existing telephone lines to the home. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, the Company's business, operating results and financial condition could be materially adversely affected. INTELLECTUAL PROPERTY The Company relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company currently has two patents issued in the United States as well as pending patent applications in the United States, Europe and Japan that relate to its network and modem technology as well as communication processes implemented in those devices. The Company's two issued U.S. patents relate to the Company's basic client cable modem device and methodology and asymmetric system architecture and methodology. The Company initially obtained the U.S. Patent No. 5,347,304 in September 1994, and filed an application for the reissuance of the patent with the U.S. Patent and Trademark Office in November 1994, which was subsequently allowed for reissuance by the U.S. Patent Office on August 19, 1997. In the future, the Company intends to seek further United States and foreign patents on its technology. There can be no assurance that any of these patents will be issued from any of the Company's pending applications or applications in preparation or that any claims allowed will be of sufficient scope or strength, or be issued in sufficient countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Moreover, any patents that have been or may be issued might be challenged. Any such challenge could result in time consuming and costly litigation and result in the Company's patents being held invalid or unenforceable. Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents. The Company has entered into confidentiality and invention assignment agreements with its employees and enters into non-disclosure agreements with certain of its suppliers, distributors and customers in order to limit access to and disclosure of its proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by the Company to protect its intellectual property will prove sufficient to prevent misappropriation of the Company's technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States. In the past, the Company has received, and in the future may receive, notices from third parties claiming that the Company's products or proprietary rights infringe the proprietary rights of third parties. The Company expects that developers of cable and wireless modems will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has and in the future may license its patents or proprietary rights for commercial or other reasons to parties who are or may become competitors of the Company. Further the Company may also elect to initiate claims or litigation against third parties for infringement of the Company's patents or proprietary rights or to establish the validity of the Company's patents or proprietary right. The Company 47 has sent notices to certain third parties offering to license the Company's patents for products which may be infringing the Company's patent rights. The Company has not yet determined if it will assert any claims against these parties or others. There can be no assurance that such notifications will not involve potential litigation initiated by the Company or related countersuits by third parties seeking to challenge the Company's patents or asserting infringement by the Company. Such litigation could be time consuming and costly and therefore have a material adverse effect on the Company's business, operating results and financial condition. EMPLOYEES As of September 30, 1997, the Company had 83 full-time employees of whom 35 were primarily engaged in research and development, 25 in operations, 16 in sales and marketing and 7 in administration and finance. None of the Company's employees is represented by a collective bargaining unit with respect to his or her employment with the Company, nor has the Company ever experienced an organized work stoppage. PROPERTIES The Company leases approximately 14,900 square feet of office, research and development and manufacturing space in Cupertino, California. The current lease for the Cupertino facility expires in May 1998 and the Company has an option to extend the lease for three additional years. The Company also subleases approximately 10,200 square feet and 9,200 square feet in Cupertino under sublease agreements expiring in May 1998 and September 1998, respectively. The Company leases approximately 900 square feet of office space in Tinton Falls, New Jersey, and approximately 2,400 square feet of office space in San Francisco, California under leases expiring in September 1998 and March 2002, respectively. The Company believes that its existing facilities are adequate to meet its needs for the immediate future and that future growth can be accommodated by leasing additional or alternative space near its current facilities. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 48 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The following table sets forth certain information regarding the executive officers, directors and key personnel of the Company as of September 30, 1997:
NAME AGE POSITION - --------------------------------------------- ----------- ------------------------------------------------------------ EXECUTIVE OFFICERS Carl S. Ledbetter.......................... 48 President, Chief Executive Officer and Chairman of the Board of Directors Gustavo (Gus) Ezcurra...................... 41 Vice President, Sales William H. Fry............................. 59 Vice President, Operations Dan E. Steimle............................. 49 Vice President, Finance and Administration, Chief Financial Officer and Secretary KEY EMPLOYEES AND OTHER DIRECTORS Frederick Enns............................. 46 Vice President and Chief Technology Officer Vishwas R. (Victor) Godbole................ 51 Vice President, Engineering Ernest P. Quinones......................... 37 Corporate Controller Jane S. Zeletes............................ 42 Vice President, Marketing James R. Flach(1)(2)....................... 50 Director Stephen E. Halprin(2)...................... 59 Director Gary M. Lauder............................. 35 Director Douglas M. Leone(1)........................ 40 Director Howard L. Strachman........................ 53 Director
- ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. CARL S. LEDBETTER joined the Company in January 1996 as its President and Chief Executive Officer, and in August 1996, he became Chairman of the Board. Prior to joining the Company, he served in various positions at AT&T from April 1993 to January 1996, most recently as President of Consumer Products. From 1991 until April 1993, Mr. Ledbetter was Vice President of Sun Microsystems and General Manager of SunSelect, Sun's PC networking business. He is also a director of Software Spectrum, Inc., a software distributor. Mr. Ledbetter holds a B.S. in Mathematics from University of Redlands, an M.A. in Mathematics from Brandeis University and a Ph.D. in Mathematics from Clark University. GUSTAVO (GUS) EZCURRA joined the Company in September 1996 as its Vice President, Sales. From May 1994 to September 1996, Mr. Ezcurra was Vice President of Worldwide Sales of the Digital Telephone Systems Division of Harris Corporation, a broadcast equipment manufacturer. From November 1988 to May 1994, he was Vice President of Worldwide Sales of the Broadcast Division of Harris Corporation. Mr. Ezcurra holds a B.S. in Economics from the California Polytechnic State University, San Luis Obispo. WILLIAM H. FRY joined the Company in August 1995 as its interim Chief Operating Officer and Acting Vice President, Operations, and in May 1996 he became Vice President, Operations. From July 1994 to July 1995, Mr. Fry was a consultant with Silicon Valley Associates. From 1991 to June 1994, he served as President and CEO of Ion Systems, a manufacturer of semiconductor processing equipment. Mr. Fry holds a B.S. in Industrial Management from LaSalle College. DAN E. STEIMLE joined the Company in July 1997 as its Vice President, Finance and Administration, Chief Financial Officer and Secretary. From January 1994 to June 1997, he served as Vice President and Chief Financial Officer of Advanced Fibre Communications, Inc., a telecommunications equipment manufacturer and from July 1997 to September 1997 he served part time as its Vice President, Business 49 Development. From September 1991 to December 1993, Mr. Steimle served as Senior Vice President, Operations and Chief Financial Officer of The Santa Cruz Operation, Inc., an operating system software company. Mr. Steimle serves as a director of Mitek Systems, Inc., a software development company. Mr. Steimle holds a B.S. in Accounting from Ohio State University and an M.B.A. from the University of Cincinnati. FREDERICK ENNS joined the Company in September 1994 as Senior Architect and has been Vice President and Chief Technology Officer since August 1996. From November 1992 to September 1994, he served as Director of Hardware Engineering of Hughes LAN Systems, a networking equipment manufacturer. Mr. Enns received a B.S. in Physics from the University of California, San Diego, an M.S. in Physics from the University of Washington and an M.S. in Electrical Engineering from Stanford University. VISHWAS R. (VICTOR) GODBOLE joined the Company in May 1997 as its Vice President, Engineering. From June 1992 to April 1997, he worked for Sierra Semiconductor Corporation, a provider of networking and telecommunications components, as Director, Systems Engineering and most recently as Vice President, Strategic Planning and Systems Engineering. Mr. Godbole received a Bachelor of Technology degree in Electrical Engineering from the Indian Institute of Technology, Bombay, India and his M.S. in Electrical Engineering from Oklahoma State University. ERNEST P. QUINONES joined the Company in July 1997 as its Controller and was promoted to Corporate Controller in October 1997. From June 1989 to March 1997, Mr. Quinones served in various positions at Genus, Inc., a semiconductor equipment manufacturer, including Acting Chief Financial Officer until his departure. Mr. Quinones received a B.S. in Accounting from Santa Clara University and is a Certified Public Accountant in California. JANE S. ZELETES joined the Company in March 1997 as its Director, Product Management, and in September 1997 she was promoted to Vice President, Marketing. Prior to joining the Company, she served as Director of Business Management of USWest Wireless. From 1990 to January 1996, Ms. Zeletes served in various positions at AT&T, most recently as Group Manager of Cordless Telephones, a business unit of AT&T's Consumer Products Division. Ms. Zeletes holds a B.A. in English from the University of Minnesota. JAMES R. FLACH has been a director of the Company since May 1995, and he served as acting Chief Executive Officer of the Company from November 1995 to January 1996. Since September 1992, Mr. Flach has been a general partner of Accel Partners, a venture capital firm. Since September 1992, he has also been the President of Flach & Associates, a Management Services firm, and since March 1997, he has been the Chief Executive Officer of Redback Networks, a network products company. From May 1990 to August 1992, Mr. Flach was Vice President of Intel, serving as the General Manager of Intel's Personal Computer Enhancement Division. He holds a B.S. in Physics from Rensselaer Polytechnic Institute and an M.S. in Applied Mathematics from The Rochester Institute of Technology. STEPHEN E. HALPRIN has been a director of the Company since September 1992. He has been a general partner of OSCCO Management Partners, a venture capital firm since 1984 and a general partner of OSCCO Management Partners III since 1989. He currently serves as a director of Landec Corporation, a materials science company. He holds a B.S. in Industrial Management from the Massachusetts Institute of Technology and an M.B.A. from the Stanford University Graduate School of Business. GARY M. LAUDER has been a director of the Company since October 1994. Since 1986 he has been the General Partner of Lauder Partners, a venture capital partnership formed by Mr. Lauder that focuses on advanced technologies for the cable TV marketplace. Since May 1995, Mr. Lauder has been Vice-Chairman of ICTV, Inc., a developer of interactive cable television technology. Mr. Lauder holds a B.A. in International Relations from the University of Pennsylvania, a B.S. in Economics from the Wharton School and an M.B.A. from the Stanford University Graduate School of Business. 50 DOUGLAS M. LEONE has been a director of the Company since May 1995. He has been associated with Sequoia Capital, a venture capital firm, since June 1988 and has been a general partner of that firm since April 1993. He currently serves as a director of Infinity Financial Technology, a client server software company, and International Network Services, a networking services company. Mr. Leone holds a B.S. from Cornell University, an M.S. from Columbia University and an M.S. in Management from the Massachusetts Institute of Technology. HOWARD L. STRACHMAN has been a director of the Company since co-founding the Company in June 1990 and served as its Chief Executive Officer from June 1990 until July 1995. In January 1996 he founded Ultracom Communications, Inc., a developer of advanced modulation products, where he serves as its Chief Executive Officer. Mr. Strachman holds a B.S. in Electrical Engineering and an M.S. in Electro-Physics from the Polytechnic University of New York. Each director will hold office until the next Annual Meeting of Stockholders and until his successor is elected and qualified or until his earlier resignation or removal. Each officer serves at the discretion of the Board of Directors (the "Board"). Upon the closing of the offering, the Company's certificate of incorporation will provide for a classified Board of Directors composed of seven directors. Accordingly, the terms of the office of the Board of Directors will be divided into three classes. Class I will expire at the annual meeting of the stockholders to be held in 1998; Class II will expire at the annual meeting of the stockholders to be held in 1999; and Class III will expire at the annual meeting of the stockholders to be held in 2000. At each annual meeting of the stockholders, beginning with the 1997 annual meeting, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election and until their successors have been duly elected and qualified, or until their earlier resignation or removal, if any. Messrs. Halprin and Leone will be designated as Class I directors; Messrs. Flach and Strachman will be designated as Class II directors; and Messrs. Lauder and Ledbetter will be designated as Class III directors. A seventh director will be nominated as soon as practicable upon the closing of this offering. To the extent that there is an increase in the number of directors, additional directorships resulting therefrom will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. BOARD COMMITTEES The Audit Committee of the Board consists of Mr. Flach and Mr. Halprin. The Audit Committee reviews the Company's financial statements and accounting practices, makes recommendations to the Board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by the Company's independent auditors. The Compensation Committee of the Board consists of Mr. Flach and Mr. Leone. The Compensation Committee makes recommendations to the Board concerning salaries and incentive compensation for the Company's officers and employees and administers the Company's employee benefit plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the Board was, at any time since the formation of the Company, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the Company's Board or Compensation Committee. DIRECTOR COMPENSATION Directors of the Company do not receive cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending meetings of the Board. In October 1994, Mr. Lauder and Mr. Halpin were granted options to acquire 18,519 and 7,408 shares of Common Stock, respectively, under the 1993 Plan, at an exercise price of $0.27 and $0.54 per share, respectively. 51 In September 1997, the Board adopted the Directors Plan and reserved a total of 100,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the Directors Plan in October 1997. Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the Directors Plan. Directors who are representatives of venture capital funds or corporate investors are not eligible to participate in the Directors Plan. Each eligible director who first becomes a member of the Board on or after the public offering ("Effective Date") will initially be granted an option for 15,000 shares (an "Initial Grant") on the later of the Effective Date or the date such director first becomes a director. At each annual meeting of stockholders thereafter, each eligible director will automatically be granted an additional option to purchase 5,000 shares if such director has served continuously as a member of the Board since the date of such director's Initial Grant (or since the Effective Date if such director did not receive an Initial Grant). All options issued under the Directors Plan will vest as to 25% of the shares on each anniversary of the date of grant, provided the optionee continues as a member of the Board or as a consultant to the Company. The exercise price of all options granted under the Directors Plan will be the fair market value of the Common Stock on the date of grant. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the year ended December 31, 1996 by (i) the Company's chief executive officer and (ii) the three other most highly compensated executive officers other than the chief executive officer who were serving as executive officers of the Company during 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARD ANNUAL COMPENSATION ------------- ----------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS(#) - ---------------------------------------------------- --------- ---------- --------- ------------- ------------- Carl S. Ledbetter(1) ............................... 1996 $ 175,000 -- $ 61,299(2) 487,919 President and Chief Executive Officer Eduardo Moura(3) ................................... 1996 133,516 -- -- -- Former Vice President, Network Systems William H. Fry ..................................... 1996 70,000 -- -- 89,816 Vice President, Operations Gustavo Ezcurra(4) ................................. 1996 17,625 $ 32,835(5) -- 77,876 Vice President, Sales
- ------------------------------ (1) From November 21, 1995 through January 15, 1996, James R. Flach, a director of the Company, served as Acting Chief Executive Officer of the Company. In December 1995, Mr. Flach was granted options to acquire 10,702 shares of Common Stock at an exercise price of $1.08 per share for his services. Mr. Ledbetter replaced Mr. Flach as Chief Executive Officer on January 15, 1996. (2) Represents temporary living expenses paid by the Company. (3) Mr. Moura resigned from his position at the Company in November 1996. (4) Mr. Ezcurra joined the Company in September 1996. (5) Represents commissions. The current annual salary rates of the Company's officers are as follows: Mr. Ledbetter--$200,000; Mr. Steimle--$150,000; Mr. Fry--$135,000; and Mr. Ezcurra--$135,000. 52 The following table sets forth further information regarding option grants pursuant to the Company's Executive Officer Plan and the 1993 Incentive Plan during 1996 to each of the Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the table sets forth the hypothetical gains or "option spreads" that would exist for the options at the end of their respective five year terms. These gains are based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted to the end of the option term. OPTION GRANTS IN 1996
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------- NAME GRANTED(1) 1996 PER SHARE DATE 5% 10% - ------------------------------------ ----------- --------------- --------------- ----------- --------- ---------- Carl S. Ledbetter................... 353,104 45.2% $ 0.54 01/22/01 $ 52,680 $ 116,410 134,815 17.2 0.54 07/08/01 20,113 44,445 Eduardo Moura(3).................... -- -- -- -- -- -- William H. Fry...................... 1,852 0.2 0.54 02/27/01 276 611 69,445 8.9 0.54 05/29/01 10,361 22,894 18,519 2.4 0.54 07/08/01 2,763 6,105 Gustavo Ezcurra..................... 77,876 10.0 1.08 08/21/01 23,237 51,348
- ------------------------------ (1) Options granted pursuant to the Executive Officer Plan and the 1993 Plan in 1996 generally have been incentive stock options or non-qualified stock options that were granted at fair market value and vest over a four-year period so long as the individual is employed by the Company. Options granted to executive officers generally expire five years from the date of grant. (2) The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future Common Stock prices. (3) Mr. Moura resigned from the Company in November 1996. The following table sets forth the number of shares acquired upon the exercise of stock options during 1996 and the number of shares covered by both exercisable and unexercisable stock options held by each of the Named Executive Officers as of December 31, 1996. Also reported are values of "in-the-money" options, which represent the positive spread between the respective exercise prices of outstanding stock options and the fair market value of the Company's Common Stock as of December 31, 1996 ($1.08) as determined by the Board. AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR-END AT YEAR-END SHARES ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Carl S. Ledbetter............... -- -- 97,772 390,147 $ 52,797 $ 210,679 Eduardo Moura................... -- -- -- -- -- -- William H. Fry.................. 4,630 $ 2,500 18,230 69,734 9,844 37,656 Gustavo Ezcurra................. -- -- -- 77,876 -- --
EMPLOYMENT AGREEMENT In January 1996, the Company entered into a two year employment agreement with Mr. Ledbetter in which he agreed to serve as the Company's Chief Executive Officer during that period. The agreement provides for Mr. Ledbetter to receive a base salary of $175,000 per year and to be eligible for up to $75,000 in bonuses during the first year, based on achieving certain milestones, as well as regular employee 53 benefits, relocation costs of up to $97,500 and five year options to purchase up to 353,104 shares of the Company's Common Stock at $0.54 per share, vesting as to 12.5% six months after commencement of employment and 2.0833% per month for 42 months thereafter. The stock option grant provides for accelerated vesting in the event of a "Change of Control Transaction" (as defined in the Executive Officer Plan). The Company is prohibited from terminating Mr. Ledbetter's employment except for "Cause" (as defined in the employment agreement). INCENTIVE BASED COMPENSATION PROGRAM In July 1997, the Company adopted a bonus plan for the Company's officers and certain managers with respect to the three quarters ending December 31, 1997. Under the bonus plan, the Compensation Committee has assigned a target bonus for each participant, expressed as a percentage of the participant's annual salary (10% to 40% for the 12-month period). The extent to which participants receive their target bonuses for any quarter depends upon the Company's net sales and operating income for the quarter as well as the Company's results in a third category which varies from participant to participant. Actual bonuses may be greater or less than the target amount, depending on whether the Company's financial results exceed or fall short of specified goals. Bonus awards under the bonus plan are to be paid 50% in cash and 50% in stock for the two quarters ended June 30, 1997 and September 30, 1997 and entirely in cash for the quarter ended December 31, 1997. For the quarter ended September 30, 1997, the Company made no cash payments and issued no shares pursuant to the bonus plan. EMPLOYEE BENEFIT PLANS In October 1992, the Board adopted the 1992 Stock Issuance Plan (the "1992 Plan"). The 1992 Plan provided for the issuance of restricted stock awards. Under the 1992 Plan, up to 555,556 shares of Common Stock were reserved for issuance. The Company is no longer issuing restricted stock awards under the 1992 Plan. In October 1993, the Board adopted the 1993 Plan, which was amended in April 1995, December 1995 and July 1996. The 1993 Plan provides for the issuance of stock bonus awards and restricted stock awards as well as the grant of both incentive stock options ("ISOs") that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options ("NQSOs"). Under the 1993 Plan, up to 1,186,035 shares of Common Stock were reserved for issuance. In December 1996, the Board adopted the 1996 Plan, which was amended in May 1997. The 1996 Plan provides for the grant of both ISOs and NQSOs. Under the 1996 Plan, up to 407,408 shares of Common Stock were reserved for issuance. As of June 30, 1997, options to purchase 1,010,156 shares of Common Stock were outstanding under the 1993 Plan and options to purchase 151,845 shares of Common Stock were outstanding under the 1996 Plan. In December 1995, the Board adopted the Executive Officer Plan, which was amended in July 1996. The Executive Officer Plan provides for the grant of both ISOs and NQSOs. Under the Executive Officer Plan, 500,000 shares of Common Stock were reserved for issuance, and in July and September 1997, this amount was increased to 770,000. To date, Mr. Ledbetter and Mr. Steimle have been granted options under the Executive Officer Plan to purchase 657,919 and 111,112 shares of Common Stock, respectively. Following the Effective Date, no additional options will be granted under the 1992 Plan, the 1993 Plan, the 1996 Plan or the Executive Officer Plan. The Executive Officer Plan provides that, if the Company enters into a Change of Control Transaction (as defined in the Executive Officer Plan) and a participant's responsibilities and position with the Company are materially diminished, such participant's option shall become exercisable on the date on which such transaction is consummated and shall continue to be exercisable for a period of one year commencing on the date on which such transaction is consummated. 1997 EQUITY INCENTIVE PLAN. In September 1997, the Board adopted the 1997 Incentive Plan. The Company's stockholders approved the 1997 Incentive Plan in October 1997. The 1997 Incentive Plan will become effective upon the Effective Date and will serve as the successor to the 1992 Plan, 1993 Plan, the Executive Officer Plan and the 1996 Plan (the "Prior Plans"). Options granted under the Prior Plans 54 before their termination will remain outstanding in accordance with their terms, but no further options will be granted under the Prior Plans after the Effective Date. The Company has reserved 1,750,000 shares of Common Stock for issuance under the 1997 Incentive Plan. Shares that (i) are issuable upon exercise of an option granted pursuant to the 1997 Incentive Plan but cease to be subject to such option for any reason other than exercise of such option, (ii) are subject to an award granted under the 1997 Incentive Plan but are forfeited or are repurchased by the Company at the original issue price or (iii) are subject to an award granted pursuant to the 1997 Incentive Plan that otherwise terminates without shares being issued, will again be available for grant and issuance in connection with future awards under the 1997 Incentive Plan. Any shares remaining unissued under the Prior Plans on the Effective Date and any shares issuable upon exercise of options granted pursuant to the Prior Plans, that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for distribution under the Prior Plans but will be available for grant and issuance under the 1997 Incentive Plan. In addition, any shares issued under the Prior Plans that are repurchased or forfeited will be available for grant or issuance under the 1997 Incentive Plan. The number of shares reserved for issuance under the 1997 Incentive Plan will be automatically increased each year by an amount equal to 5% of the outstanding shares of the Company as of the first day of the year, unless the Board determines that such increases will not occur for a particular year. The 1997 Incentive Plan provides for the grant of stock options and stock bonuses and the issuance of restricted stock by the Company to its employees, officers, directors, consultants, independent contractors and advisers. No person will be eligible to receive more than 700,000 shares in any calendar year pursuant to grants under the 1997 Incentive Plan, other than new employees of the Company who will be eligible to receive up to a maximum of 1,000,000 shares in the calendar year in which they commence employment with the Company. The 1997 Incentive Plan will be administered by the Compensation Committee of the Board. The 1997 Incentive Plan permits the Compensation Committee to grant options that are either incentive stock options (as defined in Section 422 of the Code) or nonqualified stock options, on terms (including the exercise price, which may not be less than 85% of the fair market value of the Company's Common Stock, and the vesting schedule) determined by the Compensation Committee, subject to certain statutory and other limitations in the 1997 Incentive Plan. In addition to, or in tandem with, other awards under the 1997 Incentive Plan, the Compensation Committee may grant participants restricted stock awards to purchase the Company's Common Stock. The terms of such restricted stock awards may be determined by the Compensation Committee. The Compensation Committee may also grant stock bonus awards of the Company's Common Stock either in addition to, or in tandem with, other awards under the 1997 Incentive Plan, under such terms, conditions and restrictions as the Compensation Committee may determine. Such stock bonuses may be awarded for the satisfaction of performance goals established in advance. The Compensation Committee may only grant restricted stock awards and stock bonus awards for an aggregate of 300,000 shares over the term of the 1997 Incentive Plan. Over the term of the 1997 Incentive Plan, no more than 2,750,000 shares may be issued upon the exercise of incentive stock options. The 1997 Incentive Plan will terminate ten years from the Effective Date, unless terminated earlier in accordance with the provisions of the 1997 Incentive Plan. 1997 EMPLOYEE STOCK PURCHASE PLAN. In September 1997, the Board adopted the Purchase Plan and reserved a total of 225,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the Purchase Plan in October 1997. The Purchase Plan will become effective on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. The Purchase Plan permits eligible employees to acquire shares of the Company's Common Stock through payroll deductions. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. Except for the initial offering, each offering under the Purchase Plan will be for a period of 24 months (the "Offering Period") commencing on February 1 and August 1 of each year and ending on January 31 and July 31 of each year. The first Offering Period will begin on the date on which price quotations for the Company's Common Stock are first available on the Nasdaq National Market and will end on July 31, 1999, unless otherwise determined by the 55 Board. Except for the first Offering Period, each Offering Period will consist of four purchase periods, each six months in length ("Purchase Period"). The Compensation Committee has the power to change the duration of Offering Periods or Purchase Periods without stockholder approval, provided that the change is announced at least 15 days prior to the scheduled beginning of the first Offering Period or Purchasing Period to be affected. Eligible employees may select a rate of payroll deduction between 2% and 15% of their compensation, subject to certain limits set forth in the Purchase Plan. The purchase price for the Company's Common Stock purchased under the Purchase Plan is 85% of the lesser of the fair market value of the Company's Common Stock on the first day of the applicable Offering Period or on the last day of the respective Purchase Period. 401(K) PLAN. The Company has adopted the Hybrid Networks, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan") for eligible employees ("Participants"). Participants may contribute up to 15% of their current compensation, up to a statutorily prescribed annual limit, to the 401(k) Plan. Each Participant is fully vested in his or her deferred salary contributions. Participant contributions are held in trust and invested by the 401(k) Plan's trustees. Individual Participants may direct the trustee to invest their accounts in authorized investment alternatives. Pursuant to a Company resolution, the Company may make discretionary contributions to the 401(k) Plan to be allocated among Participants who meet certain service requirements. Discretionary contributions are subject to a five-year vesting schedule. The Company may also make qualified nonelective contributions on behalf of non-highly compensated employees. Each Participant is fully vested in his or her qualified non-elective contributions. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code so that contributions to the 401(k) Plan, and income earned on such contributions, are not taxable to Participants until withdrawn or distributed from the 401(k) Plan. 56 CERTAIN TRANSACTIONS Since January 1, 1994, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of the Common Stock of the Company had or will have a direct or indirect interest other than (i) compensation arrangements, which are described where required under "Management" and (ii) the transactions described below. In November 1993, the Company entered into an exclusive, royalty-bearing license agreement with Intel Corporation, a 5% stockholder of the Company, with respect to the Company's client technology and entered into a loan and warrant agreement (the "Loan Agreement") with Middlefield Ventures, Inc. ("Middlefield"), an affiliate of Intel, pursuant to which Middlefield loaned $2,000,000 to the Company and the Company issued certain warrants to purchase shares of the Company's capital stock. Middlefield assigned its rights under the Loan Agreement and accompanying note and warrants to Intel. In December 1995, (i) the Company and Intel entered into an Amended and Restated Technology License Agreement (the "Amended License Agreement") pursuant to which, among other things, Intel's exclusive license was converted into a nonexclusive royalty-bearing license and the parties granted certain royalty-free, nonexclusive cross licenses; (ii) in consideration for Intel's transfer of certain technology to the Company pursuant to the Amended License Agreement, the Company issued 262,222 shares of Common Stock to Intel; (iii) Intel converted $1.5 million of prepaid royalties it had paid to the Company into shares of the Company's Series F Preferred Stock convertible into 365,518 shares of Common Stock and one-year warrants to purchase shares of the Company's Series B Preferred Stock convertible into an aggregate of 169,260 shares of Common Stock at an exercise price of $4.73 per share; and (iv) Intel, pursuant to the warrants that the Company had granted under the Loan Agreement, exercised those warrants and purchased from the Company, in consideration for the cancellation of the Company's indebtedness to Middlefield in the amount of $2.0 million plus accrued interest, shares of the Company's Series E Preferred Stock convertible into 487,358 shares of Common Stock. In December 1996, Intel exercised its warrants on a net basis for the Series B Preferred Stock for shares of Series B Preferred Stock convertible into 91,922 shares of Common Stock. In 1994, 1995, 1996 and the first nine months of 1997, Intel purchased products from the Company for approximately $397,800, $325,300, $613,200 and $0, respectively. While Intel no longer purchases products from the Company, it remains a stockholder of the Company and maintains certain licensing and manufacturing rights to certain Hybrid products. In October 1994, the Company sold shares of Series B Preferred Stock convertible into 164,022 shares of Common Stock, at an aggregate purchase price of $775,000, to Gary M. Lauder, a director of the Company. In November 1994, pursuant to the exercise of rights of first refusal, the Company sold shares of Series B Preferred Stock convertible into 26,825 shares of Common Stock at an aggregate purchase price of $126,746 to OSCCO III, L.P. ("OSCCO"), a 5% stockholder of the Company (of which Stephen E. Halprin, a director of the Company, is a partner). In May 1995, the Company sold shares of Series D Preferred Stock convertible into a total of 1,058,202 shares of Common Stock at an aggregate purchase price of $5,000,002 and issued warrants for shares of Series D Preferred Stock convertible into 529,101 shares of Common Stock and shares of Series B Preferred Stock convertible into 76,245 shares of Common Stock at an exercise price of $4.73 per share. This included sales to (i) partnerships associated with Sequoia Capital (the "Sequoia Partnerships"), a 5% stockholder of the Company (of which Douglas M. Leone, a director of the Company, is a partner), of shares convertible into 406,351 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 203,176 shares of Common Stock, (ii) partnerships associated with Accel Partners (the "Accel Partnerships"), a 5% stockholder of the Company (of which James R. Flach, a director of the Company, is a partner), of shares convertible into 423,284 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 211,643 shares of 57 Common Stock and (iii) AT&T Venture Co., L.P., later renamed Venture Fund I, L.P. ("Venture Fund"), a 5% stockholder of the Company, of shares convertible into 211,640 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 105,820 shares of Common Stock. Pursuant to the exercise of rights of first refusal, Mr. Lauder received one-year warrants to purchase shares of Series B Preferred Stock convertible into 63,493 shares of Common Stock and OSCCO received one-year warrants to purchase shares of Series B Preferred Stock convertible into 6,005 shares of Common Stock in May 1995. In June 1995, pursuant to the exercise of rights of first refusal, certain entities purchased additional shares of Series D Preferred Stock convertible into 126,985 shares of Common Stock (for an aggregate purchase price of $600,002) and received one-year warrants to purchase shares of Series D Preferred Stock convertible into 63,493 shares of Common Stock at an exercise price of $4.73 per share. As part of this transaction, OSCCO purchased shares of Series D Preferred Stock convertible into 82,758 shares of Common Stock and a one-year warrant to purchase shares of Series D Preferred convertible into 41,379 shares of Common Stock. In June 1996, the Company obtained a $3.2 million Bridge Loan from Sequoia Partnerships ($1.0 million), the Accel Partnerships ($1.0 million), Venture Fund ($500,000), Gary Lauder ($300,000), OSCCO ($223,886) and two other investors and issued to such lenders convertible promissory notes due in December 1996 (the "Bridge Notes"). The Bridge Notes were secured by security interests in substantially all the Company's assets. In connection with obtaining the bridge loan, the Company also (i) extended from June 1996 to June 2001 the expiration dates of the outstanding warrants held by the Sequoia Partnerships, the Accel Partnerships, Venture Fund, OSCCO and others to purchase shares of Series D Preferred Stock and the outstanding warrants held by Gary Lauder, OSCCO Ventures and another investor to purchase shares of Series B Preferred Stock and (ii) issued to the holders of the Bridge Notes additional five-year warrants to purchase shares of Series D Preferred Stock convertible into an aggregate of 167,038 shares of Common Stock at an exercise price of $4.73 per share, including warrants for shares convertible into 50,742, 52,857, 26,428, 15,857 and 11,834 shares of Common Stock to the Sequoia Partnerships, the Accel Partnerships, Venture Fund, Gary Lauder and OSCCO, respectively. In addition, in consideration for the agreement of certain of the investors in the bridge loan to reduce the preferences of the Series D Preferred Stock, two founders of the Company, Howard L. Strachman and Eduardo J. Moura, sold an aggregate of 210,573 shares of Common Stock, including 199,702 shares to the following entities in the following amounts at a purchase price of $0.54 per share: the Sequoia Partnerships, 72,195 shares; the Accel Partnerships, 75,202 shares; Venture Fund, 37,602 shares; and OSCCO, 14,703 shares. In July 1996, the Company sold shares of Series G Preferred Stock convertible into 974,952 shares of Common Stock at an aggregate purchase price of $10,081,969. Upon the consummation of the Series G Preferred Stock financing, the Bridge Notes were converted into shares of Series G Preferred. The Bridge Notes held by the Sequoia Partnerships, the Accel Partnerships, Venture Fund, Gary Lauder and OSCCO were converted into shares of Series G Preferred Stock convertible into 92,836, 96,705, 48,352, 29,011 and 21,651 shares of Common Stock, respectively. In April 1997, London Pacific Life & Annuity Company ("London Pacific"), a 5% stockholder of the Company, and the Company entered into a senior secured convertible debenture agreement pursuant to which London Pacific loaned $5.5 million to the Company in exchange for a senior secured convertible debenture due 2002. In connection with the issuance of the $5.5 Million Debenture, the Company paid a fee of $500,000 to London Pacific International Limited, a subsidiary of London Pacific. The loan accrues interest at a rate of 12% per annum, payable quarterly, and its term ends in April 2002, at which time the full principal amount is due. The loan is secured by substantially all of the Company's assets, and the Company is subject to certain restrictive covenants while the $5.5 Million Debenture is outstanding. In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited, an affiliate of London Pacific. The $5.5 Million Debenture is convertible into 513,423 shares of Common Stock, assuming a conversion price of $10.71 per share, at the option of BG Services Limited at any time and will automatically convert into that number of shares if (i) the gross proceeds to the Company from this 58 offering are at least $15.0 million, (ii) the public offering price per share is at least $166.5 million divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the $5.5 Million Debenture) prior to this offering (the "Minimum Price") and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. In 1994, 1995, 1996 and the first nine months of 1997, the Company paid $40,000, $40,000, $26,879 and $0, respectively, to Howard Strachman, a founder of the Company, and $40,000, $40,000, $15,621 and $0, respectively, to Eduardo J. Moura, a founder of the Company, in compensation for services rendered by them during 1992 and 1993. In September 1997, Dan Steimle, the Company's Vice President, Finance and Administration and Chief Financial Officer and Sequoia Partnerships loaned the Company $500,000 and $300,000, respectively, under a demand note exchangeable for Subordinated Notes. In September 1997, the Company entered into an agreement to issue the Subordinated Notes at a face value of $6,882,201 and related warrants to acquire 252,381 shares of Common Stock at a price of $10.91 per share. The following affiliates of the Company participated in the Subordinated Notes and related warrant transaction:
NUMBER OF SHARES SUBORDINATED OF COMMON STOCK NAME NOTES SUBJECT TO WARRANTS - ----------------------------------------------------------- ------------ ------------------- Sequoia Partnerships....................................... $ 300,000 11,001 Accel Partnerships......................................... 250,000 9,167 OSCCO...................................................... 200,000 7,334 Gary Lauder................................................ 100,000 3,667 Dan Steimle................................................ 500,000 18,335(1)
- ------------------------------ (1) One-half of the warrants were issued to Mr. Steimle's wife. During the nine months ended September 30, 1997, Network Systems Technologies, Inc., of which Eduardo Moura is President, Chief Executive Officer and a major stockholder, was a greater than 10% customer of the Company. During that period, Network Systems Technologies, Inc. accounted for net sales of the Company of $578,000. 59 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of September 30, 1997 by (i) each stockholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers (as defined in "Management-- Executive Compensation") and (iv) all executive officers and directors as a group.
PERCENTAGE OF SHARES NUMBER OF SHARES BENEFICIALLY OWNED BENEFICIALLY -------------------------------------- NAME OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2) - ---------------------------------------------------------- -------------------- ----------------- ------------------- Intel Corporation(3)...................................... 1,207,020 16.6% 12.1% Strachman Family Revocable Trust(4)....................... 916,710 12.6 9.2 James R. Flach Accel Partners(5)....................................... 879,562 11.6 8.6 Douglas M. Leone Sequoia Capital(6)...................................... 870,691 11.5 8.5 Eduardo J. Moura(7)....................................... 687,532 9.5 6.9 BG Services Limited(8).................................... 513,423 6.6 4.9 OSCCO III, L.P.(9)........................................ 491,159 6.7 4.9 Venture Fund I, L.P.(10).................................. 439,274 5.9 4.3 Gary M. Lauder(11)........................................ 294,569 4.0 2.9 Carl S. Ledbetter(12)..................................... 210,681 2.8 2.1 William H. Fry(13)........................................ 43,431 * * Gustavo Ezcurra(14)....................................... 26,007 * * Stephen E. Halprin(15).................................... 5,708 * * All executive officers and directors as a group (9 persons)(16)............................................. 3,302,732 40.0% 30.1%
- ------------------------------ * Represents less than 1% of the Company's outstanding Common Stock. (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options or warrants that are currently exercisable or exercisable within 60 days of September 30, 1997 and the $5.5 Million Debenture, which is convertible immediately at the option of the holder, are deemed to be outstanding and to be beneficially owned by the person holding such options, warrants or the $5.5 Million Debenture for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Assumes that the Underwriters' over-allotment option to purchase up to 405,000 shares from the Company is not exercised. If the Underwriters' over-allotment option is exercised in full, the total number of shares to be sold by each Selling Stockholder, the number of shares beneficially owned before and after the offering by each Selling Stockholder, and the percentage of shares beneficially owned before and after the offering by each Selling Stockholder, would be as follows:
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------------- ---------------------------- NUMBER OF SHARES NUMBER OF NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE - ------------------------------------------ ----------- --------------- ----------- ----------- --------------- NextLevel Systems, Inc.................... 282,109 3.9% 195,803 86,306 1.2% MOD Fund.................................. 279,760 3.8 69,940 209,820 2.9 Kistler Associates........................ 29,630 * 20,565 9,065 * Susan Harman Niethold..................... 28,573 * 19,512 9,061 * Catherine P. Lego......................... 78,922 1.1 16,218 62,704 * Aubrey K. McClendon....................... 19,341 * 13,424 5,917 * Howard E. Rachofsky....................... 19,341 * 13,424 5,917 * Milton M. Shiffman........................ 19,341 * 13,424 5,917 * TLW Investments, Inc...................... 19,341 * 13,424 5,917 * ABS Employees' Venture Fund L.P........... 40,717 * 11,389 29,328 * HBA Partnership........................... 24,075 * 7,223 16,852 *
60
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------------- ---------------------------- NUMBER OF SHARES NUMBER OF NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE - ------------------------------------------ ----------- --------------- ----------- ----------- --------------- Kim S. Peyser............................. 24,260 * 3,704 20,556 * Needham Capital Group Inc................. 4,836 * 3,356 1,480 * Cardiovascular Medical Group of Southern California.............................. 4,836 * 1,852 2,984 * Edward D. Baker........................... 9,704 * 1,742 7,962 * ----------- 405,000
(3) Includes 487,357 shares held by Middlefield Ventures, Inc., an affiliate of Intel. Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052. (4) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a co-founder of the Company and served as its President and Chief Executive Officer from June 1990 until his resignation in July 1995. He is currently a director of the Company. Mr. Strachman's address is c/o Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA 95014. (5) Represents ownership by the following entities associated with Accel Partners: 545,193 shares and 250,677 shares subject to warrants held by Accel IV, L.P., 25,594 shares and 11,769 shares subject to warrants held by Accel Investors '95 L.P., 13,095 shares and 6,022 shares subject to warrants held by Ellmore C. Patterson Partners, 11,309 shares and 5,202 shares subject to warrants held by Accel Keiretsu L.P. Also includes 10,701 shares subject to options exercisable within 60 days of September 30, 1997 held by Mr. Flach granted in connection with services performed by Mr. Flach for the Company. Mr. Flach, a director of the Company, is a venture partner of Accel Partners and holds no voting or dispositive power with respect to any of these shares. The address of Mr. Flach and the Accel partnerships is . (6) Represents 541,621 shares and 250,703 shares subject to warrants held by Sequoia Capital VI, 29,761 shares and 13,776 shares subject to warrants held by Sequoia Technology Partners VI, ("STP VI"), 16,932 shares and 440 shares subject to warrants held by Sequoia XXIV and 6,877 shares and 10,581 shares subject to warrants held by Sequoia 1995. Mr. Leone, a director of the Company, is a general partner of STP VI and of the general partner of Sequoia Capital VI. The address of Mr. Leone and the Sequoia funds is 3000 Sand Hill Road, Menlo Park, CA 94025. (7) Mr. Moura was a co-founder of the Company and served as its Vice President, Network Systems from June 1990 until his resignation in November 1996 and as a director until his resignation in January 1996. Mr. Moura's address is 3509 Mt. Davidson Court, San Jose, CA 95124. (8) Represents shares issuable upon the conversion, at the option of the holder at any time, of $5.5 million in principal amount of the $5.5 Million Debenture. See "Certain Transactions." The address of BG Services Limited is c/o Minden House, 6 Minden Place, St. Helier, Jersey, Channel Islands. (9) Includes 66,553 shares subject to warrants. The address of OSCCO III, L.P. is 3000 Sand Hill Road, 1-290, Menlo Park, CA 94025. (10) Includes 141,680 shares subject to warrants. The address of Venture Fund I, L.P., is 3000 Sand Hill Road, Menlo Park, CA 94025. (11) Includes 83,018 shares subject to warrants and 18,518 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Lauder is a director of the Company. (12) Includes 209,584 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Ledbetter is the President, Chief Executive Officer and Chairman of the Board of Directors of the Company. (13) Includes 38,386 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Fry is Vice President, Operations of the Company. (14) Includes 25,799 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Ezcurra is Vice President, Sales of the Company. (15) Includes 462 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Halprin is a director of the Company. (16) Includes 650,524 shares subject to warrants and 340,487 shares subject to options exercisable within 60 days of September 30, 1997 held by executive officers and directors of the Company. 61 DESCRIPTION OF CAPITAL STOCK Immediately following the closing of this offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value per share. As of September 30, 1997, and assuming the conversion of all outstanding Preferred Stock into Common Stock immediately prior to the closing of this offering, there were outstanding 7,273,311 shares of Common Stock held of record by 161 stockholders, warrants to purchase 1,160,558 shares of Common Stock, options to purchase 1,974,242 shares of Common Stock and a $5.5 Million Debenture convertible into 513,423 shares of Common Stock. COMMON STOCK Subject to preferences that may apply to shares of Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the Company's Certificate of Incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon a liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding Preferred Stock and payment of other claims of creditors. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock (the "Convertible Preferred") will be converted into shares of Common Stock. See Note 9 of Notes to Financial Statements for a description of the Convertible Preferred. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of additional shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The issuance of Preferred Stock with voting or conversion rights could adversely affect the voting power or other rights of the holders of Common Stock and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. WARRANTS As of September 30, 1997, the Company had outstanding exercisable warrants to purchase 844,353 shares of Common Stock at $4.73 per share. Warrants to purchase 835,887 and 8,466 of such shares expire in June 2001 and August 2005, respectively. The Company also had outstanding warrants to purchase 63,824 shares at $10.34 per share. Warrants to purchase 58,022 and 5,802 of such shares expire in July 2001 and August 2006, respectively. In addition, warrants to purchase 252,381 shares of Common Stock (assuming that the Subordinated Notes and all accrued interest thereon are repayed in full with the proceeds of this offering) at $10.91 per share expire in September 2002 and a warrant to purchase 2,659 shares of Common Stock at $10.91 per share expires in October 2002. CONVERTIBLE $5.5 MILLION DEBENTURE The Company has outstanding a senior secured convertible debenture due 2002 in the principal amount of $5.5 million to London Pacific. The loan accrues interest at a rate of 12% per annum, payable quarterly 62 and its term ends in April 2002, at which time the full principal amount is due. In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited. The $5.5 Million Debenture is convertible into 513,423 shares of Common Stock, assuming a conversion price of approximately $10.71 per share, at the option of the holder at any time and will automatically convert into that number of shares if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least equal to the Minimum Price and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering or, alternatively, upon the acquisition of the Company for at least $166.5 million in cash or fair market value of freely tradeable securities from the acquiring company. The $5.5 Million Debenture is collateralized by substantially all of the Company's assets, and as long as the $5.5 Million Debenture is outstanding the Company is subject to certain restrictive covenants, including limitations on the amount of capital expenditures it may incur in any 12 month period, and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder. See Note 6 to Notes to Financial Statements. SUBORDINATED NOTES In September 1997, the Company entered into an agreement to issue subordinated notes in the principal amount of approximately $6.9 million. The Subordinated Notes bear interest which must be paid quarterly at the rate of 10% per annum until the earlier of March 30, 1998 or the date on which the principal amount is paid in full, and if such principal amount is not repaid as of March 30, 1998, the Subordinated Notes will bear interest at the rate of 18% per annum beginning after such date. The Subordinated Notes shall become due and payable upon the closing of this offering. The Subordinated Notes contain certain restrictive covenants that limit the amount of capital expenditures the Company may incur in any 12 month period and the borrowing of additional funds and prohibit the Company from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are oustanding. See Note 5 to Notes to Financial Statements. ANTI-TAKEOVER PROVISIONS DELAWARE LAW Section 203 ("Section 203") of the Delaware General Corporation Law ("DGCL") is applicable to corporate takeovers of Delaware corporations. Subject to certain exceptions set forth therein, Section 203 provides that a corporation shall not engage in any business combination with any "interested stockholder" for a three-year period following the date that such stockholder becomes an interested stockholder unless (a) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (b) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares) or (c) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and by the affirmative votes of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. Except as specified in Section 203, an interested stockholder is generally defined to include any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation any time within three years immediately prior to the relevant date, and the affiliates and associates of such person. Under certain circumstances, Section 203 makes it more difficult for an interested stockholder to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption. The Company's certificate of incorporation and the bylaws do not exclude the Company from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors of the Company since the stockholder 63 approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of the Company, which could depress the market price of the Common Stock and which could deprive the stockholders of opportunities to realize a premium on shares of the Common Stock held by them. CHARTER AND BYLAW PROVISIONS The Company's certificate of incorporation and bylaws contain certain provisions that could discourage potential takeover attempts and make more difficult attempts by stockholders to change management. The certificate of incorporation and the bylaws provide for a classified Board of Directors and permit the Board to create new directorships and to elect new directors to serve for the full term of the class of director in which the new directorship was created. The terms of the directors are staggered to provide for the election of approximately one-third of the Board members each year, with each director serving a three-year term. The Board (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board occurring for any reason for the remainder of the term of the class of directors in which the vacancy occurred. Stockholders may remove a director or the entire Board, and such removal requires the affirmative vote of a majority of the outstanding voting stock. The Company's certificate of incorporation provides that stockholders may not take action by written consent but only at a stockholders' meeting, and that special meetings of the stockholders of the Company may only be called by the Chairman of the Board or a majority of the Board. REGISTRATION RIGHTS Beginning six months after the date of this offering, the holders of 6,257,827 shares of Common Stock, the holders of warrants to purchase 1,148,949 shares of Common Stock and the holders of the $5.5 Million Debenture convertible into 513,423 shares of Common Stock (collectively, the "Registrable Securities") will have certain rights with respect to the registration of those shares under the Securities Act, assuming no exercise of the Underwriters' over-allotment option. If the Company proposes to register any of its shares of Common Stock under the Securities Act other than in connection with a Company employee benefit plan or certain corporate acquisitions, mergers or reorganizations, the holders of the Registrable Securities may require the Company to include all or a portion of their shares in such registration, subject to certain rights of the managing underwriter to limit the number of shares in any such offering. Further, holders of Registrable Securities holding at least 30% of the outstanding shares of Registrable Securities may require the Company to register all or any portion of their Registrable Securities on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. The Company may be required to effect up to one such registration per year. In addition holders of a majority of the warrants issued in connection with the Subordinated Notes and the Credit Facility and shares of Common Stock exercisable thereunder may require the Company to register one time all or any portion of the shares issuable upon exercise of such warrants on Form S-3 commencing one year after the offering and, subject to certain limitations, to keep the Registration effective for no less than 180 days. All expenses incurred in connection with such registrations (other than underwriters' discounts and commissions) will be borne by the Company. The registration rights expire six years after the closing of this offering. In addition, no holder of Registrable Securities shall be entitled to registration rights if and so long as such holder can sell the Registrable Securities in compliance with Rule 144 of the Securities Act. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Boston EquiServe. 64 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company and there can be no assurance that a significant public market for the Common Stock, will develop or be sustained after this offering. Future sales of substantial amounts of Common Stock (including shares issued upon exercise of outstanding options and warrants and upon conversion of the $5.5 Million Debenture) in the public market after this offering could adversely affect market prices prevailing from time to time and could impair the Company's ability to raise capital through the sale of its equity or debt securities. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual restrictions on resale. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding 9,973,311 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option, no exercise of outstanding options or warrants and no conversion of the $5.5 Million Debenture. Of these shares, the 2,700,000 shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 7,273,311 shares held by existing stockholders (the "Restricted Shares") are subject to lock-up agreements providing that, with certain limited exceptions, the stockholder will not offer, sell, contract to sell, grant an option to purchase, make a short sale or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock or any option or warrant to purchase shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of these shares will be saleable until 181 days after the date of this Prospectus. Beginning 181 days after the date of this Prospectus, the 7,273,311 Restricted Shares will be eligible for sale in the public market, although all but 3,067,038 shares will be subject to certain volume limitations. Holders of warrants for 1,148,949 shares of Common Stock of the Company and the holder of the $5.5 Million Debenture which may be converted at the option of the holder at any time into 513,423 shares of Common Stock, have certain registration rights, but are also subject to the 180-day lock-up agreement. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of Common Stock then outstanding (which will equal approximately 100,000 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to 65 comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this Prospectus before selling such shares. However, all shares issued pursuant to Rule 701 are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of the representatives of the Underwriters. Immediately after this offering, the Company intends to file a registration statement under the Securities Act covering shares of Common Stock subject to outstanding options under the Company's Executive Officer Plan, 1993 Plan and 1996 Plan and reserved for issuance under the 1997 Incentive Plan, the Directors Plan and the Purchase Plan. Based on the number of shares subject to outstanding options at September 30, 1997 and currently reserved for issuance under all such plans, such registration statement would cover approximately 4,020,455 shares. Such registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates of the Company, be available for sale in the open market immediately after the 180-day lock-up agreements expire. Also beginning six months after the date of this offering, certain holders of shares of Common Stock and warrants to acquire Common Stock and the holder of the $5.5 Million Debenture will be entitled to certain rights with respect to registration of such shares of Common Stock for offer and sale to the public. See "Description of Capital Stock-- Registration Rights." 66 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by NationsBanc Montgomery Securities, Inc. and UBS Securities LLC (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock are subject to certain conditions precedent, and that the Underwriters are committed to purchase all of such shares, if any are purchased.
NUMBER OF UNDERWRITERS SHARES - --------------------------------------------------------------------------------- ---------- NationsBanc Montgomery Securities, Inc........................................... UBS Securities LLC............................................................... ---------- Total........................................................................ 2,700,000 ---------- ----------
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After this offering, the price and concessions and reallowances to dealers may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 405,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 2,700,000 shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company and, to the extent the Underwriters' over-allotment option is exercised, the Selling Stockholders will indemnify the several Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. All of the Company's stockholders have agreed that, for a period of 180 days after the date of this Prospectus, they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., directly or indirectly sell, offer to sell or otherwise dispose of any such shares of Common Stock or any right to acquire such shares. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable for the Common Stock or other equity security, other than the grant of options to purchase Common Stock or the issuance of shares of Common Stock under the Company's stock option and stock purchase plans and the issuance of shares of Common Stock pursuant to the exercise of outstanding options and warrants. 67 Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, the Company's past and present operations, its past and present financial performance, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the market prices of and demand for publicly traded common stock of comparable companies in recent periods. Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock offered hereby. Such transactions may include stabilizing, the purchase of Common Stock to cover syndicate short positions and the imposition of penalty bids. A stabilizing bid means the placing of any bid or the effecting of any purchase for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which otherwise might prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have informed the Company that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The balance sheets of Hybrid Network, Inc. as of December 31, 1995 and 1996 and September 30, 1997 and the statement of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996 and the nine months ended September 30, 1997 included in this Prospectus and the financial statement schedule for the aforementioned periods included in the registration statement for the offering have been included in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of said firm as experts in auditing and accounting. 68 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement and the exhibits and schedules thereto may be inspected without charge at the offices of the Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. Information concerning the registrant is also available for inspection at the offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. 69 GLOSSARY OF TERMS ADSL Asymmetric Digital Subscriber Line. Also see Digital Subscriber Line. ANALOG A form of transmission employing a continuous electrical signal (rather than a pulsed or digital system) that varies in frequency and amplitude. ASYMMETRIC A property of a network where digital data conveyed in upstream and downstream paths of the network are transmitted at different speeds and/or under different protocols, or are transferred over different (e.g., heterogeneous) media. BACKBONE A centralized, high-speed network that interconnects smaller, independent networks. BANDWIDTH The amount of data, usually measured in bits per second (bps), that can be sent through a dedicated transmission circuit; the capacity of a telecommunications circuit or network to carry voice, data and video information. BROADBAND WIRELESS SYSTEM OPERATOR A wireless service provider with 2 MHz or more of contiguous bandwidth that can be used to offer high speed Internet access. CENTRAL OFFICE A term commonly used to describe the location of the switching equipment that is used to connect telephone calls. COAXIAL A type of electrical cable in which one conductor is wrapped around another, separated from the inner conductor by an insulating layer. Coaxial cable (coax) is most often used in the home to bring incoming cable TV signals to the television. DAVIC Digital Audio Video Interactive Council. DAVIC is an industry consortium that has defined a set of cable modem interface specifications. DIGITAL The representation of information as discrete values (i.e., 1s and 0s). These digital values can be processed, manipulated, exchanged or stored by electronic systems. DIGITAL SUBSCRIBER LINE See xDSL. 70 ETHERNET A set of media independent LAN transport protocols that offers 10 (Ethernet), 100 (Fast Ethernet) and 1000 (Gigabit Ethernet) megabit per second speeds for data throughput. FSK Frequency Shift Keying. A modulation technique used to transmit digital signals. FREQUENCY The number of identical cycles per second, measured in hertz, of a periodic oscillation wave in radio propagation. HFC Hybrid Fiber/Coaxial cable. A mixed media architecture that some cable TV operators are deploying. HFC networks utilize fiber optic cables for the trunks from the headend to neighborhood nodes and coaxial cables for connecting neighborhood nodes to end-users. ISDN Integrated Services Digital Network. An internationally accepted telephony standard for voice, data and signaling that makes all transmission circuits end-to-end digital and defines a standard out-of-band signaling system. It can give a user up to 64 Kbps of data bandwidth on a telephone line that is also used for voice, or up to 128 Kbps if the voice capability is not used. ISP Internet Service Provider. An entity that provides commercial access to the Internet. ITFS Instructional TV Fixed Service. A set of wireless frequencies beginning at 2.5 GHz that have been allocated by the FCC for educational use. Often bundled with MDS and MMDS channels in a wireless cable system. Kbps Kilobits per second. A transmission rate equal to 1,024 bits per second. LAN Local Area Network. A data communications network (often using Ethernet as its protocol) designed to interconnect personal computers, workstations, file servers and other communications and computing devices within a local environment, generally extending throughout a building or over several buildings within a two-mile radius. LAST MILE A term used to describe the last portion of a WAN that connects the end-user to a network node (such as a telephone central office or cable headend). 71 LMDS Local Multipoint Distribution Service. A set of wireless frequencies starting at 28 GHz that have recently been set aside by the FCC for auction in 1998. LPTV Low Power TV. A group of community TV broadcasters that have been granted licenses by the FCC to broadcast community-oriented low power TV over UHF and VHF frequencies. Some LPTV operators have received experimental licenses from the FCC for providing high speed Internet access. MBPS Megabits per second. A transmission rate equal to 1,000,000 bits per second. MCNS Multimedia Cable Network System. A set of cable modem interface specifications defined by a consortium of cable TV operators and vendors. MDS Multipoint Distribution Service. A set of wireless frequencies starting at 2.1 GHz that are often bundled with MMDS and ITFS in a wireless cable system. MMDS Multichannel Multipoint Distribution Service. Often used as a synonym for "Wireless Cable." MMDS specifically refers to a set of wireless frequencies in the 2.6 GHz range that were originally allocated for analog television rebroadcast. MODEM A device for transmitting and receiving digital information over an analog telephone line. PLAIN OLD TELEPHONE SERVICE (POTS) Basic analog telephone service with no enhanced features (such as call waiting, conference calling or call forwarding), typically available in residences throughout the United States. PoP Point of Presence. A site which houses a collection of telecommunications equipment, usually digital leased lines and multi-protocol routers. Used in this document to refer to the location of the Company's headend equipment. PROTOCOL A formal description of messages to be exchanged and rules to be followed for two or more systems to exchange information. PSTN Public Switched Telephone Network. The combined telephony infrastructure of Inter Exchange Carriers (e.g., AT&T) and Local Exchange Carriers (e.g., RBOCs). Universal telephone service, embodied as the goal of the 1934 Communications Act, is provided by access to the PSTN. 72 QPSK Quadrature Phase Shift Keying. A modulation technique used to transmit digital signals. ROUTER A system including a specialized computer that takes incoming packets and compares their destination addresses to internal routing tables and, depending on network conditions, sends the packets out to the appropriate receiving router. This process may be repeated many times until the packets reach their intended destination. T-1 A digital carrier facility capable of transmitting a digital signal at a rate of 1.544 Mbps. T-3 A digital carrier facility capable of transmitting a digital signal at a rate of 44.746 Mbps. TCP/IP Transport Control Protocol/Internet Protocol. A worldwide public domain standard for connecting computers accepted by many vendors for use over WANs. TERMINAL SERVER A device located at a PoP that connects a bank of telephone modems to a LAN. The terminal server is attached to the router which in turn is attached to the DSU-CSU, which converts a data stream into a format suitable for transmission. UHF Ultra High Frequency. Defines frequencies typically used by broadcast television signals in the 470 to 806 megahertz range, denoted by channels 14-69 on a standard television. VHF Very High Frequency. Defines frequencies typically used by broadcast television signals in the 54 to 216 megahertz range, denoted by channels 2-13 on a standard television. WIRELESS COMMUNICATION SERVICES (WCS) A set of wireless frequencies auctioned by the FCC in April 1997. The frequencies start at 2.3 GHz and come in 5 and 10 MHz blocks. xDSL Digital Subscriber Line. A technology that enables high speed transmission of data over copper wires. There are several implementations of DSL technology, including: ADSL (Asymmetric Digital Subscriber Line); HDSL (High Bit Rate Digital Subscriber Line); IDSL (Integrated Digital Subscriber Line); RDSL (Rate Adaptive Digital Subscriber Line); SDSL (Symmetric Digital Subscriber Line); and VDSL (Very High Bit Rate Digital Subscriber Line). 73 HYBRID NETWORKS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----------- Report of Independent Accountants.......................................................................... F-2 Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997..................................... F-3 Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 (unaudited) and 1997.................................................................. F-4 Statements for Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1997................................................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 (unaudited) and 1997.................................................................. F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Hybrid Networks, Inc.: We have audited the accompanying balance sheets of Hybrid Networks, Inc. as of December 31, 1995 and 1996 and September 30, 1997, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hybrid Networks, Inc. as of December 31, 1995 and 1996 and September 30, 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California October 16, 1997, except for Note 16, for which the date is October 21, 1997. F-2 HYBRID NETWORKS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, SEPTEMBER 30, DEFICIT -------------------- ------------- (NOTE 15) 1995 1996 1997 SEPTEMBER 30, 1997 --------- --------- ------------- ------------------ ASSETS Current assets: Cash and cash equivalents................................. $ 2,863 $ 6,886 $ 5,314 Short-term investments.................................... 490 -- -- Accounts receivable, net of allowance for doubtful accounts of none in 1995 and 1996 and $675 in 1997...... 287 1,348 5,954 Inventories............................................... 196 943 2,068 Prepaid expenses and other current assets................. 10 125 199 --------- --------- ------------- Total current assets.................................... 3,846 9,302 13,535 Property and equipment, net................................. 707 1,178 1,767 Deferred financing costs.................................... -- -- 490 Other assets................................................ 33 59 398 --------- --------- ------------- Total assets............................................ $ 4,586 $ 10,539 $ 16,190 --------- --------- ------------- --------- --------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Convertible subordinated note payable..................... $ -- $ -- $ 6,632 Accounts payable.......................................... 280 1,424 1,712 Accrued liabilities....................................... 307 712 1,222 Current portion of capital lease obligations.............. 110 222 404 --------- --------- ------------- Total current liabilities............................... 697 2,358 9,970 Convertible debenture....................................... -- -- 5,500 Capital lease obligations, less current portion............. 184 438 723 Other liabilities........................................... 44 34 -- --------- --------- ------------- Total liabilities....................................... 925 2,830 16,193 --------- --------- ------------- Commitments (Note 9) Stockholders' equity (deficit): Convertible preferred stock, $.001 par value: Authorized: 18,000 shares; Issued and outstanding: 8,363 shares in 1995, 12,069 shares in 1996 and 12,563 shares in 1997; no shares pro forma............................................. 8 12 13 (Liquidation value: $27,750 at September 30, 1997) Common stock, $.001 par value: Authorized: 34,000 shares; Issued and outstanding: 2,497 shares in 1995, 2,520 shares in 1996 and 2,620 shares in 1997; 7,273 pro forma shares.......................................... 2 2 2 $ 15 Additional paid-in capital.................................. 12,478 25,037 27,406 27,406 Accumulated deficit......................................... (8,827) (17,342) (27,424) (27,424) --------- --------- ------------- -------- Total stockholders' equity (deficit).................... 3,661 7,709 (3) $ (3) --------- --------- ------------- -------- -------- Total liabilities and stockholders' equity (deficit)........................................... $ 4,586 $ 10,539 $ 16,190 --------- --------- ------------- --------- --------- -------------
The accompanying notes are an integral part of these financial statements. F-3 HYBRID NETWORKS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ----------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 ---------- ----------- (UNAUDITED) Net sales............................................... $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Cost of sales........................................... 1,362 761 3,130 1,602 8,214 --------- --------- --------- ----------- ---------- Gross profit (loss)................................. (694) (131) (168) (349) 938 --------- --------- --------- ----------- ---------- Operating expenses: Research and development.............................. 1,251 3,862 5,076 3,757 5,170 Sales and marketing................................... 348 390 1,786 954 3,138 General and administrative............................ 533 748 1,714 1,196 2,516 --------- --------- --------- ----------- ---------- Total operating expenses............................ 2,132 5,000 8,576 5,907 10,824 --------- --------- --------- ----------- ---------- Loss from operations.............................. (2,826) (5,131) (8,744) (6,256) (9,886) Interest income and other expense, net.................. 30 166 257 146 183 Interest expense........................................ (101) (304) (28) (22) (379) --------- --------- --------- ----------- ---------- Net loss.......................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Net loss per share...................................... $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Shares used in per share calculation.................... 2,880 2,877 3,189 3,196 3,229 --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Pro forma net loss per share............................ $ (1.24) $ (1.33) --------- ---------- --------- ---------- Pro forma shares used in per share calculation.......... 6,873 7,607 --------- ---------- --------- ----------
The accompanying notes are an integral part of these financial statements. F-4 HYBRID NETWORKS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL -------------- --------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------------ ----------- ----------- ------- Balances, January 1, 1994..... 1,547 $ 1 2,250 $ 2 $ 662 $ (661) $ 4 Repurchase of common stock..................... -- -- (74) -- (8) -- (8) Issuance of Series B preferred stock, net of issuance costs of $21..... 552 1 -- -- 943 -- 944 Issuance of Series C preferred stock upon conversion of notes payable, net of issuance costs of $1............... 761 1 -- -- 1,248 -- 1,249 Net loss.................... -- -- -- -- -- (2,897) (2,897) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1994... 2,860 3 2,176 2 2,845 (3,558) (708) Exercise of common stock options................... -- -- 9 -- 3 -- 3 Exercise of stock purchase rights.................... -- -- 44 -- 24 -- 24 Grant of stock bonus awards.................... -- -- 6 -- 3 -- 3 Issuance of common stock for technology license........ -- -- 262 -- 141 -- 141 Issuance of Series B and Series D preferred stock warrants.................. -- -- -- -- 18 -- 18 Issuance of Series D preferred stock, net of issuance costs of $42..... 3,200 3 -- -- 5,555 -- 5,558 Issuance of Series E preferred stock upon conversion of notes payable............. 1,316 1 -- -- 1,999 -- 2,000 Additional paid in capital in connection with accrued interest forgiven from conversion of notes payable to Series E preferred stock........... -- -- -- -- 402 -- 402 Issuance of Series F preferred stock from conversion of prepaid royalties, net of issuance costs of $11.............. 987 1 -- -- 1,488 -- 1,489 Net loss.................... -- -- -- -- -- (5,269) (5,269) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1995... 8,363 8 2,497 2 12,478 (8,827) 3,661 Exercise of common stock options................... -- -- 65 -- 34 -- 34 Repurchase of common stock..................... -- -- (42) -- (9) -- (9) Issuance of Series B preferred stock upon net exercise of warrants...... 248 -- -- -- -- -- -- Issuance of Series G preferred stock for cash and conversion of notes payable, net of issuance costs of $704............. 3,458 4 -- -- 12,534 -- 12,538 Net loss.................... -- -- -- -- -- (8,515) (8,515) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1996... 12,069 12 2,520 2 25,037 (17,342) 7,709 Exercise of common stock options................... -- -- 93 -- 55 -- 55 Repurchase of common stock..................... -- -- (12) -- (7) -- (7) Grant of stock bonus awards.................... -- -- 13 -- 38 -- 38 Issuance of common stock for services rendered......... -- -- 6 -- 34 -- 34 Issuance of Series H preferred stock........... 494 1 -- -- 1,999 -- 2,000 Issuance of warrants in connection with convertible subordinated notes payable............. -- -- -- -- 250 -- 250 Net loss.................... -- -- -- -- -- (10,082) (10,082) ------ ------ ------ --- ----------- ----------- ------- Balances, September 30, 1997........................ 12,563 $13 2,620 $ 2 $27,406 $(27,424) $ (3) ------ ------ ------ --- ----------- ----------- ------- ------ ------ ------ --- ----------- ----------- -------
The accompanying notes are an integral part of these financial statements. F-5 HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ---------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss......................................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................. 70 162 322 230 530 Provision for doubtful accounts................................ -- -- -- -- 690 Interest converted to Series E preferred stock................. -- 402 -- -- -- Common stock issued for technology license..................... -- 141 -- -- -- Common stock issued for services rendered...................... -- 3 -- -- 72 Change in assets and liabilities: Accounts receivable.......................................... 51 (224) (1,061) 13 (5,257) Inventories.................................................. (50) (81) (747) (247) (1,125) Prepaid expenses and other current assets.................... 5 7 (115) (106) (34) Accounts payable............................................. 78 102 1,144 384 (92) Accrued liabilities and other................................ 101 1,418 395 89 476 --------- --------- --------- ----------- --------- Net cash used in operating activities...................... (2,642) (3,339) (8,577) (5,769) (14,822) --------- --------- --------- ----------- --------- Cash flows from investing activities: Purchase of property and equipment............................... (218) (295) (321) (288) (400) Change in other assets........................................... -- (22) (26) (26) (34) Purchase of short-term investments............................... (199) (490) -- -- -- Proceeds from maturity of short-term investments................. -- 199 490 490 -- --------- --------- --------- ----------- --------- Net cash provided by (used in) investing activities........ (417) (608) 143 176 (434) --------- --------- --------- ----------- --------- Cash flows from financing activities: Repayment of capital lease obligations........................... -- (20) (106) (15) (208) Repayment of notes payable....................................... (25) -- -- -- -- Proceeds from issuance of preferred stock warrants............... -- 18 -- -- -- Proceeds from convertible subordinated note payable.............. -- -- -- -- 6,844 Net proceeds from issuance of convertible debenture.............. 2,344 -- 3,160 3,160 5,000 Net proceeds from issuance of preferred stock.................... 944 5,558 9,378 9,378 2,000 Proceeds from issuance of common stock........................... -- 27 34 24 55 Repurchase of common stock....................................... (8) -- (9) -- (7) --------- --------- --------- ----------- --------- Net cash provided by financing activities.................. 3,255 5,583 12,457 12,547 13,684 --------- --------- --------- ----------- --------- Increase (decrease) in cash and cash equivalents................... 196 1,636 4,023 6,954 (1,572) Cash and cash equivalents, beginning of period..................... 1,031 1,227 2,863 2,863 6,886 --------- --------- --------- ----------- --------- Cash and cash equivalents, end of period........................... $ 1,227 $ 2,863 $ 6,886 $ 9,817 $ 5,314 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Conversion of notes payable into preferred stock................. $ 1,250 $ 2,000 $ 3,160 $ 3,160 -- Conversion of prepaid royalties to Series F preferred stock...... -- 1,500 -- -- -- Property and equipment acquired under capital leases............. -- 314 472 259 $ 675 Capitalization of finance costs.................................. -- -- -- -- Capitalization of initial public offering costs.................. -- -- -- -- 340 Issuance of warrants in connection with subordinated notes payable........................................................ -- -- -- -- 250 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.................................................... $ 5 $ 5 $ 28 $ 18 $ 379
The accompanying notes are an integral part of these financial statements. F-6 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY The Company is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the "last mile" connection to the end user which causes slow response time for those accessing bandwidth-intensive information over the Internet and corporate intranets. The Company was incorporated in Delaware on June 6, 1990. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CHANGE IN FISCAL YEAR In 1997, the Company changed its fiscal year end from March 31 to December 31, effective January 1, 1992. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS, BUSINESS RISKS AND CREDIT CONCENTRATION The carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term cash investments, accounts receivable, accounts payable and other accrued liabilities' approximate fair value due to their short maturities. The Company sells its products primarily to communication and networking companies in North America. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company also maintains allowances for potential losses on collectibility of accounts receivable and such losses have been within Management's expectations. As of December 31, 1995, four customers represented 35%, 19%, 18% and 18% of accounts receivable, and as of December 31, 1996, two customers represented 51% and 10% of accounts receivable, respectively. As of September 30, 1997, two customers represented 12% and 11% of accounts receivable, respectively. The Company operates in the intensely competitive and rapidly changing communications industry which has been characterized by rapid technological change, evolving industry standards and federal, state and local regulation which may impede the Company's penetration of certain markets. The Company currently operates with one product line. The Company's future success depends upon its ability to develop, introduce and market new products, its ability to obtain components from key suppliers, obtaining sufficient manufacturing capacity, and the success of the broadband access business. The Company may experience future fluctuations in operating results and declines in selling prices. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid instruments with an original or remaining maturity of three months or less to be cash equivalents. Instruments with a maturity greater than three months at the date of purchase and maturing within one year from the balance sheet date are included in short-term investments. The Company's cash and cash equivalents as of December 31, 1996 and September 30, 1997 are in F-7 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) three demand accounts with a major bank. Short-term investments as of December 31, 1995 are classified as available for sale and are carried at cost which approximates fair market value, and consist of a government bond. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets of three to five years. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is less. DEFERRED FINANCING COSTS Deferred financing costs relate to fees incurred in connection with the issuance of a senior convertible debenture in April 1997 and are amortized over the five year life of the debenture (see Note 6). REVENUE RECOGNITION The Company recognizes revenue and accrues for estimated warranty costs upon shipment of products. Actual warranty costs incurred have not materially differed from those provided. PRODUCT DEVELOPMENT COSTS Costs related to research, design and development of products are charged to research and development expenses as incurred. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company's financial statements for the year ended December 31, 1996. SFAS No. 123 allows companies to either account for stock-based compensation under the new provisions of SFAS No. 123 or under the provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company has continued to account for its stock based compensation in accordance with the provisions of APB 25 and provides the required pro forma disclosures (see Note 10). COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Historical net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Common equivalent shares from stock options and convertible preferred stock are excluded from the computation of net loss per share as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares issued at prices below the public offering price during the 12 months immediately preceding the filing date of an initial public offering have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the anticipated initial public offering price). Pro forma net loss per share assumes that the common shares F-8 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) issuable upon conversion of the outstanding convertible preferred stock have been outstanding during such periods. UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying interim statement of operations and cash flow for the nine months ended September 30, 1996 are unaudited but include all adjustments, consisting of only normal recurring adjustments which the Company considers necessary to present fairly, in all material aspects, the results of operations and cash flows for the period ended September 30, 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of results for an entire year. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation and disclosure requirements for earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 requires restatement of all prior-period earnings per share data presented after the effective date. SFAS No. 128 will not have a material effect on the Company's earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998 and the impact of adoption has not been determined. F-9 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES Inventories are comprised of the following (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Raw materials............................................ $ 98 $ 526 $ 1,557 Work in progress......................................... 93 267 246 Finished goods........................................... 5 150 265 --------- --------- ------ $ 196 $ 943 $ 2,068 --------- --------- ------ --------- --------- ------
4. PROPERTY AND EQUIPMENT Property and equipment, including furniture and equipment under capital leases, (cost of $314,000, $786,000 and $1,461,000 accumulated amortization of $36,000, $177,000 and $437,000 as of December 31, 1995 and 1996 and September 30, 1997, respectively) consist of the following (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Machinery and equipment..................................... $ 755 $ 1,440 $ 2,538 Office furniture and fixtures............................... 91 107 163 Leasehold improvements...................................... 97 189 110 --------- --------- ------------- 943 1,736 2,811 Less accumulated depreciation and amortization.............. (236) (558) (1,044) --------- --------- ------------- $ 707 $ 1,178 $ 1,767 --------- --------- ------------- --------- --------- -------------
5. CONVERTIBLE SUBORDINATED NOTE PAYABLE In September 1997, the Company entered into a Convertible Subordinated Promissory Note Purchase Agreement to issue $6,882,000 of subordinated notes at 10% interest (increasing to 18% after March 30, 1998 under certain circumstances). The principal amount of the notes are payable at the earliest of September 30, 1998 or the effective date of an initial public offering of the Company's common stock. The notes may become due earlier under certain circumstances. At the option of the holders, the outstanding balance of the subordinated notes may be converted to equity capital of the Company. In connection with the Convertible Subordinated Note Purchase Agreement, the Company issued warrants to purchase shares of its common stock at $10.91 per share. The warrants become exercisable at the earliest of 180 days after issuance or the effective date of an initial public stock offering and expire in five years. The amount of warrants to be exercised is based on the length of time the debt remains outstanding. Provided the debt is repaid prior to March 30, 1998, the number of shares exercisable under the warrants is 252,381. However if the debt is repaid at a later date the number of shares exercisable under the warrants can increase to a maximum of 630,932 shares. The amount attributed to the value of the warrants is $250,000 which has been allocated to stockholders' equity and will be amortized to interest expense over the term of the note. The Company must comply with certain restrictive covenants, including non-payment of dividends, as long as the notes are outstanding. F-10 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE DEBENTURE On April 30, 1997, the Company issued a senior convertible debenture in the amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and maturing on April 30, 2002. The placement fee of $500,000 was deducted from the cash proceeds to the Company. The debenture is convertible, at the option of the holder, at any time, into common stock at $10.71 per share, subject to adjustment. Conversion is automatic if (i) the gross proceeds to the Company from its initial public offering are at least $15.0 million, (ii) the public offering price per share is at least $166,500,000 divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the debenture) prior to this offering and (iii) the closing price of the Common Stock for any 90 consecutive calendar day period after this offering is equal to or greater than $166,500,000 divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the debenture) or, alternatively, upon the acquisition of the Company for at least $166,500,000 in cash or fair market value of freely tradable securities from the acquiring company. The debenture is collateralized by substantially all the Company's assets until October 30, 1997. Subject to certain upgrade adjustments, the Company may not make capital expenditures in excess of $1,500,000, $2,500,000, $5,500,000 and $11,000,000 during the twelve months ending March 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the Company may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder as long as the debenture remains outstanding. 7. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Accrued payroll and related accruals........................... $ 244 $ 425 $ 768 Other liabilities.............................................. 63 287 454 --------- --------- ------ $ 307 $ 712 $ 1,222 --------- --------- ------ --------- --------- ------
8. CAPITAL LEASE OBLIGATIONS In August 1996, the Company entered into a financing agreement under which the Company may lease equipment and furniture in an amount not to exceed $1,000,000. As of September 30, 1997, no amount remained available under this lease line, which expired on September 15, 1997. Capital leases at September 30, 1997 expire at various dates through March 2002 and bear interest ranging from 7.6% to 10.8%. F-11 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CAPITAL LEASE OBLIGATIONS (CONTINUED) Future minimum lease payments under all capital leases are as follows (in thousands): 1997................................................................ $ 119 1998................................................................ 474 1999................................................................ 407 2000................................................................ 244 2001................................................................ 10 --------- 1,254 Less amount representing interest................................... (127) --------- 1,127 Less current portion................................................ (404) --------- $ 723 --------- ---------
9. COMMITMENTS The Company leases its facilities and equipment under operating leases expiring at various dates from May 1998 through March 2002. Under the terms of two of the facilities leases, the Company is responsible for its share of common area expenses, and has the option to extend two of the facilities leases for additional three year terms at fair market rates. Future minimum lease payments are as follows (IN THOUSANDS): 1997................................................................. $ 118 1998................................................................. 216 1999................................................................. 57 2000................................................................. 55 2001................................................................. 52 Thereafter........................................................... 9 --------- $ 507 --------- ---------
Rent expense for 1994, 1995, 1996 and nine months ended September 30, 1997 was approximately $115,000, $191,000, $263,000, and $341,000 respectively. 10. STOCKHOLDERS' EQUITY (DEFICIT) REVERSE STOCK SPLIT In September 1997, the Company's Board of Directors approved a 1-for-2.7 reverse split of the Company's common stock and a corresponding change in the preferred stock conversion ratios. All common stock and per share amounts in these financial statements have been adjusted retroactively to give effect to the split. In addition, the Company's Board of Directors approved an Amended and Restated Certificate of Incorporation which eliminates the existing convertible preferred stock and changes the number of authorized preferred stock to 5,000,000 shares, $0.001 per value, and increases the shares of common stock authorized to 100,000,000 shares, which Certificate is to be filed following the effectiveness of the initial public offering. F-12 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) INITIAL PUBLIC OFFERING In September 1997, the Board of Directors authorized management of the company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. CONVERTIBLE PREFERRED STOCK The convertible preferred stock as of December 31, 1996 and September 30, 1997 comprises (IN THOUSANDS, EXCEPT PER SHARE DATA):
NUMBER OF NUMBER OF SHARES SHARES ISSUED AND PROCEEDS LIQUIDATION DIVIDEND AUTHORIZED OUTSTANDING (NET) VALUE PER SHARE ----------- ----------- --------- ----------- ----------- Series A............................................ 1,547 1,547 $ 613 $ 758 $ 0.03 Series B............................................ 1,238 800 944 1,400 0.13 Series C............................................ 762 762 1,249 1,250 0.12 Series D............................................ 5,251 3,200 5,558 5,600 0.13 Series E............................................ 1,316 1,316 2,000 2,000 0.11 Series F............................................ 987 987 1,489 1,500 0.11 Series G............................................ 6,360 3,457 12,538 13,242 0.29 ----------- ----------- --------- ----------- Balances, December 31, 1996......................... 17,461 12,069 24,391 25,750 Series H............................................ 497 494 2,000 2,000 0.32 Undesignated........................................ 42 ----------- ----------- --------- ----------- Balances, September 30, 1997........................ 18,000 12,563 $ 26,391 $ 27,750 ----------- ----------- --------- ----------- ----------- ----------- --------- -----------
The rights, preferences and privileges of the preferred stockholders are as follows: DIVIDENDS The holders of preferred stock are entitled to noncumulative dividends, pari passu, when and as declared by the Board of Directors, at an annual rate as stated above. No cash dividend or other distribution may be made with respect to the common stock during any year unless dividends in the total amount specified for the preferred stock have been paid or declared and set apart. No dividends have been declared through September 30, 1997. LIQUIDATION The holders of preferred stock are entitled to a preference in liquidation, pari passu, to common stockholders of a liquidation amount as indicated in the above table, plus declared but unpaid dividends. Any remaining assets are distributed to the holders of common stock. CONVERSION AND REGISTRATION The preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. Conversion is automatic upon the earlier of the consummation of a firm commitment underwritten public offering of the Company's common stock for aggregate proceeds of $15,000,000, with an offering price of not less than 175% of the Series G conversion price per share ($18.10 at September 30, 1997 after giving F-13 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) effect to a 1-for-2.7 reverse split), or written consent by a majority of the holders of the then outstanding shares of preferred stock. The holders of Series A, B, D, G and H preferred stock, one of the founders, and two other entities have the right to participate in future issuances of the Company's stock prior to an initial public offering and all holders of preferred stock have certain registration rights. The Company has reserved 4,653,585 shares of common stock for issuance upon conversion of the preferred stock. VOTING Each share of preferred stock is entitled to vote on an "as converted" basis along with common stockholders. As long as 2,000,000 shares, or more than 1,000,000 but less than 2,000,0000 shares of Series D preferred stock are outstanding, the holders of Series D preferred stock, voting separately as a series, have the right to elect two or one of the Company's directors, respectively, but are not entitled to vote for other directors. As long as at least 750,000 shares of Series A preferred stock are outstanding, the holders of Series A preferred stock, voting together as a separate series, have the right to elect one of the Company's directors, but are not entitled to vote for other directors. As long as at least 800,000 shares, in the aggregate, of Series E and F preferred stock are outstanding, the holders of Series E and F preferred stock, voting together as a separate class, have the right to elect one of the Company's directors, but are not entitled to vote for other directors. So long as at least 700,000 shares of Series A preferred stock, 500,000 shares of Series B preferred stock, 250,000 shares of Series C preferred stock, 2,000,000 shares of Series D preferred stock, 600,000 shares of Series E preferred stock, 400,000 shares of Series F preferred stock, 1,500,000 shares of Series G preferred stock or 200,000 shares of Series H preferred stock are outstanding, the Company shall not, without the vote or written consent of the holders of a majority of the preferred stock, (i) merge into or consolidate with another corporation resulting in a transfer of more than 50% of the outstanding stock or ownership of less than 50% of the voting securities of the surviving corporation or (ii) create any other equity security senior to or on a parity with the existing series of preferred stock. WARRANTS The Company has historically issued warrants in connection with its various rounds of financing, equipment lease lines, and transfers of technology. The value of the warrants was assessed using the Black-Scholes Model and determined to be insignificant for financial reporting purposes. In connection with the issuance of Series G preferred stock in July 1996, and the equipment lease line, the Company issued warrants to purchase 156,658 and 15,665 shares of Series G preferred stock, respectively, at $3.83 per share. These warrants are exercisable at any time and expire in July 2001 and August 2006, respectively. The Company has reserved 172,323 shares of Series G preferred stock for issuance upon exercise of these warrants. The Series G preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock (Note 15). In connection with the issuance of convertible promissory notes in June 1996 which were later converted into Series G preferred stock, the Company issued warrants to purchase 451,000 shares of Series D preferred stock at $1.75 per share. In connection with the issuance of Series D preferred stock May 1995, the Company issued warrants, at $.001 per warrant, to purchase 1,600,001 shares of Series D F-14 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) WARRANTS (CONTINUED) preferred stock at $1.75 per share. These warrants are exercisable at any time and expire in June 2001. The Company has reserved 2,051,001 shares of Series D preferred stock for issuance upon exercise of these warrants. The Series D preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. During 1996, the Company issued warrants, at $.001 per warrant, to purchase 205,861 shares of Series B preferred stock at $1.75 per share. In connection with the technology transfer discussed in Note 13 and the 1995 equipment lease line, the Company issued warrants to purchase 457,000 and 22,857 shares of Series B preferred stock, respectively, at $1.75 per share. During 1996, the warrant to purchase 457,000 shares was exercised for a net exercise of 248,000 shares. The remaining warrants are exercisable at any time and expire in June 2001 and August 2005, respectively. The Company has reserved 228,718 shares of Series B preferred stock for issuance upon exercise of these warrants. The Series B preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. In September 1997 the Company issued warrants to purchase 252,381 shares of common stock in connection with their convertible subordinated note payable. (See Note 5). COMMON STOCK Common stock held by certain employees is subject to stock purchase agreements whereby the Company has the option to repurchase unvested shares upon termination of employment at the initial issuance price. The Company's right to repurchase these shares generally lapses at the rate of 12.5% six months from the date of the agreement and 2.0833% per month thereafter. As of September 30, 1997, no shares of common stock remain subject to the Company's right of repurchase. Thereafter, the Company has the right of first refusal, should any stockholder decide to sell shares. In addition, the Series A, B and D preferred stockholders have the right to participate in a sale by a founder, should a founder decide to sell shares resulting in proceeds greater than $250,000, or $1,000,000 after conversion of the preferred stock. STOCK OPTION PLANS In July and September 1997, the Company increased the shares authorized for the Executive Officer Incentive Plan by an aggregate of 270,000 shares. In September 1997, the Board of Directors approved the 1997 Equity Incentive Plan and reserved a total of 1,750,000 shares for issuance to employees, officers, directors, consultants, independent contractors, and advisors. Also in September 1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan and 1997 Directors' Stock Option Plan under which 225,000 and 100,000 shares of common stock, respectively, have been reserved for issuance. The Directors' Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. In December 1996, the Company adopted the 1996 Equity Incentive Plan and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants, independent contractors and F-15 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) advisors. In June 1997, the Company increased the number of shares reserved for issuance under the 1996 Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in December 2006. In December 1995, the Company adopted the Executive Officer Incentive Plan and reserved 370,370 shares of common stock for issuance to the Company's chief executive officer and other senior executive officers. In July 1996, the Company increased the number of shares reserved under this plan to 500,000 shares. In the event of a merger, consolidation, liquidation or similar change of control transaction as a result of which the participants' responsibilities and position with the Company are materially diminished, options granted under this plan become fully exercisable and remain so for one year thereafter. This plan will expire in December 2005. In October 1993, the Company adopted the 1993 Equity Incentive Plan, and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants and advisors. In 1995, 1996 and 1997, the Company increased the number of shares reserved for issuance under the 1993 Equity Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993 Equity Incentive Plan expires in October 1993. Options, under all of the above plans, may be granted at prices not less than fair market value at the date of grant, as determined by the Board of Directors, in case of incentive options (110% in certain instances), and not less than 85% of fair market value at the date of grant, as determined by the Board of Directors, in case of nonqualified options, restricted stock awards and stock bonus awards (100% in certain instances). Options and stock awards generally vest 12.5% six months from date of grant and 2.0833% per month thereafter; stock options expire three months after termination of employment and five years from date of grant. F-16 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) Activity under the Plans is set forth below (IN THOUSANDS, EXCEPT PER SHARE DATA):
VALUE OF OPTIONS AND OPTIONS AND WEIGHTED PURCHASE PURCHASE AVERAGE SHARES RIGHTS EXERCISE PRICE RIGHTS EXERCISE AVAILABLE OUTSTANDING PER SHARE OUTSTANDING PRICE ----------- ------------- -------------- ------------- ----------- Balances, January 1, 1994........................ 359 24 -- -- -- Additional shares reserved..................... 185 -- -- -- -- Restricted stock issued........................ (226) -- -- -- -- Options granted................................ (200) 200 $0.27-$0.54 $ 71 $ 0.36 Options canceled............................... 51 (51) 0.27 (14) 0.27 ----------- ----- ------ Balances, December 31, 1994...................... 169 173 0.27-0.54 57 0.33 Additional shares reserved..................... 722 -- -- -- -- Options granted................................ (235) 235 0.54 127 0.54 Purchase rights granted........................ (44) 44 0.54 24 0.54 Purchase rights exercised...................... -- (44) 0.54 (24) 0.54 Stock bonus awards............................. (6) -- 0.54 -- 0.54 Options canceled............................... 90 (90) 0.27-0.54 (35) 0.39 Options exercised.............................. -- (9) 0.27-0.54 (3) 0.33 ----------- ----- ------ Balances, December 31, 1995...................... 696 309 0.27-0.54 146 0.47 Additional shares reserved..................... 741 -- -- -- -- Options granted................................ (1,267) 1,267 0.54-1.08 865 0.68 Stock repurchased.............................. 11 -- 0.54 -- -- Options canceled............................... 32 (32) 0.27-0.54 (14) 0.44 Options exercised.............................. -- (65) 0.54 (35) 0.54 ----------- ----- ------ Balances, December 31, 1996...................... 213 1,479 0.27-1.08 962 0.65 Additional shares reserved..................... 2,409 -- -- -- -- Options granted................................ (801) 801 1.08-11.04 4,658 5.82 Stock bonus awards............................. (13) 13 1.08-5.40 -- 2.97 Stock repurchased.............................. 12 -- 0.58 -- -- Options canceled............................... 226 (226) 0.54-2.16 (199) 0.88 Options exercised.............................. -- (93) 0.27-1.08 (55) 0.59 ----------- ----- ------ Balances, September 30, 1997..................... 2,046 1,974 $0.27-$11.04 $ 5,366 $ 2.72 ----------- ----- ------ ----------- ----- ------
For the years ended December 31, 1995 and 1996 and nine months ended September 30, 1997, the weighted average fair value of options granted was $0.42, $0.81 and $3.44 per share, respectively. F-17 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) As of September 30, 1997, the stock options outstanding were as follows (IN THOUSANDS, EXCEPT PER SHARE DATA):
OPTIONS OUTSTANDING - -------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ----------- ------------- --------------- ----------- --------------- ----------- $ 0.27 57 1.78 $ 0.27 50 $ 0.27 0.54 904 3.40 0.54 357 0.54 1.08 294 4.08 1.08 74 1.08 2.16 75 4.48 2.16 10 2.16 2.70 159 4.64 2.70 1 2.70 5.40 201 4.79 5.40 -- 5.40 8.78 114 4.92 8.78 -- 8.78 11.04 170 4.96 11.04 -- 11.04 ----- --- 1,974 $ 2.73 492 $ 0.62 ----- --- ----- ---
As of December 31, 1995 and 1996, options to purchase 125,000 and 294,000 shares were exercisable at an average weighted exercise price of $0.46 and $0.54, respectively. The Company has elected to continue to follow the provisions of APB No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No. 123"). Accordingly, no compensation cost has been recognized for the Company's stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1995, 1996 and the nine months ended September 30, 1997 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share for 1995, 1996, and the nine months ended September 30, 1997 would have been increased to the pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
YEAR ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------- ------------------ 1995 1996 1997 --------- --------- ------------------ Net loss--as reported...................................... $ 5,269 $ 8,515 $ 10,082 --------- --------- ------- --------- --------- ------- Net loss--pro forma........................................ $ 5,275 $ 8,548 $ 10,259 --------- --------- ------- --------- --------- ------- Net loss per share--as reported............................ $ (1.83) $ (2.67) $ (3.12) --------- --------- ------- --------- --------- ------- Net loss per share--pro forma.............................. $ (1.83) $ (2.68) $ (3.18) --------- --------- ------- --------- --------- -------
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. In accordance with the provisions of SFAS No. 123, the fair value of each option is estimated using the following assumptions used for grants during 1995 and 1996 and the nine months ended September 30, F-18 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) 1997; dividend yield of 0%, volatility of 0%, risk-free interest rates of 5.18% to 7.68% at the date of grant and an expected term of four years. 11. INCOME TAXES Temporary differences which gave rise to significant portions of deferred tax assets are as follows (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Net operating loss carryforwards......................... $ 2,120 $ 4,119 $ 6,557 Capitalized research expenditures........................ 1,501 3,553 4,415 Tax credit carryforwards................................. 221 637 855 Inventory reserves....................................... 67 103 197 Other accrued liabilities................................ 46 104 492 --------- --------- ------------- Total deferred asset................................... 3,955 8,516 12,516 Valuation allowance...................................... (3,955) (8,516) (12,516) --------- --------- ------------- Net deferred asset..................................... $ -- $ -- $ -- --------- --------- ------------- --------- --------- -------------
In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. The Company has established a valuation allowance to the extent of its deferred tax assets since it is not certain that a benefit can be realized in the future due to the Company's recurring operating losses. The valuation allowance increased by $1,136,000, $2,345,000, $4,561,000 and $4,000,000 in 1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively. The Company had federal and state net operating loss carryforwards of approximately $28,000,000 and $18,000,000, respectively, as of September 30, 1997 available to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire in 1997 through 2011, if not utilized.
TAX EXPIRATION REPORTING DATES ---------- ----------- Research and development credit..................................... $ 535,000 2007-2010 State research and development credit............................... $ 320,000 1997-2011
The Company's net operating loss and tax credit carryforwards are subject to a limitation of approximately $5,120,000 upon an ownership change, as defined by tax laws. 12. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution retirement plan (the "Plan"), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The Plan covers essentially all employees. Eligible employees may make voluntary contributions to the Plan up to 15% of their annual compensation and the employer is allowed to make discretionary contributions. In 1994, 1995, 1996 and for the nine months of 1997, the Company made no employer contributions. F-19 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. RELATED PARTY TRANSACTIONS During 1994, the Company entered into borrowing agreements with two parties. At the time of each borrowing, the Company was required to issue warrants to purchase its preferred stock. In December 1994, one of the lenders applied its outstanding balance of $1,250,000 to the exercise of its warrants. In December 1995, the second lender used its outstanding balance of $2,000,000 to exercise its warrants. Accrued interest on the note was forgiven. However, the Company recorded the related accrued interest of $402,000 as an additional capital contribution related to the issuance of the Series E preferred stock. In connection with these borrowing agreements the Company granted an exclusive royalty bearing license to certain technology to one of the lenders. In December 1995, advance royalties in the amount of $1,500,000 were converted into 986,898 shares of Series F preferred stock at $1.52 per share. At the same time, the above license became nonexclusive, and the Company received a nonexclusive license to certain technology, consideration for which was the issuance of 708,000 shares of the Company's common stock at $.20 per share. The Company had net sales to two stockholders of $578,000 and $288,000, respectively, for the nine months ending September 30, 1997. An executive officer of the Company contributed $500,000 or 7% of the proceeds received from the issuance of the $6,882,000 convertible subordinated note payable as referred to at Note 5. 14. BUSINESS SEGMENT AND MAJOR CUSTOMERS The Company operates in a single industry segment and primarily sells its products to customers in North America. Products sold to customers in other geographic regions are insignificant. Individual customers that comprise 10% or more of the Company's net sales are as follows:
NINE MONTHS ENDED 1994 1995 1996 SEPTEMBER 30, 1997 --------- --------- --------- --------------------- A.............................. 24% 28% 41% 10% B.............................. 60 52 21 -- C.............................. 12 -- -- --
15. PRO FORMA FINANCIAL STATEMENT INFORMATION Upon the closing of the Company's initial public offering, each outstanding share of the Company's Series A, B, C, D, E, F, G and H preferred stock will be converted automatically to common stock based on conversion rates set forth in Note 10. The pro forma effect of the conversion has been presented as a separate column in the Company's balance sheet assuming the conversion had occurred as of September 30, 1997. 16. SUBSEQUENT EVENTS In October 1997, the Company entered into a credit facility agreement with a bank which provides for borrowings up to a maximum of $4,000,000. Borrowings under the line of credit, which expires in October 1998, will bear interest at the prime rate and will be collateralized by substantially all the Company's assets. The agreement contains restrictive covenants including maintenance of certain financial ratios and limitations of quarterly losses. F-20 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS (CONTINUED) In October 1997, the stockholders of the Company approved a 1-for-2.7 reverse split of the Company's common stock and a corresponding change in the preferred stock conversion ratios. F-21 BACK INSIDE COVER [PHOTO OF COMPUTER SCREEN, KEYBOARD AND MODEM] WE MAKE THE INTERNET FLY-TM- - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------------- TABLE OF CONTENTS ----------------------
PAGE ---- PROSPECTUS SUMMARY........................................................ 3 RISK FACTORS.............................................................. 5 USE OF PROCEEDS........................................................... 21 DIVIDEND POLICY........................................................... 21 CAPITALIZATION............................................................ 22 DILUTION.................................................................. 23 SELECTED FINANCIAL DATA................................................... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................................. 25 BUSINESS.................................................................. 33 MANAGEMENT................................................................ 49 CERTAIN TRANSACTIONS...................................................... 57 PRINCIPAL AND SELLING STOCKHOLDERS........................................ 60 DESCRIPTION OF CAPITAL STOCK.............................................. 62 SHARES ELIGIBLE FOR FUTURE SALE........................................... 65 UNDERWRITING.............................................................. 67 LEGAL MATTERS............................................................. 68 EXPERTS................................................................... 68 ADDITIONAL INFORMATION.................................................... 69 GLOSSARY OF TERMS......................................................... 70 FINANCIAL STATEMENTS...................................................... F-1
---------------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,700,000 SHARES [LOGO] COMMON STOCK ------------ PROSPECTUS ------------ NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES , 1997 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses to be paid by the Company in connection with the sale of the shares of Common Stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee............... $ 13,173 NASD filing fee................................................... 4,847 Nasdaq National Market filing fee................................. 42,320 Accounting fees and expenses...................................... 250,000 Legal fees and expenses........................................... 350,000 Printing and engraving expenses................................... 125,000 Blue sky fees and expenses........................................ 5,000 Transfer agent and registrar fees and expenses.................... 5,000 Miscellaneous..................................................... 54,660 --------- Total......................................................... $ 850,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by Section 145 of the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of the Registrant provide that: (i) the Registrant is required to indemnify its directors to the fullest extent permitted by the Delaware General Corporation Law; (ii) the Registrant may, in its discretion, indemnify other officers, employees and agents as set forth in the Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay such advances if indemnification is determined to be unavailable, the Registrant is required to advance expenses, as incurred, to its directors in connection with defending a civil or criminal action, suit or proceeding (except if the agent is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any willful and deliberate breach in bad faith of such agent's duty to the corporation or its stockholders; and (iv) the rights conferred in the Bylaws are not exclusive and the Registrant is authorized to enter into indemnification agreements with its directors, officers and employees and agents. The Registrant's policy is to enter into indemnity agreements with each of its directors and executive officers. The indemnity agreements provide that directors and executive officers will be indemnified and held harmless to the fullest possible extent permitted by law including against all expenses (including attorneys' fees), judgments, fines and settlement amounts actually and reasonably incurred by them in any action, suit or proceeding, including any derivative action by or in the right of the Registrant, on account of their services as directors or officers of the Registrant or as directors or officers of any other company or enterprise when they are serving in such capacities at the request of the Registrant. The Registrant will not be obligated pursuant to the agreements to indemnify or advance expenses to an indemnified party with II-1 respect to proceedings or claims (i) initiated by the indemnified party and not by way of defense, except with respect to a proceeding authorized by the Board of Directors and successful proceedings brought to enforce a right to indemnification under the Indemnity Agreement, the charter documents or any other statute or law or otherwise although indemnification may be provided by the Company in specific cases if the Board of Directors finds it appropriate, (ii) for any amounts paid in settlement of a proceeding unless the Registrant consents in advance in writing to such settlement, (iii) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the Registrant pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and related laws, (iv) on account of conduct by a director which is finally adjudged to have been in bad faith or conduct that the director did not reasonably believe to be in, or not opposed to, the best interests of the Registrant, (v) on account of any criminal action or proceeding arising out of conduct that the director had reasonable cause to believe was unlawful or (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The indemnity agreement requires a director or executive officer to reimburse the Registrant for all expenses advanced only to the extent it is ultimately determined that the director or executive officer is not entitled, under Delaware law, the Certificate of Incorporation, the Bylaws, the indemnity agreement or otherwise, to be indemnified for such expenses. The indemnity agreement provides that it is not exclusive of any rights a director or executive officer may have under the Certificate of Incorporation, Bylaws, other agreements, any majority-in-interest vote of the stockholders or vote of disinterested directors, the Delaware law or otherwise. The indemnification provision in the Bylaws, and the indemnity agreements entered into between the Registrant and its directors and executive officers, may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). As authorized by the Registrant's Bylaws, the Registrant, with approval by the Board, expects to purchase director and officer liability insurance. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER - ------------------------------------------------------------------------------------ ----------- Underwriting Agreement (draft dated October 21, 1997)............................... 1.01 Registrant's Currently Effective Amended and Restated Certificate of Incorporation..................................................................... 3.01 Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split....................................................................... 3.02 Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering................................................ 3.03 Registrant's Bylaws................................................................. 3.04 Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering............................................................ 3.05 Form of Indemnification Agreement................................................... 10.08
II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following table sets forth information regarding all securities sold by the Registrant since October 1, 1994.
AGGREGATE PURCHASE NUMBER OF PRICE AND FORM OF CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES CONSIDERATION - ----------------------------------- -------------- -------------------------------- ---------- ------------------ Three (3) investors................ 10/94 and Series B Preferred Stock 551,721 $ 965,512(1) 11/94 General Instrument Corporation..... 2/95 Series C Preferred Stock 761,694 1,250,000(2) Eleven (11) investors(3)........... 5/95 and 6/95 Series D Preferred Stock 3,200,002 5,600,004(1) Eleven (11) investors(3)........... 5/95 and 6/95 Warrants to purchase Series D 1,600,001 -- Preferred Stock at $1.75 per share Three (3) investors(3)............. 5/95 Warrants to purchase Series B 205,861 -- Preferred Stock at $1.75 per share Comdisco, Inc...................... 8/95 Warrant to purchase Series B 22,857 -- (4) Preferred Stock at $1.75 per share Intel Corporation.................. 12/95 Series E Preferred Stock 1,315,864 2,000,000(2) Intel Corporation.................. 12/95 Series F Preferred Stock 986,898 1,500,000(5) Intel Corporation.................. 12/95 Common Stock 262,222 141,600(6) Intel Corporation.................. 12/95 Warrants to purchase Series B 457,000 -- (5) Preferred Stock at $1.75 per share Twelve (12) investors(7)........... 6/96 Convertible Secured Promissory $3,160,257 3,160,257(1) Notes face value Twelve (12) investors(7)........... 6/96 Warrants to purchase Series D 451,000 -- Preferred Stock at $1.75 per share Fifty-five (55) investors.......... 7/96 Series G Preferred Stock 3,457,501 13,242,224(8) Alex. Brown & Sons Incorporated.... 7/96 Warrant to purchase Series G 156,658 -- (9) Preferred Stock at $3.83 per share Comdisco, Inc...................... 8/96 Warrant to purchase Series G 15,665 -- (4) Preferred Stock at $3.83 per share Intel Corporation.................. 12/96 Series B Preferred Stock issued 248,187 -- (5) upon exercise of warrant Itochu Corporation................. 2/97 Series H Preferred Stock 493,827 2,000,000(1) London Pacific Life & Annuity Company(11)...................... 4/97 Senior Secured Convertible $5.5 $5,500,000 5,500,000(1)(10) Million Debenture Due 2002 face value Nineteen (19) investors including certain affiliates of the Company.......................... 9/97 Subordinated Notes and Warrants $6,882,201 6,882,201(1) to purchase Common Stock at face value $10.91 per share 252,387 Officers, directors, employees and consultants...................... 10/94-9/97 Exercise of options to purchase 205,518 144,007(13) Common Stock restricted stock awards and stock bonuses (12) Venture Bank Group................. 10/97 Warrant to purchase Common Stock 2,659 -- (14) at $10.91 per share
(SEE FOOTNOTES ON FOLLOWING PAGE.) II-3 - ------------------------------ (1) Paid in cash. (2) In consideration for canceled indebtedness of the Registrant. (3) Registrant sold shares of Series D Preferred Stock and warrants to purchase additional shares of Series D Preferred Stock to investors. In addition, two (2) investors of the Series D Preferred Stock and Gary Lauder received warrants to purchase Series B Preferred Stock pursuant to their rights of first refusal. (4) In consideration for leases extended to the Registrant. (5) In consideration for prepaid royalties of $1,500,000 paid to the Registrant. On December 4, 1996, Intel net exercised the warrant and received 248,187 shares of Series B Preferred Stock. (6) In consideration for transfer to Hybrid pursuant to the Amended License Agreement of certain technology rights. (7) Registrant received loans in the amount of $3,160,257 in exchange for the Convertible Secured Promissory Notes, new warrants to purchase Series D Preferred Stock and the extension of expiration dates on existing warrants to purchase Series D Preferred Stock and certain existing warrants to purchase Series B Preferred Stock. (8) In consideration for cash of $10,081,967 and the conversion of the Convertible Secured Promissory Notes with a face value of $3,160,257. (9) In consideration for acting as private placement agent in the sale of the Series G Preferred Stock. (10) In connection with the sale of the $5.5 Million Debenture, London Pacific International Limited received a fee of $500,000 from the Registrant. (11) In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited, an affiliate of London Pacific Life & Annuity Company. (12) With respect to the grant of stock options, exemption from registration under the Securities Act was unnecessary in that none of such transactions involved a "sale" of securities as such term is used in Section 2(3) of the Securities Act. (13) In consideration for cash and services rendered to the Company. (14) In consideration for extending a credit facility to the Registrant in the amount of $4.0 million. The securities acquired by the Registrant's officers, directors, employees and consultants were made in reliance on Rule 701 under the Securities Act. All sales of Preferred Stock, warrants and notes and the sale of the debentures were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. II-4 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 1.01 -- Underwriting Agreement (draft dated October 21, 1997). 3.01 -- Registrant's currently effective Amended and Restated Certificate of Incorporation.* 3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split.* 3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering.* 3.04 -- Registrant's Bylaws.* 3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering.* 4.01 -- Form of Specimen Certificate for Registrant's Common Stock. 5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being registered.+ 10.01 -- Amended and Restated Investors Rights Agreement, dated as of September 18, 1997 between Registrant and certain investors, as amended October 13, 1997. 10.02 -- Registrant's 1993 Equity Incentive Plan.* 10.03 -- Registrant's 1996 Equity Incentive Plan.* 10.04 -- Registrant's Executive Officer Incentive Plan.* 10.05 -- Registrant's 1997 Equity Incentive Plan.* 10.06 -- Registrant's 1997 Directors Stock Option Plan.* 10.07 -- Registrant's 1997 Employee Stock Purchase Plan.* 10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.* 10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant dated May 25, 1995.* 10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.* 10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated January 15, 1996.* 10.12 -- Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior Secured Convertible $5.5 Million Debenture Due 2002 and Security Agreement and Senior Secured Convertible $5.5 Million Debenture Due 2002 transferred to BG Services Limited.* 10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among Registrant and certain investors dated September 18, 1997, form of Convertible Subordinated Promissory Note and form of Common Stock Purchase Warrant. 10.14 -- Commitment Letter between Registrant and Venture Banking Group dated September 16, 1997.* 10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996* and Addendum No. 1 thereto dated November 25, 1996. 10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.*/**
II-5
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures, Inc. dated July 1, 1996.*/** 10.18 -- Value Added Reseller Agreement between Registrant and Network System Technologies dated November 25, 1996.*/** 10.19 -- Registrant's Incentive Based Compensation Program.* 10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant dated October 16, 1997, Form of Common Stock Purchase Warrant and Subordination Agreements among the Registrant and certain securityholders of the Registrant dated October 16, 1997. 11.01 -- Statement regarding computation of net (loss) per share. 23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).+ 23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants. 24.01 -- Power of Attorney.* 27.01 -- Financial Data Schedule.
- ------------------------ * Previously filed. + To be filed by amendment. ** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. (b) The following financial statement schedule is included on pages S-1 and S-2: Report on Financial Statement Schedule. Valuation allowance for doubtful accounts. Valuation allowance for deferred tax asset. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California, on the 22nd day of October, 1997. HYBRID NETWORKS, INC. By: /s/ CARL S. LEDBETTER ----------------------------------------- Carl S. Ledbetter PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ CARL S. LEDBETTER President, Chief Executive - ------------------------------ Officer, and Chairman of October 22, 1997 Carl S. Ledbetter the Board of Directors PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: Vice President, Finance /s/ DAN E. STEIMLE and Administration, - ------------------------------ Chief Financial Officer October 22, 1997 Dan E. Steimle and Secretary ADDITIONAL DIRECTORS: /s/ JAMES R. FLACH* - ------------------------------ Director October 22, 1997 James R. Flach /s/ STEPHEN E. HALPRIN* - ------------------------------ Director October 22, 1997 Stephen E. Halprin /s/ GARY M. LAUDER* - ------------------------------ Director October 22, 1997 Gary M. Lauder /s/ DOUGLAS M. LEONE* - ------------------------------ Director October 22, 1997 Douglas M. Leone - ------------------------------ Director October 22, 1997 Howard L. Strachman *By: /s/ DAN E. STEIMLE ------------------------- Dan E. Steimle ATTORNEY-IN-FACT II-8 REPORT ON FINANCIAL SCHEDULE Our report on the financial statements is included on page F-2 of this Form S-1. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page S-2 of this Form S-1. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND, L.L.P. San Jose, CA October 16, 1997 S-1 HYBRID NETWORKS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) VALUATION ALLOWANCE FOR DOUBTFUL ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------------------------- ----------- ----------- ----------- ----------- --------- December 31, 1994........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1995........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1996........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- FOR THE NINE MONTHS ENDED: - --------------------------------------------------------- September 30, 1997....................................... -- $ 690 -- $ 15 $ 675 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ---------
VALUATION ALLOWANCE FOR DEFERRED TAX ASSET
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------------------------- ----------- ----------- ----------- ----------- --------- December 31, 1994........................................ $ 474 $ 1,136 -- -- $ 1,610 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1995........................................ $ 1,610 $ 2,345 -- -- $ 3,955 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1996........................................ $ 3,955 $ 4,561 -- -- $ 8,516 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- FOR THE NINE MONTHS ENDED: - --------------------------------------------------------- September 30, 1997....................................... $ 8,516 $ 4,000 -- -- $ 12,516 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ---------
S-2 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 1.01 -- Underwriting Agreement (draft dated October 21, 1997). 3.01 -- Registrant's currently effective Amended and Restated Certificate of Incorporation.* 3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split.* 3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering.* 3.04 -- Registrant's Bylaws.* 3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering.* 4.01 -- Form of Specimen Certificate for Registrant's Common Stock. 5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being registered.+ 10.01 -- Amended and Restated Investors Rights Agreement, dated as of September 18, 1997 between Registrant and certain investors, as amended October 13, 1997. 10.02 -- Registrant's 1993 Equity Incentive Plan.* 10.03 -- Registrant's 1996 Equity Incentive Plan.* 10.04 -- Registrant's Executive Officer Incentive Plan.* 10.05 -- Registrant's 1997 Equity Incentive Plan.* 10.06 -- Registrant's 1997 Directors Stock Option Plan.* 10.07 -- Registrant's 1997 Employee Stock Purchase Plan.* 10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.* 10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant dated May 25, 1995.* 10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.* 10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated January 15, 1996.* 10.12 -- Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior Secured Convertible $5.5 Million Debenture Due 2002 and Security Agreement and Senior Secured Convertible $5.5 Million Debenture Due 2002 transferred to BG Services Limited.* 10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among Registrant and certain investors dated September 18, 1997, form of Convertible Subordinated Promissory Note and form of Common Stock Purchase Warrant. 10.14 -- Commitment Letter between Registrant and Venture Banking Group dated September 16, 1997.* 10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996* and Addendum No. 1 thereto dated November 25, 1996. 10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.*/** 10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures, Inc. dated July 1, 1996.*/** 10.18 -- Value Added Reseller Agreement between Registrant and Network System Technologies dated November 25, 1996.*/** 10.19 -- Registrant's Incentive Based Compensation Program.*
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant dated October 16, 1997, Form of Common Stock Purchase Warrant and Subordination Agreements among the Registrant and certain securityholders of the Registrant dated October 16, 1997. 11.01 -- Statement regarding computation of net (loss) per share. 23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).+ 23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants. 24.01 -- Power of Attorney.* 27.01 -- Financial Data Schedule.
- ------------------------ * Previously filed. + To be filed by amendment. ** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. EX-1.01 2 EXHIBIT 1.01 WSGR DRAFT DATED 10/21/97 2,700,000 SHARES HYBRID NETWORKS, INC. COMMON STOCK UNDERWRITING AGREEMENT DATED [___] UNDERWRITING AGREEMENT [Date] NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES LLC As Representatives of the several Underwriters c/o NATIONSBANC MONTGOMERY SECURITIES, INC. 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: INTRODUCTORY. Hybrid Networks, Inc., a Delaware corporation (the "Company), proposes to issue and sell to the several underwriters named in SCHEDULE A (the "Underwriters") an aggregate of 2,700,000 shares (the "Firm Common Shares") of its Common Stock, par value $0.001 per share (the "Common Stock"). In addition, certain stockholders of the Company named on SCHEDULE B (the "Selling Stockholders") have severally granted to the Underwriters an option to purchase up to an additional [___________] shares of Common Stock, each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in SCHEDULE B, all as provided in Section 2. The additional [_____________] shares to be sold by the Selling Stockholders pursuant to such option are exclusively called the "Optional Common Shares." The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares." NationsBanc Montgomery Securities, Inc. and UBS Securities LLC have agreed to act as Representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-36001), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements and the exhibits thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement," and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus;" PROVIDED, HOWEVER, if the Company has, with the consent of NationsBanc Montgomery Securities, Inc., elected to rely upon Rule 434 under the Securities Act, -2- the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated [___] (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company and each of the Selling Stockholders hereby confirm their respective agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES. A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. -3- (b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has delivered to the Representatives two complete manually signed copies of the Registration Statement and each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) or the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification or contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations, whether or not arising from transactions in the ordinary course of business, of the Company (any such change is called a "Material Adverse Change"); (ii) the Company has not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of capital stock or repurchase or redemption by the Company of any class of capital stock. (h) INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. -4- (i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly in all material respects the consolidated financial position of the Company as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Financial Data," "Selected Financial Data" and "Capitalization" fairly present in all material respects the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) INCORPORATION AND GOOD STANDING OF THE COMPANY. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement. The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. The Company has no subsidiaries. (k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock (including the shares of Common Stock owned by the Selling Stockholders) have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock was issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (l) STOCK EXCHANGE LISTING; NASD APPROVAL. The Common Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. The National -5- Association of Securities Dealers, Inc. (the "NASD") has approved the Underwriters' participation in the offering and distribution of the Common Shares. (m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED. The Company is not in violation of its charter or by-laws nor is it in breach or default (nor, with the giving of notice or lapse of time, would it be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or bylaws of the Company, (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, or require the consent of any other party to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. As used herein, a "Debt Repayment Triggering Event" means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company. (n) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as disclosed in the Registration Statement and Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company exists or, to the Company's knowledge, is threatened or imminent. -6- To the Company's knowledge, no labor dispute exists with the employees of any principal supplier of the Company. (o) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses the trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct its business substantially as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Except as disclosed in the Registration Statement and Prospectus, the Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, could result in a Material Adverse Change. (p) ALL NECESSARY PERMITS, ETC. The Company possesses such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies as are necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (q) TITLE TO PROPERTIES. The Company has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as are disclosed in the Registration Statement and Prospectus or as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company. The real property, improvements, equipment and personal property held under lease by the Company are held under valid and enforceable leases, with such exceptions as are disclosed in the Registration Statement and Prospectus or as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company. (r) TAX LAW COMPLIANCE. The Company has filed all necessary federal, state and foreign income and franchise tax returns and paid all taxes required to be paid by the Company other than those being contested in good faith and, if due and payable, any related or similar assessment, fine or penalty levied against the Company other than those being contested in good faith. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined. (s) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) INSURANCE. The Company is insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are -7- generally deemed adequate and customary for its business including, but not limited to, policies covering real and personal property owned or leased by the Company against theft, damage and destruction. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. The Company has not been denied any insurance coverage which it has sought or for which it has applied. (u) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (v) RELATED PARTY TRANSACTIONS. There are no business relationships or related-party transactions involving the Company or any other person required to be described in the Prospectus which have not been described as required. (w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company nor, to the Company's knowledge, any employee or agent of the Company, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (x) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not, individually or in the aggregate, result in a Material Adverse Change (i) the Company is not in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written -8- notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company, now or in the past (collectively, "Environmental Claims"), pending or, to the Company's knowledge, threatened against the Company or any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law; and (iii) to the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or against any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law. (z) ERISA COMPLIANCE. The Company and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company or its "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates. No "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder represents, warrants and covenants to each Underwriter as follows: (a) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof -9- may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the (i) Custody Agreement signed by such Selling Stockholder and Boston Equiserve, as custodian (the "Custodian"), relating to the deposit of the Common Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney appointing certain individuals named therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (c) TITLE TO COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS OBTAINED. Such Selling Stockholder has, and on the First Closing Date and the Second Closing Date (as defined below) will have, good and valid title to all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law and under its charter or by-laws, or other organizational documents to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. (d) DELIVERY OF THE COMMON SHARES TO BE SOLD. Delivery of the Common Shares which are sold by such Selling Stockholder pursuant to this Agreement will pass good and valid title to such Common Shares, free and clear of any security interest, mortgage, pledge, lien, encumbrance or other claim. (e) NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED. The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement and the Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a Default under, or require the consent of any other party to, the charter or by-laws, or other organizational documents of such Selling Stockholder or any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, any provision of applicable law or any judgment, order, decree or regulation applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions contemplated in this Agreement, except such as have been obtained or made and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. (f) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the -10- Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described in the Prospectus under "Shares Eligible for Future Sale." (g) NO FURTHER CONSENTS, ETC. Except for the (i) exercise by such Selling Stockholder of certain registration rights pursuant to the Investor Rights Agreement originally dated as of September 16, 1992 and last amended as of April 30, 1997 (the "Rights Agreement") (which registration rights have been duly exercised pursuant thereto), (ii) consent of such Selling Stockholder to the respective number of Common Shares to be sold by all of the Selling Stockholders pursuant to this Agreement and (iii) waiver by certain other holders of Common Stock of certain registration rights pursuant to such Rights Agreement no consent, approval or waiver is required under any instrument or agreement to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, in connection with the offering, sale or purchase by the Underwriters of any of the Common Shares which may be sold by such Selling Stockholder under this Agreement or the consummation by such Selling Stockholder of any of the other transactions contemplated hereby. (h) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS. All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and Prospectus is, and on the First Closing Date and the Second Closing Date will be, true, correct, and complete in all material respects, and does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. Such Selling Stockholder confirms as accurate the number of shares of Common Stock set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Common Shares). (i) NO PRICE STABILIZATION OR MANIPULATION. Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (j) CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. Such Selling Stockholder has no reason to believe that the representations and warranties of the Company contained in Section 1(A) hereof are not true and correct, is familiar with the Registration Statement and the Prospectus and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement or the Prospectus which has had or may have a Material Adverse Effect and is not prompted to sell shares of Common Stock by any information concerning the Company which is not set forth in the Registration Statement and the Prospectus. Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES. -11- (a) THE FIRM COMMON SHARES. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Common Shares set forth opposite their names on SCHEDULE A. The purchase price per Firm Common Share to be paid by the several Underwriters to the Company shall be $[___] per share. (b) THE FIRST CLOSING DATE. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California (or such other place as may be agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco time, on [___], or such other time and date not later than 10:30 a.m. San Francisco time, as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 9. (c) THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Selling Stockholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 405,000 Optional Common Shares from the Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company and the Selling Stockholders, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, (a) each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on SCHEDULE A opposite the name of such Underwriter bears to the total number of Firm Common Shares and (b) each Selling Stockholder agrees, severally and not jointly, to sell the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be sold as the number of Optional Common Shares set forth in SCHEDULE B opposite the name of such Selling Stockholder bears to the total number of -12- Optional Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Selling Stockholders. (d) PUBLIC OFFERING OF THE COMMON SHARES. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares to be sold by the Company shall be made at the First Closing Date by wire transfer of immediately available funds to the order of the Company. Payment for the Common Shares to be sold by the Selling Stockholders shall be made at the First Closing Date or the Second Closing Date, as the case may be, by wire transfer of immediately available funds to the order of the Custodian. It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. NationsBanc Montgomery Securities, Inc., individually and not as the Representative of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Common Shares to be sold by such Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. (f) DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Selling Stockholders shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase from them at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may -13- designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. SECTION 3. ADDITIONAL COVENANTS. A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS. During the period beginning on the date hereof and ending on the later of the First Closing Date or such date as, in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object. (b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the Company shall promptly advise the Representatives (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the reasonable opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to prepare promptly (subject to Section 3(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. -14- (d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives reasonably may request. (e) BLUE SKY COMPLIANCE. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or Canadian provincial securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) USE OF PROCEEDS. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (g) TRANSFER AGENT. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) EARNINGS STATEMENT. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending December 31, 1998 that satisfies the provisions of Section 11(a) of the Securities Act. (i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery Period, the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the sole discretion of NationsBanc Montgomery Securities, Inc.), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); PROVIDED, HOWEVER, that (i) the Company may issue shares of Common Stock upon the exercise of warrants and stock options that are presently -15- outstanding and described as such in the Prospectus, or are granted under the option plans or equity incentive plans described in the Prospectus, (ii) the Company may issue Common Stock under the employee stock purchase plan described in the Prospectus and (iii) the Company may issue shares of Common Stock in an acquisition of another corporation, entity or assets provided that (1) such shares represent less than 10% of the Company's then outstanding shares of Common Stock and (2) the Company has taken reasonable steps to ensure that such shares may not be resold during the 180 days after the date of the Prospectus; PROVIDED, FURTHER, that the Company will impose a stop-transfer order with respect to such shares, options, or shares issued upon exercise of such options held by a holder in the event a holder attempts to sell, offer, dispose of or otherwise transfer any such shares or options during the 180 day period following the date of the Prospectus and without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the sole discretion of NationsBanc Montgomery Securities, Inc.). (k) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of three years hereafter, the Company will furnish to the Representatives at 600 Montgomery Street, San Francisco, California 94111 Attention: Mr. Michael Richter: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. (l) AGREEMENT NOT TO RELEASE LOCK-UP RESTRICTIONS ON SECURITIES. During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the sole discretion of NationsBanc Montgomery Securities, Inc.), directly or indirectly, release, waive or otherwise fail to enforce any lock-up or other market stand-off agreement with stockholders, option holders or others to which the Company is a party. B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder further covenants and agrees with each Underwriter as follows: (a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. Such Selling Stockholder will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. -16- (b) DELIVERY OF FORMS W-8 AND W-9. To deliver to the Representative prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the Selling Stockholder is a United States Person). SECTION 4. PAYMENT OF EXPENSES. The Company and the Selling Stockholders, jointly and severally, agree, whether or not the transactions contemplated hereunder are consummated, to pay all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Common Stock on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 7 and Section 8 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. The Selling Stockholders further agree with each Underwriter to pay (directly or by reimbursement) all fees and expenses incident to the performance of their obligations under this Agreement which are not otherwise specifically provided for herein, including but not limited to (i) fees and expenses of counsel and other advisors for such Selling Stockholders, (ii) fees and expenses of the Custodian and (iii) expenses and taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Stockholders to the Underwriters hereunder (which taxes, if any, may be deducted by the Custodian under the provisions of Section 2 of this Agreement). This Section 4 shall not affect or modify any separate, valid agreement relating to the allocation of payment of expenses between the Company, on the one hand, and the Selling Stockholders, on the other hand. SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. -17- The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein, on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Stockholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: (a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the Representatives shall have received from Coopers & Lybrand, L.L.P., independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement on Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received an additional three conformed copies of such accountants' letter for each of the several Underwriters). (b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION FROM NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representatives' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) NO MATERIAL ADVERSE CHANGE. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, in the reasonable judgment of the Representatives there shall not have occurred any Material Adverse Change. (d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received an opinion of Fenwick & West LLP, -18- counsel for the Company, dated as of such Closing Date, in the form attached as EXHIBIT A (and the Representatives shall have received an additional [___] conformed copies of such counsel's legal opinion for each of the several Underwriters). (e) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of counsel for each Selling Stockholder, dated as of such Closing date, in the form attached as EXHIBIT B (and the Representatives shall have received an additional [___] conformed copies of such counsel's legal opinion for each of the several Underwriters). (f) SELLING STOCKHOLDERS' CERTIFICATE. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received a written certificate executed by or on behalf of each Selling Stockholder, dated as of such Closing Date, to the effect that: (i) the representations, warranties and covenants of such Selling Stockholder set forth in Section 1(B) of this Agreement are true and correct with the same force and effect as though expressly made by such Selling Stockholder on and as of such Closing Date; and (ii) such Selling Stockholder has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (g) SELLING STOCKHOLDERS' DOCUMENTS. On the date hereof, the Company and the Selling Stockholders shall have furnished for review by the Representatives copies of the Power of Attorney and Custody Agreements executed by each of the Selling Stockholders and such further information, certificates and documents as the Representatives may reasonably request. (h) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received an opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, dated as of such Closing Date with respect to the matters set forth in paragraphs (i), (vii) (with respect to subparagraph (i) only), (ix), (x) and (xii) (with respect to the caption "Description of Capital Stock" subparagraph (i) only), and the next-to-last paragraph of EXHIBIT A (and the Representatives shall have received an additional [___] conformed copies of such counsel's legal opinion for each of the several Underwriters). (i) OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received an opinion of Farkas & Manelli P.L.L.C., intellectual property counsel for the Company, dated as of such Closing Date, in the form attached as EXHIBIT C (and the Representatives shall have received an additional [____] conformed copies of such counsel's legal opinion for each of the several Underwriters). (j) OFFICERS' CERTIFICATE. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer and President of the Company and the Chief Financial Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c) of this Section 5, and further to the effect that: -19- (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (k) BRING-DOWN COMFORT LETTER. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received from Coopers & Lybrand, L.L.P., independent accountants for the Company, a letter dated such date, in form and substance reasonably satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received an additional [___] conformed copies of such accountants' letter for each of the several Underwriters). (l) LOCK-UP AGREEMENT FROM STOCKHOLDERS OF THE COMPANY. On the date hereof, the Company shall have furnished to the Representatives an agreement in the form of EXHIBIT D hereto from each director, officer and stockholder of the Company and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (m) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company and the Selling Stockholders at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 7 and Section 8 shall at all times be effective and shall survive such termination. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Representatives pursuant to Section 5 or Section 10(i), (iv) or (v), or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the -20- proposed purchase and the offering and sale of the Common Shares, including but not limited to reasonable fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION. (a) INDEMNIFICATION OF THE UNDERWRITERS. Each of the Company and each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company or such Selling Stockholder contained herein; or (iv) in whole or in part upon any failure of the Company or such Selling Stockholder to perform its respective obligations hereunder or under law; or (v) upon any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above, PROVIDED that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; PROVIDED, HOWEVER, that (i) neither the Company nor any Selling Stockholder will be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with the information furnished to the Company and the Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), (ii) no Selling Stockholder shall be liable other than for loss, claim, damage, liability or expense arising out of or based upon (A) an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with the information furnished to the Company by such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), (B) an inaccuracy in such Selling Stockholder's representations and warranties contained herein or (C) a failure by such Selling Stockholder to perform its obligations hereunder or under law; and PROVIDED, FURTHER, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, -21- liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company and the Selling Stockholders may otherwise have. (b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, or the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company and the Selling Stockholders by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. Each of the Company and each of the Selling Stockholders, hereby acknowledges that the only information that the Underwriters have furnished to the Company and the Selling Stockholders expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last two paragraphs on the inside front cover page of the Prospectus concerning stabilization by the Underwriters and (B) in the table in the first paragraph and as the second paragraph and as the last paragraph under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have -22- to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (NationsBanc Montgomery Securities, Inc. in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. (d) REIMBURSEMENT BY THE COMPANY. In addition to its other obligations under Section 7(a) hereof, the Company and each Selling Stockholder, severally and not jointly, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon (i) any statement or omission or any alleged statement or omission, (ii) any act or failure to act or any alleged act or failure to act of the Company (in the case of the Company) or such Selling Stockholder (in the case of such Selling Stockholder) or (iii) any breach or inaccuracy in the representations and warranties of the Company (in the case of the Company) or such Selling Stockholder (in the case of such Selling Stockholder), they will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligation of the Company or the Selling Stockholders, as the case may be, to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company or the Selling Stockholders as applicable, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America, San Francisco, California (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from, in the case of the Company, the due date for such reimbursement and, in the case of the Selling Stockholders, one hundred twenty (120) days after the due date for such reimbursement. -23- (e) REIMBURSEMENT BY THE UNDERWRITERS. In addition to its other obligations under Section 7(b) hereof, each Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 7(b) hereof which relates to information furnished to the Company and the Selling Stockholders pursuant to that section, it will reimburse the Company and the Selling Stockholders (and, to the extent applicable, each officer, director or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and the Selling Stockholders (and, to the extent applicable, each officer, director or controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and the Selling Stockholders (and, to the extent applicable, each officer, director or controlling person) shall promptly return it to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and the Selling Stockholders within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (f) SETTLEMENTS. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. SECTION 8. CONTRIBUTION. If the indemnification provided for in Section 7 is for any reason held to be unavailable to or is otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders, -24- on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Stockholders, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company and the Selling Stockholders, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 7(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 7(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 8; PROVIDED, HOWEVER, that no additional notice shall be required with respect to any action for which notice has been given under Section 7(c) for purposes of indemnification. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 8. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 8 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in SCHEDULE A. For purposes of this Section 8, each officer and employee of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each -25- person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. SECTION 8A. LIMITATION OF SELLING STOCKHOLDER LIABILITY. The liability of each Selling Stockholder pursuant to this Agreement, including with respect to the Selling Stockholder's representations and warranties contained in paragraph (B) of Section 1 hereunder and with respect to the reimbursement, indemnity and contribution provisions contained in Sections 6, 7 and 8 hereof, shall be limited to the product obtained by multiplying the per share price set forth in Section 2(a) hereof by the number of Optional Common Shares sold by such Selling Stockholder pursuant to this Agreement. SECTION 9. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on SCHEDULE A bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs, equals or exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 6, Section 7 and Section 8 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 9. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. -26- SECTION 10. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company and the Selling Stockholders if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 10 shall be without liability on the part of (a) the Company or the Selling Stockholders to any Underwriter, except that the Company and the Selling Stockholders shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the Selling Stockholders, or (c) of any party hereto to any other party except that the provisions of Section 7 and Section 8 shall at all times be effective and shall survive such termination. SECTION 11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 12. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 -27- Facsimile: 415-249-5558 Attention: Mr. Richard A. Smith with a copy to: NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. If to the Company: Hybrid Networks, Inc. 10161 Bubb Road Cupertino, California 95014 Facsimile: (408) 725-0990 Attention: Mr. Carl Ledbetter with a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, California 94306 Facsimile: (650) 494-1417 Attention: Dennis R. Debroeck, Esq. If to the Selling Stockholders: Boston Equiserve 150 Royall Street Canton, Massachusetts 02021 Facsimile: Attention: Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 13. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 9 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7 and Section 8, and in each case their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. No assignment shall relieve any party of its obligations hereunder. The term -28- "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 14. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 15. GOVERNING LAW PROVISIONS. (a THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. (c WAIVER OF IMMUNITY. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. SECTION 16. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, as the case may be, then the -29- Underwriters shall have the right, by written notice from the Representatives to the Company and the Selling Stockholders, to postpone the Second Closing Date, but in no event for longer than seven days, in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 7 and the contribution provisions of Section 8, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 7 and 8 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -30- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company and the Custodian the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, HYBRID NETWORKS, INC. By: -------------------------------- Carl S. Ledbetter President, Chief Executive Officer and Chairman of the Board SELLING STOCKHOLDERS By: --------------------------------- [Attorney-in Fact] Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California, as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES LLC Acting as Representatives of the several Underwriters named in the attached SCHEDULE A. By: NATIONSBANC MONTGOMERY SECURITIES, INC. By: ----------------------------- -31- SCHEDULE A UNDERWRITERS NUMBER OF FIRM COMMON SHARES TO BE PURCHASED NationsBanc Montgomery Securities, Inc. UBS Securities LLC Total 2,700,000 -32- SCHEDULE B SELLING STOCKHOLDERS MAXIMUM NUMBER OF OPTIONAL COMMON SHARES TO BE SOLD [Selling Stockholder #1] [_______________] [Address] Attention: [ ] [Selling Stockholder #2] [_______________] [Address] Attention: [ ] [Selling Stockholder #3] [_______________] [Address] Attention: [ ] [Selling Stockholder #4] [_______________] [Address] Attention: [ ] Total [_______________] -33- EXHIBIT A Opinion of counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this EXHIBIT A include any supplements thereto at the Closing Date. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) To the knowledge of such counsel, the Company has no subsidiaries. (v) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conform in all material respects to the descriptions thereof set forth in the Prospectus. All of the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and, to such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and California securities laws. The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the certificate of incorporation and bylaws of the Company and the General Corporation Law of the State of Delaware. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus, to such counsel's knowledge, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (vi) Following the closing, no stockholder of the Company or any other person will have any preemptive right, right of first refusal or other similar right not effectively waived to subscribe for or purchase securities of the Company arising (i) by operation of the certificate of incorporation or bylaws of the Company or the General Corporation Law of the State of Delaware or (ii) to the knowledge of such counsel, otherwise. (vii) The Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification and contribution thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, -1- moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (viii) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable and will not be subject to any preemptive right, right of first refusal or other similar right not effectively waived to subscribe for or purchase securities of the Company arising (i) by operation of the certificate of incorporation or bylaws of the Company or the General Corporation Law of the State of Delaware or (iii) to the knowledge of such counsel, otherwise. (ix) Based solely upon oral advice from the Commission's staff, the Registration Statement has been declared effective by the Commission under the Securities Act. To the knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (x) The Registration Statement, the Prospectus, and each amendment or supplement to the Registration Statement and the Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein and the financial data derived therefrom or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act. (xi) Based solely upon a letter from the Nasdaq Stock Market, the Common Shares have been approved for listing on the Nasdaq National Market. (xii) The statements (A) in the Prospectus under the captions "Risk Factors--Control by Principal Stockholders, Executive Officers and Directors," "--Shares Eligible for Future Sale," "--Anti-Takeover Effects of Delaware Law," "--No Dividends," "Description of Capital Stock," "Certain Transactions," "Shares Eligible for Future Sale," and "Underwriting" and (B) in Item 14 and Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's certificate of incorporation or bylaw provisions, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xiii) To the knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened that are required to be disclosed in the Registration Statement, other than those disclosed therein. (xiv) To the knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than -2- those described or referred to therein or filed as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. (xv) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution and delivery of the Underwriting Agreement and performance by the Company of its obligations pursuant thereto, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD. (xvi) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which no opinion need be rendered); (i) will not result in any violation of the provisions of the charter or bylaws of the Company; (ii) to the knowledge of such counsel, will not constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any material Existing Instrument listed in such counsel's opinion; or (iii) to the knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company. (xvii) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xviii) Except as disclosed in the Prospectus under the caption "Shares Eligible for Future Sale," to the knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement, except for such rights as have been duly waived. (xix) To the knowledge of such counsel, the Company is not in violation of its certificate of incorporation or bylaws nor is it in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument filed as an exhibit to the Registration Statement, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent accountants for the Company and with Representatives of the Underwriters and their counsel at which the contents of the Registration Statement and the Prospectus, and related matters were discussed and, although such counsel has not independently checked or verified the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), on the basis of the foregoing, nothing has come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing -3- Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or schedules, or other financial data derived therefrom, included in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the laws of the State of California or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; PROVIDED, HOWEVER, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. -4- EXHIBIT B Opinion of counsel for each Selling Stockholder to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this EXHIBIT B include any supplements thereto at the Closing Date. (i) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of, such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification and contribution thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ii) The execution and delivery by or on behalf of such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, the Underwriting Agreement and its Custody Agreement and its Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a default under, the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, of such Selling Stockholder, or, to such counsel's knowledge, violate or contravene any provision of applicable law or regulation, or violate, result in a breach of or constitute a default under the terms of any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound, or any judgment, order or decree applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (iii)Such Selling Stockholder has the legal right and power, and all authorizations and approvals required under its charter and by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, to enter into the Underwriting Agreement and its Custody Agreement and its Power of Attorney, to sell, transfer and deliver all of the Common Shares which may sold by such Selling Stockholder pursuant to the Underwriting Agreement and to comply with its other obligations pursuant to the Underwriting Agreement, its Custody Agreement and its Power of Attorney. (iv) Each of the Custody Agreement and Power of Attorney of such Selling Stockholder has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification and contribution thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (v) Upon delivery of and payment for the Optional Common Shares to be sold by each Selling Stockholder as provided in the Underwriting Agreement and upon registration of the Optional Common Shares in the names of the Underwriters (or their nominees) in the stock records of the -5- Company, the Underwriters will be the owners of the Optional Common Shares, free and clear of any adverse claim, security interests, liens, equities and other encumbrances, provided that the Underwriters are purchasing the Optional Common Shares in good faith and without notice of any adverse claim. (vi) To such counsel's knowledge, no consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions contemplated in the Underwriting Agreement, except as required under the Securities Act, applicable state securities or blue sky laws, and from the NASD. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the Laws of the State of California or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representative) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; PROVIDED, HOWEVER, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of the Selling Stockholders and public officials. In addition, in rendering such opinion with respect to Selling Stockholders who are individuals, such counsel may rely and state that it has relied, solely upon the representations and warranties of such Selling Stockholders contained herein and in the Powers of Attorney and Custody Agreements signed by such Selling Stockholders. -6- EXHIBIT C Opinion of intellectual property counsel for the Company to be delivered pursuant to Section 5(i) of the Underwriting Agreement. References to the Prospectus in this EXHIBIT C include any supplements thereto at the Closing Date. (i) To such counsel's knowledge, the Company owns all patents, patent applications, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by it or necessary for the conduct of its business, and such counsel is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing; (ii) Except for the patent infringement claim alleged by Mr. Keen Y. Yee, as identified in Section 5.7(C) of the Schedule of Exceptions to Loan and Security Agreement with Venture Banking Group, such counsel is not aware of any legal actions, claims or proceedings pending or threatened against the Company alleging that the Company is infringing or otherwise violating any patents or trade secrets owned by others; (iii) Such counsel has reviewed the descriptions of the Company's patent application under the captions "Risk Factors--Protection and Enforcement of Intellectual Property Rights" and "Business--Intellectual Property" in the Registration Statement and Prospectus, and, to the extent they constitute matters of law or legal conclusions, these descriptions are accurate in all material respects and fairly and completely present the patent application of the Company; (iv) To such counsel's knowledge, for each patent or patent application filed by the Company or described in the Prospectus as being owned by it or necessary for the conduct of its business, the Company has obtained a written assignment of all rights and title therein to the Company from all inventors and owners of such patent or patent application and has properly recorded such written assignment with the appropriate patent office or governmental agency; and (v) To such counsel's knowledge after review of the file history and patent attorney's file for the patent application described in the Prospectus as being owned by the Company or necessary for the conduct of its business, such counsel is aware of nothing that causes such counsel to believe that, as of the date the Registration Statement became effective and as of the date of such opinion, the description of patents and patent applications under the captions "Risk Factors--Protection and Enforcement of Intellectual Property Rights" and "Business--Intellectual Property" in the Registration Statement and Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, including without limitation, any undisclosed material issue with respect to the subsequent validity or enforceability of such patent or patent application. -7- EXHIBIT D LOCK-UP AGREEMENT NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES LLC c/o NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 Re: HYBRID NETWORKS, INC. Ladies and Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock ("Common Stock") of Hybrid Networks, Inc. (the "Company") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering') pursuant to a Registration Statement to be filed under the Securities Act of 1933, as amended (the "Registration Statement") for which you will act as underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering (the Underwriting Agreement"). In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld in its sold discretion), directly or indirectly, sell, offer, contract or grant any option to sell or purchase, make any short sale (including without limitation any "short vs. the box"), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing to a date 180 days after the first date any of the Common Stock to be sold in the Offering is released by you for sale to the public. Notwithstanding the foregoing, (i) if the undersigned is an individual, he or she may transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for the Company's Common Stock either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the undersigned and/or a member or members of his or her immediate family; provided, however, that prior to any such transfer each transferee shall execute an agreement, satisfactory to NationsBanc Montgomery Securities, Inc., pursuant to which each transferee shall agree to receive and hold such shares of Common Stock, or securities convertible into or exchangeable or exercisable for the Common Stock, -8- subject to the provisions hereof, and there shall be no further transfer except in accordance with the provisions hereof, (ii) if the undersigned is a corporation, the undesigned corporation may transfer shares of Common Stock to an affiliated corporation, partnership or other affiliated entity for which as of the date above, it owns 80% or more of the capital stock, or to any shareholder of such corporation (which may, in turn, make transfers as set forth in (i) above), provided that any transferee or transferees thereof agree to be bound by the restrictions set forth herein, (iii) if the undersigned is a partnership, the undersigned partnership may transfer shares of Common Stock to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner (which may, in turn, make transfers as set forth in (i) above), provided that any transferee or transferees thereof agree to be bound by the restrictions set forth herein, and (iv) the undersigned may sell or otherwise transfer shares of Common Stock with the prior written consent of NationsBanc Montgomery Securities, Inc. For the purposes of this paragraph, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of any of the Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. The undersigned understands that this agreement is irrevocable and shall be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. Very truly yours, ------------------------------------------- Signature ------------------------------------------- Please Type or Print Name ------------------------------------------- Please Type or Print Title (if applicable) ------------------------------------------- Additional Signature(s), if stock jointly held -9- EX-4.1 3 EXH 4.1 FORM OF SPECIMEN CERT. Number HYBRID Shares HYBRID NETWORKS, INC. THIS CERTIFICATE IS TRANSFERABLE CUSIP 44860K 10 2 IN BOSTON, MA OR NEW YORK, NY THIS CERTIFIES THAT SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SHARES IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF HYBRID NETWORKS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED: BankBoston, N.A. TRANSFER AGENT AND REGISTRAR BY: AUTHORIZED SIGNATURE /S/ DAN E. STEIMLE /S/ CARL S. LEDBETTER SECRETARY CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT HYBRID NETWORKS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE JUNE 6, 1990 A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, as established from time to time by the Certificate of Incorporation of the Corporation or any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ........................ Custodian ......................... (Cust) (Minor) under Uniform Gifts to Minors Act......................................................... (State) UNIF TRF MIN ACT - ............. Custodian (until age .........................) (Cust) ..................................... under Uniform Transfers (Minor) to Minors Act ................................ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ____________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________ | | |_________________________________| ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_______________ _________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatsoever. SIGNATURES GUARANTEED ___________________________________________ The signature should be guaranteed by a brokerage firm or a financial institution that is a member of a securities approved Medallion program, such as Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) or New York Stock Exchange, Inc. Medallion Signature Program (MSP). 2 EX-10.01 4 EXHIBIT 10.01 HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SEPTEMBER 18, 1997 TABLE OF CONTENTS Page ---- 1. Registration Rights...................................................2 1.1 Definitions......................................................2 1.2 Company Registration.............................................3 1.3 Obligations of the Company.......................................4 1.4 Furnish Information..............................................5 1.5 Expenses of Company Registration.................................5 1.6 Underwriting Requirements........................................5 1.7 Delay of Registration............................................6 1.8 Indemnification..................................................6 1.9 Reports Under Securities Exchange Act of 1934....................8 1.10 Form S-3 Registration............................................8 1.11 Assignment of Registration Rights...............................11 1.12 "Market Stand-Off" Agreement....................................12 1.13 Termination of Registration Rights..............................12 2. Covenants of the Company.............................................12 2.1 Delivery of Financial Statements................................12 2.2 Termination and Assignment of Information Covenants.............13 2.3 Right of First Offer............................................13 3. Miscellaneous........................................................16 3.1 Successors and Assigns..........................................16 3.2 Governing Law...................................................16 3.3 Counterparts....................................................16 3.4 Titles and Subtitles............................................16 3.5 Notices.........................................................16 3.6 Expenses........................................................16 3.7 Amendments and Waivers..........................................17 3.8 Severability....................................................17 3.9 Aggregation of Stock............................................17 3.10 Entire Agreement; Amendment; Waiver.............................17 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is entered into as of September 18, 1997 by and among Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"), the investors listed on Schedule A hereto (each of which is herein referred to as a "SERIES A INVESTOR"), the investors listed on Schedule B hereto (each of which is herein referred to as a "SERIES B INVESTOR"), General Instrument Corporation of Delaware, a Delaware corporation (the "SERIES C INVESTOR"), the investors listed on Schedule C hereto (each of which is herein referred to as a "SERIES D INVESTOR"), Intel Corporation ("INTEL"), Howard L. Strachman ("STRACHMAN"), Eduardo J. Moura (Mr. Moura and Strachman are referred to collectively as the "FOUNDERS"), the current holders of the Company's Series G Preferred Stock (each of which is herein referred to as a "SERIES G INVESTOR"), Alex. Brown & Sons Incorporated (the "AGENT"), ITOCHU Corporation ("ITOCHU"), BG Services Limited ("BG") and the investors listed in Schedule D hereto (each of which is herein referred to as a "NOTE WARRANT INVESTOR"). RECITALS WHEREAS, the Company, the Series A Investors and the Founders entered into the Investor Rights Agreement dated as of September 16, 1992 (the "AGREEMENT") whereby, among other things, the Company granted rights thereunder to the Series A Investors; WHEREAS, the Agreement was amended in October and November 1994 whereby, among other things, the Company granted rights thereunder to the Series B Investors ; WHEREAS, the Agreement was further amended as of February 28, 1995 whereby, among other things, the Company granted certain registration rights to the Series C Investor; WHEREAS, the Agreement was further amended in May and June 1995 whereby, among other things, the Company granted rights thereunder to the Series D Investors; WHEREAS, the Agreement was further amended in December 1995 whereby, among other things, the Company granted rights thereunder to Intel (concurrently therewith the Company and Intel entered into the Series E/F Preferred Stock Purchase Agreement dated in December 1995 -- the "SERIES E/F AGREEMENT"); WHEREAS, the Agreement was further amended in February 1996 whereby, among other things, the Company granted Strachman certain rights of first offer thereunder; WHEREAS, the parties to the Convertible Note and Warrant Purchase Agreement among the Company and certain Series B Investors and Series D Investors dated in June 1996 (the "CONVERTIBLE NOTE AGREEMENT") and the parties to the Agreement For Sale of COMMON STOCK among the Company, the Founders and Certain Series D Investors dated in June 1996 (the "Common Stock Agreement"), which parties constituted the holders of at least a majority of the then Registrable Securities (as defined below), acknowledged that the holders of the securities issued pursuant to the Convertible Note Agreement and the shares of Common Stock sold by Strachman pursuant to the Common Stock Agreement were entitled to certain rights under this Agreement with respect to such securities and shares; WHEREAS, the Agreement was further amended in July 1996 whereby, among other things, the Company granted rights thereunder to the Series G Investors and the Agents; WHEREAS, the Agreement was further amended in February 1997 whereby, among other things, the Company granted rights thereunder to Itochu; WHEREAS, the Agreement was further amended in April 1997 whereby, among other things, the Company granted rights to London Pacific Life & Annuity Company ("London") in connection with the Company's issuance to London of the Company's Senior Secured Convertible Debenture due 2002 (the "DEBENTURE"); London subsequently transferred to BG the Debenture and London's rights under this Agreement; WHEREAS, pursuant to a Subordinated Note Purchase Agreement (the "SUBORDINATED NOTE AGREEMENT"), the Company is issuing to the Note Warrant Investors the Company's Subordinated Promissory Notes (the "SUBORDINATED NOTES") and warrants to purchase shares of the Company's Common Stock (the "NOTE WARRANTS"); and WHEREAS, pursuant to the Agreement, the holders of a majority of the Registrable Securities (as defined below) desire to amend the Agreement further to provide for, among other things, the grant of rights thereunder to the Note Warrant Investors as required under the terms of the Subordinated Note Agreement and to restate the Agreement as amended by this amendment and to supersede all prior amendments so that the Agreement as amended is set forth in its entirety in this Amended and Restated Investor Rights Agreement, and the Note Warrant Investors desire to obtain such rights and to enter into this Amended and Restated Investor Rights Agreement. NOW, THEREFORE, THE PARTIES HEREBY AGREE that this Amended and Restated Investor Rights Agreement amends the Agreement and restates in its entirety and supersedes all previous amendments to the Agreement so that the Agreement, as amended hereby ("THIS AGREEMENT"), is set forth herein in its entirety, and further agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (1) shares of Common Stock of the Company issuable or issued upon exercise of the Note Warrants or conversion of the Subordinated Notes, the Debenture or shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred 2 Stock, Series G Preferred Stock or Series H Preferred Stock of the Company (including, without limitation, shares of Series B Preferred Stock or Series D Preferred Stock issuable or issued upon exercise of any warrants issued or extended pursuant to the Convertible Note Agreement, the shares of Series G Preferred Stock issued upon conversion of the convertible notes issued pursuant to the Convertible Note Agreement, shares of Series B Preferred Stock issuable or issued upon exercise of any warrants issued pursuant to the Series E/F Agreement and shares of Series G Preferred Stock issuable or issued upon exercise of the warrant issued to the Agent pursuant to the engagement letter between the Company and the Agent relating to the offer and sale of Series G Preferred Stock), (2) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Note Warrants, Subordinated Notes, Debenture, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock or Common Stock, excluding in all cases, however, any Registrable Securities sold, transferred or otherwise assigned by a person or entity in a transaction in which his rights under this Section 1 are not assigned and (3) shares of Common Stock issuable upon conversion or exchange of securities convertible into, or exchangeable for, Common Stock upon conversion of the Subordinated Notes; (c) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof; and (e) The term "FORM S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion of incorporation of substantial information by reference to other documents filed by the Company with the SEC. 1.2 COMPANY REGISTRATION. (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration on Form S-4 (or any successor form) or a registration on any form which does not include substantially the same information (other than information as would be required under Item 507 of Regulation S-K under the Act with respect to selling stockholders) as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, 3 subject to the provisions of Section 1.6, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. (b) Upon any sale by the Company of shares of its Common Stock to the public in a firmly underwritten public offering, the Founders (and the Series B Investors and Series D Investors, to the extent they purchased shares of Common Stock from Strachman), on the date notice is provided to each Holder pursuant to subsection 1.2(a), shall be entitled to include any of their shares of Common Stock in any registration by the Company under this Section 1.2, if such persons agree to be bound by all other provisions of this Agreement and participate in any such registration on the same basis as each Holder in accordance with all applicable provisions of this Agreement. 1.3 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to 4 state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.4 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.2 and Section 1.10 for each Holder (which right may be assigned as provided in Section 1.11), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.6 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's Common Stock, the Company shall not be required under Section 1.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be first apportioned pro rata among the selling stockholders other than the Founders according to the total amount of securities entitled to be included therein owned by each selling stockholder other than the Founders or in such other proportions as shall mutually be agreed to by such selling stockholders, and the remaining securities, if any, to be so apportioned between the Founders). As a result of the 5 immediately preceding sentence, no securities owned by a Founder shall be entitled to be included in such offering unless the total amount of securities entitled to be included therein owned by each selling stockholder other than the Founders has not been reduced to less than the amount of Registrable Securities requested by such selling stockholders to be included in such offering in accordance with Section 1.2. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder", and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will severally indemnify and hold harmless the Company, each of its directors, each of its officers who has signed 6 the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.8(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.8(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.8. (d) If the indemnification provided for in this Section 1.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the 7 indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.10 FORM S-3 REGISTRATION. (a) In case the Company shall receive from any Holder or Holders who own, in the aggregate, at least 30% of the outstanding shares of Registrable Securities, a written request or requests that the Company effect a registration on Form S-3 and any related qualification 8 or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (i) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (ii) as soon as practicable effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.10(a): (1) if Form S-3 is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.10(a); provided, however, that the Company shall not utilize this right more than once in any 12-month period; (4) if the Company has, within the 12-month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.10(a); (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (iii) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Notwithstanding anything to the contrary in this Section 1.10(a), the Series C Investor will have rights under this Section 1.10(a), and any Holder of any shares of Series C Preferred Stock or any Registrable Securities issued with respect thereto will have rights under this Section 1.10(a) with respect to such shares or Registrable Securities, only for so long as the Series A Investors and the Series B Investor have rights under this Section 1.10(a). (b) In addition to the registration rights provided for in Sections 1.1, 1.2 and 1.10(a), the Note Warrant Investors that own any Note Warrants, Subordinated Notes or shares of Common Stock of the Company that have been issued upon exercise of any Note Warrants or conversion of any Subordinated Notes (such Note Warrant Investors are referred to herein as "NOTE/WARRANT HOLDERS") shall be entitled, collectively, to one demand shelf-registration as provided in this Section 1.10(b). For the purposes of this Section 1.10(b), (1) the term "NOTE/WARRANT SHARES" refers to shares of Common Stock of the Company that have been issued, or are issuable, 9 upon exercise of any Note Warrants or conversion of any Subordinated Notes, and (2) a Note/Warrant Holder shall be deemed to own the number of Note/Warrant Shares that are issuable upon the exercise of Note Warrants owned by such Note/Warrant Holder as well as the number of Note/Warrant Shares that are currently issued and outstanding and owned by such Note/Warrant Holder. In the event that, after the first anniversary of the consummation of the initial sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm underwritten offering of its securities to the general public, the Company shall receive from Note/Warrant Holders that own, in the aggregate, a majority of the Warrant Shares a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Note/Warrant Shares owned by such Note/Warrant Holder or Note/Warrant Holders, the Company will: (i) promptly give written notice of the proposed registration, and any related qualification or compliance, to all Note/Warrant Holders; and (ii) as soon as practicable effect such registration and all qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Note/Warrant Holder's or Note Warrant Holders' Note/Warrant Shares as are specified in such request, together with all or such portion of the Note/Warrant Shares of any Note/Warrant Holder or Note/Warrant Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 1.10(b): (1) if Form S-3 is not available for such offering by the Note/Warrant Holders other than as a result of a failure of the Company to comply with the reporting requirements of Sections 13 and 15 of the 1934 Act; (2) if the Company shall furnish to the Note/Warrant Holders requesting such registration a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement until, in the good faith judgment of the Board of Directors of the Company, it would no longer be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected (but in no event for a period of more than 90 days after receipt of the request of the Note/Warrant Holder or Note Warrant Holders under this Section 1.10(b)); (3) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. If Form S-3 is not available for such offering by the Note/Warrant Holders as a result of a failure of the Company to comply with the reporting requirements of Sections 13 and 15 of the 1934 Act, the Company shall effect such registration on Form S-1. (iii) Subject to the foregoing, the Company shall file a registration statement on Form S-3 covering the Note/Warrant Shares so requested to be registered as soon as practicable after receipt of the request or requests of the Note/Warrant Holder or Note/Warrant Holders and shall use its best efforts to cause the registration statement to become effective under the Act and to keep the registration statement continuously effective under the Act and available for the offer and sale of the Note/Warrant Shares covered thereby for 180 days (or such shorter period 10 ending when all Note/Warrant Shares covered by the registration statement have been sold or are no longer entitled to registration under this Section 1.10(b)). The Company will be deemed not to have used its best efforts to keep the registration statement effective and available for such offer and sale during the requisite period if the Company voluntarily takes any action that would result in Note/Warrant/Holders of Note/Warrant Shares covered thereby not being able to offer and sell such Note/Warrant Shares thereunder during any portion of that period unless (1) such action is required by applicable law or (2) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter causes the registration to become effective under the Act and available for such offer and sale. In the event that the effectiveness or availability of the registration statement is suspended during the requisite period, the Company will be obligated to extend the period of effectiveness and availability of the registration statement for a period that is at least equal to the period during which such effectiveness or availability was suspended. (iv) Each Note/Warrant Holder that causes the Company to register any of such Note/Warrant Shares and under this Section 1.10(b) shall immediately notify the Company in writing of any sales of Note/Warrant Sales under the registration statement and, if the effectiveness of the registration statement is terminated in accordance with this Section 1.10(b), shall return to the Company's transfer agent all stock certificates that represent any unsold Note Warrant Shares so that the transfer agent may affix any appropriate securities legends thereto. (v) Notwithstanding anything to the contrary in Section 3.7, any term of this Section 1.10(b) may be amended, and the observance of any term of this Section 1.10(b) may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Note/Warrant Holders that then own a majority of all Note/Warrant Shares then owned by Note/Warrant Holders. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the Company, each Note Warrant Holder and each future holder of any Note/Warrant Shares. (vi) Any Form S-3 registration statement required pursuant to this Section 1.10(b) shall not be required to include any Registrable Securities that are freely tradable by the Holders thereof without registration under the Act (including shares as to which paragraph (k) of Rule 144 under the Act applies but not shares that are subject to applicable holding period, volume limitation or manner of sale and notice requirements of paragraphs (d), (e), (f), (g), (h) and (i) of Rule 144). 1.11 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, (i) after such assignment or transfer, holds at least 50,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (ii) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, 11 that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. For the purposes of determining the number of shares of Registrable Securities held by any Note Warrant Investor, the shares of Registrable Securities held by such Note Warrant Investor shall be aggregated with the shares of Registrable Securities held by affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 1.12 "MARKET STAND-OFF" AGREEMENT. Each signatory to the Agreement or hereto or any prior or subsequent amendment to the Agreement or hereto hereby agrees that, during the period of duration specified by the Company and an underwriter of Common Stock of the Company not to exceed 180 days following the effective date of a registration statement of the Company filed under the Act (unless otherwise required by an underwriter), such signatory shall not, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration and except to the extent otherwise consented to by the Company and such underwriter. To the extent that any officer or director of the Company has not entered into a market stand-off agreement of equivalent duration and effect with respect to any Company securities beneficially owned by such officer or director, the Company shall use best efforts to require each officer and director of the Company to enter into such an agreement. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.13 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 after 6 years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. Notwithstanding anything to the contrary in this Section 1, except as provided otherwise in Section 1.10(b)(v), no Holder shall be entitled to cause the Company to register the sale or other transfer of Restricted Securities if and so long as the intended sale or other transfer may then be effectuated by such Holder in compliance with Rule 144 under the Act without violating the holding period, volume limitations or other restrictions of Rule 144. 12 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Series A Investor, Series B Investor, Series C Investor, Series D Investor, Intel, Series G Investor, Note Warrant Investor, Itochu and BG (each, for the purposes of this Section 2.1, an "INVESTOR"): (a) as soon as practicable, but in any event within 90 days after the end of each fiscal year of the Company, an income statement and statement of cash flows for such fiscal year, a balance sheet of the Company, and a statement of stockholder's equity as of the end of such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants selected by the Company; (b) as soon as practicable, but in any event within 45 days after the end of each of the first 3 quarters of each fiscal year of the Company, an unaudited profit or loss statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter. (c) only to Investors who hold more than 350,000 shares of Registrable Securities, within 30 days of the end of each month, an unaudited income statement, a statement of cash flows and an unaudited balance sheet for and as of the end of such month, prepared internally, in reasonable detail; (d) only to Investors who hold more than 350,000 shares of Registrable Securities, as soon as practicable, but in any event 90 days after the end of each fiscal year, a budget for the then current fiscal year, prepared on a monthly basis, including balance sheets and statements of cash flows for such months; and (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company certifying that such financials fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment. For the purposes of determining the number of shares of Registrable Securities held by any Note Warrant Investor, the shares of Registrable Securities held by such Note Warrant Investor shall be aggregated with the shares of Registrable Securities held by affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 2.2 TERMINATION AND ASSIGNMENT OF INFORMATION COVENANTS. The covenants set forth in Section 2.1 shall terminate and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. The information rights set forth in Section 2.1 13 may be assigned (but only with all related obligations) by an Investor to a transferee or assignee of Registrable Securities who, (a) after such assignment or transfer, holds at least 350,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (b) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such information rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, (i) the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership and (ii) the holdings of a Note Warrant Investor shall be aggregated with the holdings of affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Series A Investor, each Series B Investor, Intel, each Series D Investor, each Series G Investor, Itochu, BG, Strachman and each Note Warrant Holder a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, the term "INVESTOR" includes each Series A Investor, each Series B Investor, Intel, each Series D Investor, each Series G Investor, Itochu, BG, Strachman and each Note/Warrant Holder, and any general or limited partners and affiliates of any Series A Investor, any Series B Investor, Intel, any Series D Investor or any Note/Warrant Holder. Each Series A Investor, each Series B Investor, Intel and each Series D Investor shall be entitled to apportion the right of first offer hereby granted to such Investor among itself and its general or limited partners and affiliates in such proportions as such Investor deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("SHARES"), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions: (a) The Company shall deliver a written notice ("NOTICE") to the Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within 20 calendar days after receipt of the Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock or the Series H Preferred Stock 14 then held, by such Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities). The Company shall promptly, in writing, inform each Investor which purchases all the shares available to it ("FULLY-EXERCISING INVESTOR") of any other Investor's failure to do likewise. During the 5-day period commencing after delivery of such information to such Fully-Exercising Investor(s), each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares not subscribed for by the Investors which is equal to the proportion that the number of shares of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, Series B Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the case may be, then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock or the Series H Preferred Stock, as the case may be, then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed Shares. The rights of first offer in this Section 2.3 shall not be applicable to the Subordinated Notes or any securities that may be issued or issuable upon conversion of any Subordinated Notes, although the issuance of any securities upon conversion of the Subordinated Notes shall not reduce the number of Shares that any Note Warrant Holder shall be entitled to purchase, as compared to any other Investor, pursuant to such rights of first offer. (c) If all Shares which Investors are entitled to obtain pursuant to subsection 2.3(b) are not elected to be obtained as provided in subsection 2.3(b) hereof, the Company may, during the 120-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree, than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 120 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith. (d) The rights of first offer in this Section 2.3 shall not be applicable: (i) to the issuance or sale of shares of the Company's Common Stock (or options therefor) to service providers for the primary purpose of soliciting or retaining their services as approved by the vote or written consent of a majority of the Board of Directors. (ii) to consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Act pursuant to a registration statement on Form S-1; (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) to securities of the Company issued pursuant to the acquisition of (A) another corporation by the Company by merger or other reorganization whereby the 15 Company owns more than 50% of the voting power of such other corporation, or (B) substantially all the assets of another corporation; (v) to the issuance of securities pursuant to transactions involving technology licensing, research and development activities, distribution or manufacture of the company's products, lease of equipment by the Company, or any transactions with corporate partners, provided that each of the foregoing transactions is primarily for non-equity financing purposes and is approved by the Company's Board of Directors; (vi) to shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, recapitalization and the like by the Company following approval by the Board of Directors; or (vii) to the issuance of up to 255,000 shares of Common Stock to service providers for services performed for the benefit of the Company, which services were performed prior to the first issuance of the Series A Preferred Stock. (e) The rights of first offer in this Section 2.3 shall terminate and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever shall first occur. (f) The rights of first offer in this Section 2.3 and/or the right to register Registrable Securities pursuant to this Agreement or to register shares of Common Stock subject to registration rights pursuant to Section 1.2(b) ("1.2(b) SHARES") may be assigned (but only with all related obligations) by any Series A Investor, any Series B Investor, Intel, any Series D Investor, Strachman, any Series G Investor, Itochu, BG or any Note/Warrant Investor to a transferee or assignee from such person of Registrable Securities or Section 1.2(b) Shares who, (i) after such assignment or transfer, holds at least 350,000 shares of Registrable Securities or Section 1.2(b) Shares (subject in each case to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (ii) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities or Section 1.2 Shares held by a transferee or assignee for the purposes of this Section 2.3(f), (i) the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities or Section 1.2 Shares by gift, will or intestate succession) shall be aggregated together and with the partnership and (ii) the holdings of a Note Warrant Investor shall be aggregated with the holdings of affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general 16 partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities or Section 1.2(b) Shares). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or facsimile transmission to such party to the facsimile number for such party on the signature page hereof (or, for parties not executing this Agreement, the facsimile number of such party on the stock records of the Company) or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof (or, for parties not executing this Agreement, the address of such party on the stock records of the Company), or at such other facsimile number or address as such party may designate by ten days' advance written notice to the other parties. 3.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 17 3.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 ENTIRE AGREEMENT. This Amended and Restated Investor Rights Agreement (including the Schedules hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 18 IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor Rights Agreement as of the date first above written. COMPANY: HYBRID NETWORKS, INC. By:/s/ Carl S Ledbetter --------------------------- Carl S. Ledbetter, Chief Executive Officer Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 19 IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor Rights Agreement as of the date first above written. COMPANY: HYBRID NETWORKS, INC. By:___________________________ Carl S. Ledbetter, Chief Executive Officer Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 INTEL CORPORATION By: /s/Company Officer --------------------------- Its: VP and Treasurer -------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Facsimile Number: (408) 765-6038 20 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By:/s/ Robert P. Forlenza ---------------------- Robert P. Forlenza, Vice President Address: c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By:/s/ Robert P Forlenza --------------------- Robert P. Forlenza, Vice President Address same as immediately above RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza ----------------------- Robert P. Forlenza, Vice President Address same as immediately above RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: /s/ Robert P. Forlenza ----------------------- Robert P. Forlenza, Vice President Address same as immediately above 21 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT INVESTORS: __________________________ Catherine P. Goodrich Address: 3787 Woodside Road Woodside, CA 94062 Facsimile Number: (415) 851-0726 22 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT J.F. SHEA CO., INC., By: /s/ Edmund Shea, Jr. --------------------------------- Edmund Shea, Jr. Address: 655 Brea Canyon Road P. O. Box 489 Walnut, CA 91789-0489 Facsimile Number: (909) 869-0840 23 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT OSCCO III, L.P. By: /s/ Stephen E. Halprin ----------------------------------- Stephen E. Halprin Address: One First Street, #15 Los Altos, CA 94022 Facsimile Number: (415) 917-0801 24 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Gary M. Lauder ------------------------------------- (Executing this Agreement as a Series B Investor) Address: 88 Mercedes Lane Atherton, CA 94027 Facsimile Number: (415) 323-2171 25 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT AT&T VENTURE COMPANY, L.P. By: AT&T Venture Partners, Its: General Partner By: /s/ Neal Douglas ------------------------------ Its: General Partner ----------------------------- Address: 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Facsimile Number: (415) 854-4923 26 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SEQUOIA CAPITAL VI By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA TECHNOLOGY PARTNERS VI By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA XXIV By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 27 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ACCEL IV L.P. ACCEL KEIRETSU L.P. By: Accel IV Associates L.P. By: Accel Partners & Co., Inc. Its: General Partner Its: General Partner By: /s/ G. Carter Sednaoui By: /s/ G. Carter Sednaoui ----------------------- ----------------------- Its: General Partner Its: Chief Financial Officer ---------------------- ---------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS By: /s/ G. Carter Sednaoui By: /s/ Company Officer ----------------------- ----------------------- Its: General Partner Its: General Partner ---------------------- ---------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 28 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Howard L. Strachman ----------------------------------- Howard L. Strachman Address: c/o Ultracom Communications 21580 Stevens Creek Blvd. Suite 207 Cupertino, CA 95014 Facsimile Number: (408) 863-0363 29 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Eduardo J. Moura ------------------------------------ Eduardo J. Moura Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 30 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ITOCHU Corporation By: --------------------------------- Its: -------------------------------- Address: 5-1, Kita-Aoyama 2-chome Minato-ku, Tokyo 107-77 Japan Facsimile Number: 011-81-3-3497-3131 31 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT BG SERVICES LIMITED By: --------------------------------- Its: -------------------------------- Address: c/o Minden House 6 Minden Place St. Helier Jersey, Channel Islands Attention: Ron Green Facsimile Number: (0) 1534-607799 32 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Daniel E. Steimle ----------------------------- Daniel E. Steimle 33 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT 888 GROUP /s/ David Hayes By: /s/ Company Officer --------------------------- Its: /s/ Company Officer --------------------------- 34 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Bradford J. Shafer ------------------------------ Bradford J. Shafer 35 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ K. Philip Hwang ------------------------------ K. Philip Hwang 36 SCHEDULE A Hybrid Networks, Inc. Series A Investors ------------------ ------------------ # of Shares of Name Series A Preferred Stock - ---- ------------------------ Catherine P. Goodrich 63,090 J.F. Shea Co., Inc. 378,541 Subhash Bal 25,236 Stewart H. Greenfield 63,090 James Marver 25,236 Walter Baumgartner 63,090 The Cypress Fund Alexander Cilento 63,090 Krivonos Fmly Lv Tst 50,472 IRA FBO Susan Harman Neithold 62,926 OSCCO III, L.P. 752,404 TOTAL 1,547,175 SCHEDULE B Hybrid Networks, Inc. Series B Preferred Investors ---------------------------- ---------------------------- # of Shares of Series B Preferred Stock --------------------------------------- Subject to Issuance on Name Issued Exercise of Warrants - ---- ------ ----------------------- Gary M. Lauder 442,857 171,429 OSCCO III, L.P. 72,426 16,213 J.F. Shea Co., Inc. 36,438 18,219 Intel 248,187 -- TOTAL 799,908 205,861 SCHEDULE C Hybrid Networks, Inc. Series D Investors ------------------ ------------------
# of Shares of Series D Preferred Stock ------------------------------------------------- Subject to Subject to Issuance Issuance on # of Shares on Exercise of Exercise of of Series G # of Issued Original Warrants New Warrants Preferred Stock* 1.2(b) Shares ------ -------------------- ------------- ---------------- -------------- AT&T Venture Company, L.P. 571,428 285,714 71,355 130,548 58,015 Sequoia Capital VI 1,040,001 520,000 129,866 237,598 105,587 Sequoia Technology Partners VI 57,143 28,572 7,136 13,055 5,802 Sequoia 1995 45,714 22,857 5,708 10,444 4,641 Accel Investors '95 L.P. 49,153 24,571 6,137 11,227 4,989 Accel IV L.P. 1,046,858 523,429 130,722 239,164 106,283 Accel Keiretsu L.P. 21,714 10,857 2,711 4,961 2,205 Ellmore C. Patterson Partners 25,143 12,572 3,140 5,744 2,553 OSCCO III, L.P. 223,444 111,722 31,951 58,456 22,685 J.F. Shea Co., Inc. 112,414 56,207 18,587 34,007 11,413 Susan Harmon Niethold 7,000 3,500 874 1,599 710 Gary M. Lauder -- -- 42,813 78,329 -- TOTALS 3,200,002 1,600,001 451,000 825,132 324,883
- ------------------- * Issued upon conversion of convertible notes at the closing of the sale of shares of Series G Preferred Stock to the purchasers pursuant to the Series G Agreement. SCHEDULE D Hybrid Networks, Inc. Note Warrant Investors ---------------------- # of Shares of Common Stock for which Name Note Warrants May Become Exercisable - ---- ------------------------------------- Tudor BVI Futures, Ltd. 182,440-456,106 Tudor Arbitrage Partners, L.P. 46,667-116,667 Raptor Global Fund, Ltd. 120,593-301,486 Raptor Global Fund, L.P. 46,336-115,841 Sequoia Capital VI 27,029-67,574 Sequoia Technology Partners VI 1,485-3,713 Sequoia XXIV 1,188-2,970 Accel IV L.P. 22,673-56,683 Accel Investors '95 L.P. 1,064-2,661 Accel Keiretsu L.P. 470-1,176 Ellmore C. Patterson Partners 545-1,361 AT&T Ventures 25,465-63,664 OSCCO III, L.P. 19,802-49,505 Gary M. Lauder 9,901-24,753 888 Group 12,376-30,941 Daniel E. Steimle 49,505-123,763 Bradford J. Shafer 4,950-12,376 J.F. Shea Co., Inc. 9,901-24,753 K. Philip Hwang 99,009-247,525 HYBRID NETWORKS, INC. AMENDMENT TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT The Amended and Restated Investor Rights Agreement dated as of September 18, 1997 among Hybrid Networks, Inc. (the "COMPANY") and certain holders of securities of the Company (the "ORIGINAL AGREEMENT") is hereby amended by this amendment (this "AMENDMENT") dated as of October 13, 1997 among the Company, Venture Banking Group, a division of Cupertino National Bank (the "BANK"), and the holders of a majority of the Registrable Securities outstanding immediately prior to this Amendment. Except as provided otherwise herein, the terms used in this Amendment that are defined in the Original Agreement have the same meanings as those terms have in the Original Agreement. 1. The Original Agreement is hereby amended as follows: (a) The Bank will have the same registration rights under the Original Agreement as amended by this Amendment (the "AGREEMENT"), with respect to the shares of Common Stock of the Company issued or issuable upon exercise of the warrants issued by the Company to the Bank in October 1997 to purchase up to 7,178 shares of Common Stock of the Company (the "BANK WARRANTS"), as the Note Warrant Investors have with respect to the shares of Common Stock that are issued or issuable upon exercise of the Note Warrants. (b) The definition of "Registrable Securities" in Section 1.1(b) of the Original Agreement is amended to include (i) shares of Common Stock of the Company issuable or issued upon exercise of any Bank Warrants and (ii) any Common Stock of the Company issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any Bank Warrants. (c) The Bank will have, with respect to the Bank Warrants or shares of Common Stock of the Company that have been issued upon exercise of any Bank Warrants, the same right as any Note/Warrant Holder has to participate in the one demand shelf-registration provided for in Section 1.10(b) of the Original Agreement. (d) As signatory of this Amendment, the Bank will be bound by the provisions of Section 1.12 of the Original Agreement (Market Stand-Off Agreement). (e) The Company shall deliver financial statements to the Bank as provided in Sections 2.1 and 2.2 of the Original Agreement. (f) Section 3.5 of the Original Agreement is amended to replace the words "registered or certified" with "first class." 2. Except as amended as provided in Section 1 above, the Original Agreement continues in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which will be deemed an original but, all of which together will constitute one and the same instrument. SIGNATURE PAGE DATED AS OF OCTOBER 13, 1997 TO THE Hybrid Networks, Inc. Amended and Restated Investor Rights Agreement - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, EACH OF THE UNDERSIGNED EXECUTES AND DELIVERS THIS AMENDMENT AS OF THE DATE SET FORTH IMMEDIATELY ABOVE. THE COMPANY: HYBRID NETWORKS, INC. By /S/ Carl S. Ledbetter ---------------------------------------- Its: President and CEO -------------------------------------- THE BANK: VENTURE BANKING GROUP, A DIVISION OF CUPERTINO NATIONAL BANK By /S/ Company Officer ---------------------------------------- Its: -------------------------------------- SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------- Robert P. Forlenza, Vice President Address: c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 Facsimile No.: c/o Bingham, Dana & Gould LLP (617) 951-8736 Attn: Victor J. Paci, Esq. TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By: --------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: --------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- J.F. SHEA CO., INC., By: --------------------------------- Edmund Shea, Jr. Address: 655 Brea Canyon Road P. O. Box 489 Walnut, CA 91789-0489 Facsimile Number: (909) 869-0840 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- OSCCO III, L.P. By: --------------------------------- Stephen E. Halprin Address: One First Street, #15 Los Altos, CA 94022 Facsimile Number: (415) 917-0801 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ----------------------------------- Gary M. Lauder Address: 88 Mercedes Lane Atherton, CA 94027 Facsimile Number: (415) 323-2171 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- AT&T VENTURE COMPANY, L.P. By: AT&T Venture Partners, Its: General Partner By: -------------------------------- Its: ------------------------------- Address: 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Facsimile Number: (415) 854-4923 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- SEQUOIA CAPITAL VI By: ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA TECHNOLOGY PARTNERS VI By: ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA XXIV By: ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ACCEL IV L.P. ACCEL KEIRETSU L.P. By: Accel IV Associates L.P. By: Accel Partners & Co., Inc. Its: General Partner Its: General Partner By: By: ---------------------- ---------------------- Its: Its: --------------------- --------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS By: By: ---------------------------- ---------------------------- Its: Its: --------------------------- --------------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- INTEL CORPORATION By: ------------------------------- Its: ------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Facsimile Number: (408) 765-6038 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ITOCHU Corporation By: ------------------------------- Its: ------------------------------- Address: 5-1, Kita-Aoyama 2-chome Minato-ku, Tokyo 107-77 Japan Facsimile Number: 011-81-3-3497-3131 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- BG SERVICES LIMITED By: ------------------------------- Its: ------------------------------- Address: c/o Minden House 6 Minden Place St. Helier Jersey, Channel Islands Attention: Ron Green Facsimile Number: (0) 1534-607799 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ----------------------------------- Daniel E. Steimle Address: P. O. Box 928 Occidental, CA 95465 Facsimile No.: (408) 725-0990 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- 888 GROUP By: ------------------------------- Its: ------------------------------ Address: 555 California Street, Suite 2200 San Francisco, CA 94104 Attn: David Hayes Facsimile No.: (415) 576-2361 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ----------------------------------- Bradford J. Shafer Address: Heartport, Inc. 200 Chesapeake Drive Redwood City, CA 94063 Facsimile No.: (415) 306-7905 SIGNATURE PAGE DATED AS OF OCTOBER __, 1997 TO THE HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - -------------------------------------------------------------------------------- ----------------------------------- K. Philip Hwang Address: 2345 Harris Way San Jose, CA 95131-1413 Facsimile: (408) 954-8131 EX-10.13 5 EXH 10.13 CONVERTIBLE SUBORDINATED PROMISSORY HYBRID NETWORKS, INC. CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT THIS CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT (the "AGREEMENT") is entered into as of September 18, 1997, among Hybrid Networks, Inc., a Delaware corporation having its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167 (the "COMPANY"), and those certain purchasers identified on SCHEDULE 1 hereto (each a "PURCHASER" and collectively the "PURCHASERS"). In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. AUTHORIZATION AND SALE OF NOTES 1.1 AUTHORIZATION OF NOTES. The Company has authorized the issuance and sale pursuant to the terms and conditions hereof of up to $8.0 million in principal amount of the Company's Convertible Subordinated Promissory Notes due 1998 (the "NOTES"), which Notes shall be in the form set forth in EXHIBIT A hereto and shall be convertible into shares of the Company's Common Stock, at a conversion price determined as set forth in the Notes. 1.2 ISSUANCE AND SALE OF NOTES. Subject to the terms and conditions hereof, at the Closing (as defined in Section 2.1 hereof) the Company will issue and sell the Notes to the Purchasers, and the Purchasers will purchase the Notes from the Company. 1.3 ISSUANCE AND DELIVERY OF WARRANTS. At the Closing, the Company will issue and deliver to the Purchasers warrants (the "WARRANTS") to purchase up to an aggregate of 1,980,200 shares (subject to adjustment as provided in the Warrants) of the Company's Common Stock, at an exercise price of $4.04 per share (subject to adjustment as provided in the Warrants), as set forth on SCHEDULE 1 hereto, which Warrants shall be substantially in the form set forth in EXHIBIT B hereto. 1.4 ALLOCATION OF PURCHASE PRICE. The Company and the Purchaser agree that the consideration paid for the Warrants and Notes shall be allocated, in proportion to each $1,000,000 of such consideration, $999,900 to the Notes and $100 to the Warrants. 2. CLOSING; DELIVERY. 2.1 CLOSING. The closing (the "CLOSING") of the purchase and sale of the Notes will occur on September __, 1997, or such other date as the parties may agree upon (the "CLOSING DATE"). The Closing will take place at the offices of Fenwick & West LLP, counsel to the Company, at Two Palo Alto Square, Palo Alto, California. 2.2 DELIVERY. Subject to the terms of this Agreement, at the Closing (i) the Company will issue and deliver the Notes to the Purchasers, (ii) the Purchasers will deliver to the Company by wire transfer the aggregate purchase price for the Notes shown as SCHEDULE 1, (iii) the Company will pay the expenses of the Purchasers as provided in Section 7.9, (iv) the Company will issue and deliver the Warrants to the Purchasers, (v) the Company, the Purchasers and certain existing stockholders of the Company will enter into the Amended and Restated Investor Rights Agreement in substantially the form set forth in EXHIBIT C hereto (the "RIGHTS AGREEMENT"), (v) the Company, the Purchasers and certain existing stockholders of the Company will enter into a Right of Co-Sale Agreement in substantially the form set forth in EXHIBIT D hereto (the "Co-Sale Agreement"), and (vi) the parties will deliver such other documents as they are required to deliver pursuant to Section 5. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchasers, except as set forth on an exceptions letter (the "EXCEPTIONS LETTER") furnished to the Purchasers, as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as now conducted and expected to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. The Company has made available to the Purchasers true and complete copies of the certificate of incorporation and bylaws of the Company, as amended to date. 3.2 CORPORATE POWER. The Company has all requisite legal and corporate power to enter into this Agreement, the Rights Agreement and the Co-Sale Agreement, to issue, sell, execute and deliver the Notes and Warrants hereunder and to carry out and perform its obligations under the terms of this Agreement, the Rights Agreement, the Co-Sale Agreement and the Notes and Warrants. 3.3 SUBSIDIARIES. The Company does not control, directly or indirectly, or have an interest in, any other corporation, association or business entity. 3.4 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company as of August 31, 1997 consists of: (a) PREFERRED STOCK. 18,000,000 shares of Preferred Stock, (i) 1,547,175 shares of which are designated Series A Preferred Stock, all of which are issued and outstanding, (ii) 1,237,439 shares of which are designated Series B Preferred Stock, of which 799,908 shares are issued and outstanding, (iii) 761,694 shares of which are designated Series C Preferred Stock, all of which are issued and outstanding, (iv) 5,251,003 shares of which are designated Series D Preferred Stock, of which 3,200,002 shares are issued and outstanding, (v) 1,315,864 shares of which are designated Series E Preferred Stock, all of which are issued and outstanding, (vi) 986,898 shares of which are designated Series F Preferred Stock, all of which are issued and outstanding, (vii) 6,360,381 shares of which are designated Series G Preferred Stock, of which 3,457,500 shares are issued and outstanding, and (viii) 497,327 shares of which are designated Series H Preferred Stock, of which 493,827 shares are issued and outstanding. The rights, preferences and privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock are as stated in the Amended and Restated Certificate of Incorporation, a copy of which the Company has provided to the Purchasers (the "AMENDED CERTIFICATE"). 2 (b) COMMON STOCK. 29,000,000 shares of Common Stock, of which 7,011,555 shares are issued and outstanding. (c) VALID ISSUANCE. All the issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and are validly issued, fully paid and nonassessable and were issued in compliance with all federal and state securities laws. (d) OPTIONS AND CONVERTIBLE SECURITIES. There are no outstanding preemptive or other rights, plans, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock, except for (i) the conversion privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock and the Debentures (as defined below), (ii) the rights provided in paragraph 2.3 of the Amended and Restated Investors Rights Agreement as in effect prior to the execution and delivery of the Rights Agreement (the "CURRENT RIGHTS AGREEMENT"), (iii) 3,202,292 shares of Common Stock reserved for issuance upon the exercise of outstanding options or awards granted or that may be granted under the Company's 1993 Equity Incentive Plan, (iv) 1,620,000 shares of Common Stock reserved for issuance upon the exercise of options or awards granted or that may be granted under the Company's Executive Incentive Plan, (v) 969,612 shares of Common Stock reserved for issuance upon the exercise of options or awards granted or that may be granted under the Company's 1996 Equity Incentive Plan, (vi) warrants to purchase up to 2,051,001 shares of Series D Preferred Stock and warrants to purchase up to 205,861 shares of Series B Preferred Stock granted or extended pursuant to the Convertible Note and Warrant Agreement dated as of June 12, 1996, (vii) warrants granted to Alex. Brown & Sons Incorporated to purchase at $3.83 per share up to 156,658 shares of Series G Preferred Stock, (viii) warrants to purchase up to 22,857 shares of Series B Preferred Stock and up to 15,665 shares of Series G Preferred Stock granted pursuant to certain equipment leasing agreements entered into by the Company and (ix) the rights granted to Gary M. Lauder under Section 4.3 of the Stock Purchase Agreement dated as of October 21, 1994 between the Company and Mr. Lauder (the "SERIES B AGREEMENT"), whereby the Company covenanted to Mr. Lauder that, as long as he holds at least 50% of the number of shares of Series B Preferred Stock purchased by him under the Series B Agreement, the Company will not, without his prior written consent, alter or change the powers, preferences or special rights of the Company's Series B Preferred Stock so as to affect them adversely without so affecting the entire class of Preferred Stock. Except for the Amended Certificate and Sections 4.2 and 4.3 of the Series B Agreement, the Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. Substantially all the stockholders, option holders and warrant holders of the Company (excluding the holder of the warrant referred to in (viii) above) have entered into "market stand-off" agreements substantially similar to that set forth in Section 1.12 of the Current Rights Agreement. In the case of warrants the exercise period of which has been extended, such extensions were duly effected by all necessary corporate action. With respect to the liquidation preference participation rights of the Series D Preferred Stock and the Series E Preferred Stock that have been eliminated, such elimination was effected by all necessary corporate action. 3 3.5 AUTHORIZATION. (a) All corporate action on the part of the Company, its officers, directors and stockholders necessary for (i) the issuance and sale of the Notes pursuant hereto, (ii) the issuance of the shares of Common Stock or other securities of the Company issuable upon conversion of the Notes (the "COMMON SHARES"), (iii) the issuance of the Warrants pursuant hereto, (iv) the issuance of the shares of Common Stock issuable upon exercise of the Warrants pursuant thereto (the "WARRANT SHARES"), and (v) the execution, delivery and performance by the Company of this Agreement, the Rights Agreement, the Co-Sale Agreement and the Notes and Warrants have been taken or will be taken prior to the Closing hereunder. This Agreement is, and upon execution and delivery the Rights Agreement, the Co-Sale Agreement and the Notes and Warrants will be, the valid and binding obligations of the Company enforceable against it in accordance with their respective terms. (b) The Notes and Warrants, when issued in compliance with the provisions of this Agreement, and the Common Shares and Warrant Shares, when issued in compliance with the Notes and Warrants, respectively, will be duly authorized, validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Common Shares and Warrant Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or otherwise required by such laws at the time a transfer is proposed. The Company has reserved for issuance the Common Shares and the Warrant Shares. (c) No stockholder of the Company has any right of first refusal or any preemptive rights in connection with the issuance and sale of the Notes and Warrants or the Common Shares and Warrant Shares, except those that have been complied with or waived. 3.6 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties and assets and good title to all its leasehold estates, in each case subject to no mortgage, pledge, lien, encumbrance, security interest, claim, equitable interest or charge, other than or resulting from taxes which have not yet become delinquent and liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company and which have not arisen otherwise than in the ordinary course of business. 3.7 MATERIAL CONTRACTS. Except for the agreements and instruments, stock options and warrants referred to in Section 3.4, the Company is not a party to any agreement or contract which is not in the ordinary course of business of the Company requiring payment by or to the Company of an amount in excess of $25,000. 3.8 PATENTS, TRADEMARKS, ETC. The Company owns, or has the right to use (or can obtain the right to use on reasonable commercial terms), all patents, trademarks, service names, trade names, copyrights, licenses, trade secrets, inventions or other proprietary rights necessary to its business as now conducted or proposed to be conducted, and has not received a notice that it is infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, and, to the Company's knowledge, there is no basis for any such claim. The Company is not aware of any violation by a third party of any of the Company's patents, trademarks, service marks, trade names, copyrights, trade secrets or other 4 proprietary rights. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company or that would conflict with the Company's business as currently conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any employee is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees made prior to their employment by the Company, except for inventions that have been assigned or licensed to the Company pursuant to assignments or licenses that were entered into by the Company on commercially reasonable terms. 3.9 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of its charter documents, as amended, or any mortgage, indenture, contract, agreement, instrument, judgment, decree, writ or order by which the Company is bound or to which its properties are subject or any statute, rule, or regulation applicable to the Company, except for any violation that would not materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. The execution, delivery and performance of and compliance with this Agreement, the Rights Agreement, the Co-Sale Agreement and the Notes and Warrants (including the issuance of the Common Shares and Warrant Shares), and the transactions provided for herein and therein will not result in any such violation and will not be in conflict with or constitute a default under any of the foregoing and will not result in the creation of any mortgage, pledge, lien, encumbrance, security interest, claim, equitable interest or charge upon any of the properties or assets of the Company pursuant to any of the foregoing. To the best of the Company's knowledge, all material instruments, licenses, contracts, leases or other agreements as amended or modified to date (collectively "CONTRACTS") to which the Company is a party are valid and binding and in full force and effect in all material respects, and the Company has not been notified by any party thereto of any such party's intention or desire to terminate or modify in any material respect any of such Contracts, or of any claim or threat that the Company has breached any of such Contracts. The Company has provided the Purchasers with access to all Contracts, including, without limitation, those listed in the Exceptions Letter. 3.10 EMPLOYEES. To the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or to be conducted by the Company or for any other reason, and the continued employment by the Company of its present employees will not result in any such violations. Other than the Company's 40l-K plan and the incentive stock plans referred to in Section 3.4, the Company has no deferred compensation, pension, profit sharing, bonus, insurance, severance or any other similar employee benefit plan or arrangements covering any of its officers or employees. There are no asserted controversies or labor disputes or union organization activities pending or, to the knowledge of the Company, threatened, between it and its employees. Each employee of the Company has executed a Proprietary Information and Inventions Agreement, a copy of the form of which has been made available to the Purchasers. To 5 the Company's knowledge, the Company has complied with all applicable state and federal equal employment opportunity and other laws related to employment. 3.11 LITIGATION, ETC. There are no actions, suits, claims, proceedings or governmental investigations against the Company pending before any court or governmental agency or, to the Company's knowledge, threatened to be brought against the Company before any court or governmental agency, nor, to the Company's knowledge, is there any basis therefor, which, either in any case or in the aggregate, would result in any material adverse change in the business, prospects, affairs or operations of the Company, or in any material impairment of the right or ability of the Company to carry on its business, or in any material liability on the part of the Company, and none which questions the validity of this Agreement, the Rights Agreement, the Co-Sale Agreement, or the Notes and Warrants (including the issuance of the Common Shares and Warrant Shares) or any action taken or to be taken in connection herewith or therewith. The Company is not a party or subject to any writ, order, decree or judgment, and there is no action, suit or proceeding currently pending that the Company has originated. 3.12 REGISTRATION RIGHTS. Except as provided in the Current Rights Agreement and in the Rights Agreement (when executed and delivered), the Company is not under any obligation to register (and has not agreed to register) any presently outstanding securities, or any securities which may hereafter be issued, under the Securities Act. 3.13 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of, or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the Rights Agreement, the Co-Sale Agreement or the Notes and Warrants, or the offer, sale or issuance of the Notes or Warrants or the consummation of any other transaction provided for herein or therein (including the issuance of Common Shares and Warrant Shares), except, if required, qualifications or filings under the Securities Act, the California Corporate Securities Law of 1968, as amended, and other applicable state securities laws, which qualifications or filings, if required, will be obtained or made and will be effective within the time periods required by law. 3.14 SECURITIES ACT. Subject to the accuracy of the Purchasers' representations in Section 4 hereof, the offer, sale and issuance of the Notes and Warrants in conformity with the terms of this Agreement and the issuance of the Common Shares upon conversion of the Notes constitute transactions exempt from the registration requirements of Section 5 of the Securities Act. 3.15 INSURANCE. The Company has fire and casualty insurance policies, with extended coverage in full force and effect, with all premiums currently paid, sufficient in amount (subject to reasonable deductibles) to allow the Company to replace any of its properties (including leased properties) that might be damaged or destroyed and adequate for the Company's business and, to the Company's knowledge, consistent with insurance coverage maintained by similar businesses. 3.16 DISCLOSURE. No statement by the Company contained in this Agreement, including all exhibits, the Exceptions Letter and the Rights Agreement, Co-Sale Agreement, Notes and Warrants, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not 6 misleading in light of the circumstances under which they were made. The Company has provided the Purchasers with all material information the Purchasers or their respective representatives have requested in connection with the Purchasers' decision to purchase the Notes and Warrants. 3.17 TAXES. The Company has paid, or made provision for the payment of, all taxes which have or may have become due pursuant to income tax returns required to be filed by it or pursuant to any assessment which has been received by it. The Company's sales tax returns through March 1995 have been audited with no deficiency assessment. Except for those returns, no federal or state income or sales tax return of the Company has been audited. No deficiency assessment or proposed adjustment of the Company's United States income tax, state or municipal taxes or sales taxes is pending, and the Company has no knowledge of any proposed liability for any tax to be imposed on its property or assets. 3.18 TRANSACTIONS WITH PRINCIPALS. Except for employment, severance or other compensation arrangements referred to above, no employee, stockholder or director of the Company is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. 3.19 FINANCIAL STATEMENTS. The Company has delivered to the Purchasers audited balance sheets of the Company (including any subsidiaries) at March 31, 1997, March 31, 1996 and at March 31, 1995, audited statements of operations, stockholders' equity (deficiency) and cash flows for the fiscal years ended March 31, 1997, March 31, 1996 and March 31, 1995, an unaudited balance sheet at June 30, 1997 and an unaudited statement of operations for the three months ended June 30, 1997 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles and the Company's books and records, and fairly present the financial position of the Company at the date thereof and the results of operations, stockholders' equity and cash flows of the Company for the periods covered thereby (except, in the case of the unaudited financial statements, for normal audit adjustments. The Company has adopted a December 31 fiscal year end. 3.20 CHANGES. Since March 31, 1997, there has not been any material change in the assets, liabilities, financial condition or operations of the Company other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is likely to have a material adverse effect on such assets, liabilities, financial condition or operations of the Company, or to the knowledge of the Company, any other event or condition of any character that has materially and adversely affected, or threatened to materially or adversely affect, the results of operations, financial condition or business of the Company, including but not limited to the following: (a) any event which materially and adversely affects the Company's business as it is currently being conducted; (b) any declaration, setting aside or payment of any dividend or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company, other than the repurchase of unvested shares of Common Stock of the Company issued to employees, officers or directors of, or consultants to, the Company; (c) any waiver by the Company of a valuable right or of a material debt owed to it where such waiver has a material and adverse effect on the Company's 7 financial condition or business as it is currently conducted; (d) any material change or amendment to a contract or arrangement by which the Company or any of its assets or properties is bound or subject where such change or amendment has a material and adverse effect on the Company's financial condition or business as it is currently conducted; (e) any commitment, transaction or other action by the Company other than in the ordinary course of business and consistent with past practice where such commitment, transaction or other action has a material and adverse effect on the Company's financial condition or business as it is currently conducted; (f) any amendment or other change to the Amended Certificate or to the Bylaws of the Company (including any change of the Company's name); (g) any sale or other disposition of any material right, title or interest in or to any material assets or properties of the Company or any revenues derived therefrom other than in the ordinary course of business and consistent with past practice; (h) any creation, incurrence or assumption of any indebtedness for money borrowed by the Company exceeding $25,000 (not including net increases in accounts payable incurred in the ordinary course of the Company's business); (i) any material capital expenditures by the Company not in the ordinary course of business; (j) any material change in any accounting principle or method (other than normal adjustments as a result of the audit of the Company's financial statements for fiscal 1997) or in any election for federal income tax purposes used by the Company; or (k) any authorization, approval, agreement or commitment to do any of the foregoing. 3.21 MINUTE BOOKS. The minute books of the Company made available to the Purchasers contain a complete summary of all meetings of directors and stockholders since the date of the Company's incorporation. The most recent minutes furnished by the Company to Purchaser were for the Board meeting held August 29, 1997. The Company has, however, provided Purchaser with a draft of the minutes for the meeting held September 12, 1997. There were no duly convened meetings of the Company's Board of Directors between those dates. 3.22 PERMITS. The Company has all permits, licenses and any similar authority necessary, to its knowledge, for the conduct of its business as now conducted by it, the lack of which would materially and adversely affect the properties, prospects or financial condition of the Company, except for any licenses which the Company can obtain without undue effort or expense. 3.23 ENVIRONMENTAL AND SAFETY LAWS. The Company is not, to its knowledge, in violation of any applicable statute, law or regulation relating to environment (including disposal of waste products and effluents) or occupation, health and safety, except for any violation which the Company could cure without making material expenditures or without materially changing its business or operations. 3.24 MANUFACTURING AND MARKETING RIGHTS. Except for the Intel License and the Sharp Agreements, the Company has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other persons, and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products, other than license agreements entered into in the ordinary course of business. The Company has identified satisfactory back-up manufacturing sources for its current products, and is seeking manufacturing arrangements with one or more manufacturers for certain of its other products. The Company currently has adequate sources for the components of its current products and those currently under development, except that the Company has a single source for certain of its components (including the 64 QAM modulation chip and the 286 c.p.u. chip), and a disruption in the supply of such components could have a material adverse effect on the Company, its business and its operations. 8 3.25 INVENTORY. The Company's inventory and work in process are in good condition, not obsolete, and salable in the ordinary course of the Company's business, except for obsolete inventory that the Company has fully reserved for in its Financial Statements (the reserve is approximately $450,000). 3.26 CONTINUING DEVELOPMENT. The Company is in the development stage and has and continues to provide products to customers for testing. As the Company receives input from customers with respect to the operation of its products, including descriptions of issues, problems and complaints, the Company responds with improvements in its products and related services. That process is ongoing. While the issues, problems and complaints that customers have had with the Company's products during their various stages of development are not immaterial, the Company believes that it has responded appropriately with respect to these matters in the past and that it fully anticipates being able to respond appropriately with respect to such matters in the future as well. 3.27 CANCELED PURCHASE ORDERS. The Company has from time to time had purchase orders rescinded, continued or modified, although such rescission, continuance or modification has not had a material adverse effect on the Company's business or prospects as described in the Business Plan. 3.28 LEASES. The Company leases properties (a) in New Jersey at 106 Apple Street, Tinton Falls (which lease expires September 16, 1998); (b) in San Francisco at 500 Sansome Street (which lease expires March 9, 2002); (c) in Cupertino (the Company's principal place of business) at 10161 Bubb Road (which lease expires May 31, 1998), subject to a three year option to renew exercisable between the ninth and sixth month preceding the end of the term). The Company is also the Sublessee (with Norian Corporation as Sublessor) at 10201 Bubb Road in Cupertino (which sublease expires September 30, 1998), and the Sublessee (with Digital Chef Inc. as Sublessor) at 10351 Bubb Road in Cupertino (which sublease expires June 14, 1998). 3.29 TRIALS. The Company's trials in Minnesota of wireless internet access systems is proceeding in a reasonably satisfactory manner. 3.30 Each of the current executive officers, members of the Board of Directors, and greater than five percent stockholders of the Company has entered into a Market Stand-Off Agreement of equivalent duration and effect to that described under Section 4.4 of this Agreement with respect to the securities of the Company beneficially owned by such person. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS AND RESTRICTIONS ON TRANSFER IMPOSED BY THE SECURITIES ACT AND STATE SECURITIES LAWS. 4.1 REPRESENTATIONS AND WARRANTIES BY PURCHASER. Each of the Purchasers severally and not jointly represents and warrants to the Company as follows (the Company is entering into this Agreement with each Purchaser in reliance upon such Purchaser's representations to the Company set forth below, which by such Purchaser's execution of this Agreement such Purchaser hereby confirms with respect to such Purchaser only and not with respect to any other Purchaser): (a) The Notes and Common Shares issuable upon conversion thereof, and the Warrants and the Warrant Shares issuable upon exercise thereof, to be acquired by 9 Purchaser are being acquired by Purchaser for Purchaser's own account, not as a nominee or agent, and not with a view to the sale or other disposition of any part thereof. Purchaser has no present intention of selling, granting any participation in, or otherwise disposing of the Notes or Common Shares, or the Warrants or Warrant Shares, or any interest therein. Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person (or to any other person) with respect to the Notes or Common Shares, or the Warrants or Warrant Shares. Purchaser has not offered to sell the Notes or Warrants or Common Shares or Warrant Shares to any other person. (b) Purchaser understands that the Notes and Warrants, and the Common Shares and Warrant Shares, have not been registered under the Securities Act of 1933, as amended (the "SECURITIES ACT") is in reliance upon the exemptions or under state securities laws from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) of the Securities Act and Regulation D thereunder and in reliance upon certain exemptions from the registration requirements of applicable state securities laws. The Company has no present intention of registering the Notes or Warrants or the Common Shares or Warrant Shares. The Notes and Warrants, and Common Shares and Warrant Shares, must be held by Purchaser indefinitely (unless sold by Purchaser in a registered offering or pursuant to valid exemptions from the requirements of registration under the Securities Act and the applicable state securities laws). Purchaser must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities law or is exempt from registration. Purchaser further understands that the exemptions from registration relied upon by the Company depend upon, among other things, the bona fide nature of Purchaser's investment intent expressed above and Purchaser's other representations herein. (c) During the negotiation of the transactions contemplated herein, Purchaser and Purchaser's representatives and legal counsel have been afforded full and free access to corporate books, financial statements, records, contracts, documents and other information concerning the Company, and to its offices and facilities, have been afforded an opportunity to ask such questions of the Company's officers, employees, agents, accountants and representatives concerning the Company's business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, in order to evaluate the merits and risks of the prospective investments contemplated herein (including purchase of the Notes and Warrants and Common Shares and Warrant Shares). (d) Purchaser and Purchaser's representatives and legal counsel have been solely responsible for Purchaser's own "due diligence" investigation of the Company and its management and business, for Purchaser's own analysis of the merits and risks of this investment, and for Purchaser's own analysis of the fairness and desirability of the terms of the investment. In taking any action or performing any role relative to the arranging of the proposed investment, Purchaser has acted solely in Purchaser's own interest, and neither Purchaser nor any agent or employee of Purchaser has acted as an agent of the Company. Purchaser has such knowledge and experience in financial and business matters that Purchaser is capable of evaluating the merits and risks of the purchase of the Notes and Warrants (and Common Shares and Warrant Shares) pursuant to the terms of this Agreement and of protecting Purchaser's interests in connection therewith. Purchaser acknowledges that the Exceptions Letter is provided to Purchaser strictly for 10 Purchaser's use in connection with its purchase of the Notes hereunder, and Purchaser agrees to keep the Exceptions Letter confidential and not disclose any information contained therein to others (other than Purchaser's counsel and representatives in connection with this investment) without the prior written consent of the Company. (e) Purchaser represents that: (i) Purchaser is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act; (ii) Purchaser has the ability to bear the economic risks inherent in Purchaser's investment in the Notes and Warrants and Common Shares and Warrant Shares; (iii) Purchaser is able, without materially impairing its financial condition, to hold the Notes and Warrants and Common Shares and Warrant Shares for an indefinite period of time and to suffer a complete loss of its investment; and (iv) Purchaser understands and has fully considered for purposes of this investment the risks of this investment and understands that: (1) the Company is an enterprise with limited financial and operating history; (2) the Notes and Warrants and the Common Shares and Warrant Shares represent an extremely speculative investment which involves a high degree of risk of loss; (3) there are substantial restrictions on the transferability of, and there may be no public market for, the Notes and Warrants and the Common Shares and Warrant Shares, and, accordingly, it may not be possible for Purchaser to liquidate its investment in the Notes and Warrants and the Common Shares and Warrant Shares; and (4) there have been no representations as to the present or possible future value, if any, of the Notes and Warrants and the Common Shares and Warrant Shares. (f) Purchaser has the full right, power and authority to enter into and perform Purchaser's obligations under this Agreement, the Rights Agreement, and the Co-Sale Agreement and each of this Agreement, the Rights Agreement constitutes the valid and binding obligation of Purchaser enforceable against Purchaser in accordance with their terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and rules or laws concerning equitable remedies. (g) No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Purchaser is required in connection with the valid execution, delivery and performance by Purchaser of this Agreement, the Rights Agreement or the Co-Sale Agreement; neither the execution, the delivery nor the performance of this Agreement, the Rights Agreement or the Co-Sale Agreement by Purchaser is or will be in violation of any applicable statute, law or regulation. 4.2 LEGENDS. The Notes and Warrants, and each certificate representing any Common Shares or Warrant Shares, may be endorsed with the following legends (or any legends substantially to the same effect): (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN 11 INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. (b) Any other legends as the Company may reasonably deem to be required by California law or other applicable state securities laws. In order to ensure and enforce compliance with the restrictions imposed by applicable law and those referred to in the foregoing legends, or elsewhere herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, with respect to any certificate or other instrument representing the Notes or any Common Shares, or, if the Company transfers its own securities, that it may make appropriate notations to the same effect in the Company's records. 4.3 REMOVAL OF LEGEND AND TRANSFER RESTRICTIONS. Any legend endorsed on a certificate pursuant to Section 4.2 and the stop transfer instructions or notations with respect to the Notes or Warrants or Common Shares or Warrant Shares shall be removed, and the Company shall issue a certificate without such legend to the holder thereof, if the Notes or Warrants or Common Shares or Warrant Shares are registered under the Securities Act (and a prospectus meeting the requirements of Section 10 of the Securities Act is available) and are registered under applicable state securities law, if such legend and instructions may be properly removed under the terms of Rule 144 promulgated under the Securities Act and under any applicable state securities law or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that any resale, transfer or assignment of the Notes or Warrants or Common Shares or Warrant Shares may be made without registration. 4.4 "MARKET STAND-OFF". Each Purchaser on behalf of such Purchaser only hereby agrees that, during the period of duration specified by the Company and an underwriter of Common Stock of the Company not to exceed 180 days following the effective date of a registration statement of the Company filed under the Securities Act, such signatory shall not, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees, or affiliates, of such Purchaser who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration and except to the extent otherwise consented to by the Company and such underwriter. To the extent that any officer or director of the Company has not entered into a market stand-off agreement of equivalent duration and effect with respect to any Company securities beneficially owned by such officer or director, the Company shall use best efforts to require each officer and director of the Company to enter into such an agreement. 5. CONDITIONS TO CLOSINGS. 5.1 CONDITIONS TO OBLIGATIONS OF PURCHASERS AT CLOSING. The obligation of each Purchaser to purchase the Notes and Warrants at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived by Purchaser pursuant to the terms of Section 7.1: 12 (a) REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 of this Agreement and in the Notes shall be true and complete in all material respects (i) on the date hereof (except where explicitly made as of a different date) and (ii) on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date (except where explicitly made as of a different date); the Company's business and assets shall not have been adversely affected in any material way prior to the Closing Date; and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date. (b) CONSENTS AND WAIVERS. The Company shall have obtained any and all consents (including all governmental or regulatory consents, approvals or authorizations required in connection with the valid execution, issuance, delivery and performance by the Company of this Agreement, the Rights Agreement, the Co-Sale Agreement or the Notes or Warrants), permits and waivers necessary or appropriate for consummation of the transactions provided for in this Agreement, Rights Agreement, the Co-Sale Agreement and the Notes and Warrants. (c) RIGHTS AGREEMENT AND CO-SALE AGREEMENT. The Company and the existing stockholders of the Company whose signatures are required shall have executed and delivered the Rights Agreement and the Co-Sale Agreement. (d) COMPLIANCE CERTIFICATE. The Company shall have delivered to the Purchasers a certificate, executed on behalf of the Company by its Chief Executive Officer, dated the Closing Date, certifying to the fulfillment of the conditions specified in subsections (a) and (b) of this Section 5.1. (e) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions hereby contemplated to occur at the Closing, and all documents and instruments incident to such transactions, shall be reasonably satisfactory in substance and form to the Purchasers and their special counsel, and the Purchasers shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY AT THE CLOSING. The Company's obligation to issue and sell the Notes and Warrants at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived by the Company: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Purchasers in Section 4 hereof shall be true and complete in all material respects (i) on the date hereof and (ii) on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. (b) CONSENTS AND WAIVERS. The Purchasers shall have obtained any and all consents (including all governmental or regulatory consents, approvals or authorizations required in connection with the valid execution, delivery and performance by the Purchasers of 13 this Agreement), permits and waivers necessary or appropriate for the consummation by the Purchasers of the transactions provided for in this Agreement or in the Notes or Warrants. 6. AFFIRMATIVE AND NEGATIVE COVENANTS. The Company hereby covenants and agrees with the Purchasers as follows (the following covenants and agreements shall continue as long as the Notes remain outstanding, unless an earlier expiration date is indicated below): 6.1 INSPECTION RIGHTS. Until the Company consummates the closing of the Company's first offer and sale of securities pursuant to a registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), filed with and declared effective by the Securities and Exchange Commission (an "INITIAL PUBLIC OFFERING"), the Company will permit representatives of each Purchaser to visit and inspect any of its properties and to examine and make copies of its non-privileged books and records and to discuss its affairs, finances and accounts with its officers, employees and agents all at such reasonable times and as often as may reasonably be desired. Each Purchaser agrees to keep such information confidential and not to buy or sell the Company's securities while in the possession of material non-public information regarding the Company. 6.2 BOARD VISITATION RIGHTS. Until the Company consummates the closing of its Initial Public Offering, the Company will permit one representative of all the Purchasers to attend all Board of Director meetings in a non-voting capacity, and shall provide such representative with copies of all non- privileged information otherwise distributed to members of the Board of Directors. Each Purchaser agrees to keep such information confidential. 6.3 DIVIDENDS AND DISTRIBUTIONS. The Company will not pay any dividends to any stockholder or effect any distribution of the Company's assets to any stockholder (other than payments in the ordinary course of the Company's business or repurchases in accordance with the terms of the Company's equity incentive plans of shares issued under such plans). 6.4 ENCUMBRANCES AND LIENS. Except as provided in the Notes, the Company will not create, assume or suffer to exist, any mortgage, pledge, security interest, encumbrance or lien on property of any kind, real, personal or mixed, now owned or hereafter acquired, or upon the income or profits thereof, except (i) as already existed prior to the execution of this Agreement; (ii) for minor encumbrances and easements on real property which do not affect its market value, (iii) for purchase money interests (which includes mortgages, conditional sale contracts, capitalized leases and similar title retention or deferred purchase devices) encumbering only the property purchased and existing liens on purchased property in the ordinary course of business, or (iv) for any extension, renewal or replacement of the foregoing in the ordinary course of business. 6.5 AFFILIATES. The Company will not enter into or perform any transaction with any person or entity who controls or is controlled by or under common control with the Company (an "Affiliate"), except on terms no less favorable to the Company than would be available in a bona fide arms length transaction with a non-Affiliate. 6.6 PAYMENT OF OBLIGATIONS. The Company will pay and discharge promptly all taxes, assessments and other governmental charges and claims levied or imposed upon it or its property, or any part thereof, provided, however, that the Company will have the right to contest in good faith any such taxes, assessments, charges or claims, and pending the outcome of such contest, to delay or refuse payment thereof provided that adequate funded reserves are established. 14 6.7 MAINTENANCE OF CORPORATE EXISTENCE AND PRINCIPAL PLACE OF BUSINESS. The Company will maintain and preserve its existence and assets and all rights, franchises and other authority necessary for the conduct or its business and will maintain and preserve its property, equipment and facilities in commercially useful order, condition and repair. The Company will not change its corporate name or dba without the prior written consent of Purchasers holding a majority of the then-outstanding principal amount of the Notes, which consent shall not be unreasonably withheld by the Purchasers. The Company will not move its principal place of business outside California without the prior written consent of Purchasers holding a majority of the then-outstanding principal amount of the Notes, which consent shall not be unreasonably withheld by the Purchasers. 6.8 MAINTENANCE OF COMMERCIAL RELATIONSHIPS. The Company shall use commercially reasonable efforts to preserve its contracts and leases material to its business and to preserve the goodwill of and maintain the existing relationships with its customers, suppliers and personnel which are beneficial to the business of the Company. 6.9 INSURANCE. The Company will keep all of its insurable property, real, personal, or mixed, insured by good and responsible companies against fire, accident and such other risks as are customarily insured against by companies conducting similar business with respect to like properties and in amounts of coverage as are commercially reasonable. The Company will maintain adequate worker's compensation insurance and adequate insurance against liability for damage to persons or property. 6.10 COMPLIANCE WITH LAWS AND REGULATIONS. The Company will use its best efforts to ensure that it does not violate any federal, state, local or foreign law, ordinance or regulations or any order, judgment, injunction or decree or any court, arbitrator or governmental body which are material to the conduct of the Company's business, including without limitation laws relating to pollution or protection of the environment, labor and employment practices, health and safety, and importing and exporting goods and services. 6.11 CAPITAL EXPENDITURES. The Company will not (i) make any plant or fixed capital expenditure, or any commitment therefor, or purchase any personal property or replacement equipment in excess of $1.5 million during the twelve month period ending March 31, 1998, in excess of $2.5 million during the twelve month period ending March 31, 1999, in excess of $5.5 million during the twelve month period ending March 31, 2000 and in excess of $11.0 million during the twelve month period ending March 31, 2001; provided, however, that such limits will be increased by a percentage equal to that percentage by which the current fiscal year's net revenues exceed the current fiscal year's projected net revenues. 6.12 KEY MAN LIFE. The Company will obtain and maintain key man life insurance on Mr. Carl S. Ledbetter ("Ledbetter") for so long as Ledbetter remains Chief Executive Officer of the Company, with proceeds payable to the Company. 6.13 ADDITIONAL COVENANTS. The Company will not, without the consent of Purchasers holding a majority of the then-outstanding principal amount of the Notes: (a) create or authorize the creation or issuance of any additional class or shares of capital stock, or any shares of any existing class of capital stock, or create or authorize any 15 obligation or security convertible into shares of any class of capital stock, or issue, grant or sell any options, warrants or other rights to acquire any shares of capital stock of the Company (except pursuant to existing stock or stock option plans of the Company); (b) engage in any business other than the business presently conducted by the Company and businesses reasonably ancillary thereto, or take any action for the purpose of substantially changing the nature or character of its business as it is presently conducted; (c) assume or incur any indebtedness for borrowed money or guarantee any such indebtedness, or issue or sell any debt securities or rights to acquire any debt securities, or guarantee any debt securities of others, or create any mortgages, liens, security interests or other encumbrances on the property of the Company in connection with any indebtedness thereof, or enter into any "keep well" or other agreement or arrangement to maintain the financial condition of another person, other than (i) purchase money indebtedness in an amount not in excess of $100,000 per single transaction or $500,000 in the aggregate in any calendar year, (ii) guarantees of the Company's trade accounts in the ordinary course of business consistent with past practice, (iii) any renewal, extension or refinancing of any indebtedness existing as of the date hereof, in an amount not in excess of the amount of indebtedness being renewed, extended or refinanced, and on terms not less favorable to the company than those of the indebtedness being renewed, extended or refinanced, or (iv) an increase in the amount of Senior Indebtedness not in excess of $5,000,000; (d) enter into, become a party to, become subject to or authorize any agreement or instrument which would restrict, prohibit or interfere with the Company's performance of its obligations under the terms of the Company's charter documents, bylaws, or this Agreement, the Notes or the Warrants; (e) have outstanding, or acquire or commit itself to acquire or hold, any investment except (i) investments in marketable direct obligations issued or guaranteed by the United States of America that mature within one year from the date of acquisition thereof or which are subject to a repurchase agreement, exercisable within ninety (90) days from the date of acquisition of such agreement, with any commercial bank or trust company incorporated under the laws of the United States of America or any State thereof or the District of Columbia, (ii) investments in commercial paper maturing within one year from the date of acquisition thereof and having, at the date of acquisition thereof, the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation, (iii) investments in bankers' acceptances eligible for rediscount under Federal Reserve Board requirements accepted by any commercial bank or trust company referred to in clause (i) hereof, (iv) investments in deposits or certificates of deposit maturing within one year from the date of acquisition thereof issued by any commercial bank or trust company referred to in clause (i) hereof and having capital and surplus of at least $100,000,000, (v) investments in certificates of deposit issued by banks organized under the laws of any other jurisdiction, each having combined capital and surplus of not less than $100,000,000, and (vi) investments in securities issued by subsidiaries of the Company; (f) make, declare or pay any dividends or make any distributions on any of its capital stock or make any other distribution of assets in respect of its capital stock, or purchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into 16 Common Stock, except that the Company may do so (i) in connection with the termination of any director, officer, employee, agent or consultant of the Company, or (ii) as permitted by an employee benefit plan, contract or arrangement that has been approved by the Board of Directors of the Company; (g) make any loans on advances other than (i) for travel, entertainment and similar expenses in the ordinary course of business consistent with past practice, (ii) pursuant to any employee stock option plan or stock purchase agreement of the Company, or (iii) advances to employees in an aggregate amount not in excess of $25,000; (h) engage in any transaction involving payments by the Company in excess of $25,000 in any single calendar year with any other person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company, including without limitation any person who is a director, officer, employee or direct or indirect beneficial holder of at least 5% of the then outstanding capital stock of the Company, any member of the family of any such person, or any corporation, trust, partnership or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof (each an "Affiliate"), except in the ordinary course of business and pursuant to the reasonable requirements of the Company's business and upon terms no less favorable to the Company than would have been obtainable from a person who is not an Affiliate on an arms'-length basis in the ordinary course of business; (i) modify, rescind, terminate, waive, release or otherwise amend in any material respect any of the terms or provisions (i) relating to non-competition or confidential or proprietary information and contained in any agreement, document or instrument with or relating to any of its employees, officers, directors or other related parties, or to fail to enforce any such provision, or fail to avail itself of all the rights and remedies thereunder, or (ii) of this Agreement; or (j) merge or consolidate with any other corporation or sell all or substantially all of its assets or effect a voluntary dissolution, liquidation or winding up of the Company. 7. MISCELLANEOUS. 7.1 WAIVERS AND AMENDMENTS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. This Agreement shall automatically terminate at such time after the Closing Date as the Notes are no longer outstanding, or on October 31, 1997 if the Closing has not then been completed. 7.2 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 7.3 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive the execution of this Agreement and the Closing. 17 7.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. The Company may not assign its rights or delegate its duties under this Agreement, the Rights Agreement, the Co-Sale Agreement or the Notes and Warrants, except by operation of law or with the prior written consent of the Purchasers holding a majority of the then-outstanding principal amount of the Notes. Each Purchaser may assign or transfer its rights hereunder in addition to the Notes and Warrants, and the Common Shares and Warrant Shares, in whole or in part, to any affiliate of Purchaser or any entity for which Purchaser or any of its affiliates serves as general partner and/or investment advisor or in a similar capacity, and to all mutual funds, or other pooled investment vehicles or entities, under the control or management of such Purchaser or the general partner or investment advisor thereof, or any affiliate of any of the foregoing. 7.5 ENTIRE AGREEMENT. This Agreement, the exhibits to this Agreement and the Exceptions Letter constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and supersede and replace any prior or concurrent agreements, understandings or representations between the Company and the Purchasers. 7.6 NOTICES, ETC. All notices required or permitted hereunder shall be in writing and shall be sent via facsimile, overnight courier service or mailed by first class mail, postage prepaid, addressed or sent (a) if to Purchaser, at the address of Purchaser set forth opposite such Purchaser's name on SCHEDULE 1, or at such other address or number as such Purchaser shall have furnished to the Company in writing, with a copy to Victor J. Paci, Esq., Bingham, Dana & Gould LLP, 150 Federal Street, Boston, MA 02110 or (b) if to the Company, at the address set forth above or facsimile no.: (408) 725-2439, or at such other address or number as the Company shall have furnished to Purchaser in writing, with a copy to Edwin N. Lowe, Esq., Fenwick & West LLP, Two Palo Alto Square, Palo Alto, CA 94306. 7.7 SEPARABILITY. In case any provision of this Agreement shall be declared invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7.8 FINDER'S FEES. (a) The Company (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement other than a finders fee to Mr. Lee in the amount of four percent with respect to $2,000,000 principal amount of Notes purchased pursuant to this Agreement, payable in stock or cash at the Company's election, and (ii) hereby agrees to indemnify and to hold Purchaser harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any other broker or person or firm (and the costs and expenses of defending against such liability or asserted liability) for which the Company, or any of its employees or representatives, are responsible. (b) Each Purchaser (i) represents and warrants that it has retained no finder or broker, in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or 18 firm (and the costs and expenses of defending against such liability or asserted liability) for which such Purchaser, or any of its employees or representatives, are responsible. 7.9 EXPENSES AND FEES. The Company will bear the actual expenses, including fees and disbursements of counsel, incurred by Tudor Global Trading, Inc. with respect to this Agreement and the transactions provided for herein up to a maximum aggregate amount of $40,000, which shall be payable to Bingham, Dana & Gould LLP at closing. Except for the immediately preceding sentence, the Company and each Purchaser shall each bear these respective expenses and legal fees incurred with respect to this Agreement and such transaction. In the event any litigation between the parties arises out of, in connection with or with respect to this Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable costs and expenses incurred by the prevailing party (including attorneys fees) in connection with such litigation. 7.10 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 7.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 7.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to the Purchasers, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Purchasers' part of any breach or default under this Agreement, or any waiver on the Purchasers' part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing and that all remedies, either under this Agreement, or by law or otherwise afforded to the Purchasers', shall be cumulative and not alternative. 7.13 FUTURE EMPLOYEE AGREEMENTS AND ISSUANCES. The Company will require that all future employees of the Company enter into Proprietary Information and Inventions Agreements in substantially the form attached as EXHIBIT E, with such amendments thereto or deviations therefrom as the Company's Chief Executive Officer or Board of Directors may from time to time deem appropriate. All future issuances of securities of the Company to employees, officers and consultants shall be made pursuant to stock purchase or stock option agreements approved by the Company's Board of Directors, and including a "market stand-off" provision substantially similar to that set forth in Section 1.12 of the Rights Agreement or such other terms as the Board of Directors may approve. 19 IN WITNESS WHEREOF, the parties have executed this Convertible Subordinated Promissory Note Purchase Agreement as of the day and year first above written. "COMPANY" HYBRID NETWORKS, INC. By: /S/ Carl S. Ledbetter ------------------------------- Its: President and CEO ------------------------------ "PURCHASERS" TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By: /S/ Robert P. Forlenza ---------------------------- Robert P. Forlenza, Vice President TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By: /S/ Robert P. Forlenza --------------------------- Robert P. Forlenza, Vice President RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: /S/ Robert P. Forlenza ---------------------------- Robert P. Forlenza, Vice President RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: /S/ Robert P. Forlenza ---------------------------- Robert P. Forlenza, Vice President 20 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT SEQUOIA CAPITAL VI By: /S/ Michael Moritz --------------------------------- Its: -------------------------------- SEQUOIA TECHNOLOGY PARTNERS VI By: /S/ Michael Moritz --------------------------------- Its: -------------------------------- SEQUOIA XXIV By: /S/ Michael Moritz --------------------------------- Its: -------------------------------- 21 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT ACCEL IV L.P. By: /S/ G. Carter Sednaoui --------------------------------- Its: General Partner -------------------------------- ACCEL INVESTORS '95 L.P. By: /S/ G. Carter Sednaoui --------------------------------- Its: General Partner -------------------------------- ACCEL KEIRETSU L.P. By: /S/ G. Carter Sednaoui --------------------------------- Its: Chief Financial Officer -------------------------------- ELLMORE C. PATTERSON PARTNERS By: /s/ Company Officer --------------------------------- Its: General Partner -------------------------------- 22 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT AT & T VENTURES By: /S/ Neal Douglas --------------------------------- Its: General Partner -------------------------------- 23 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT OSCCO III, L.P. By: /S/ Stephen Halprin --------------------------------- Its: General Partner -------------------------------- 24 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT /S/ Daniel E. Steimle ------------------------------------ Daniel E. Steimle 25 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT 888 GROUP By: /S/ David Hayes --------------------------------- Its: /S/ Company Officer -------------------------------- Company Officer 26 SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT /S/ Bradford J. Shafer ------------------------------------ Bradford J. Shafer 27 Signature Page to Convertible Subordinated Promissory Note Purchase Agreement K. PHILLIP HWANG By: /s/ K. Phillip Hwang ------------------------ Its: ------------------------ 28 Signature Page to Convertible Subordinated Promissory Note Purchase Agreement J. F. SHEA CO., INC. By: /s/ Edmund Shea, Jr. ------------------------ Its: Vice President ------------------------ 29 Signature Page to Convertible Subordinated Promissory Note Purchase Agreement /s/ Gary Lauder ------------------------ Gary M. Lauder 30 Schedule: - -------- 1. List of Purchasers Exhibits: - -------- A. Form of Subordinated Convertible Promissory Note B. Form of Common Stock Purchase Warrant C. Form of Rights Agreement D. Form of Right of Co-Sale Agreement E. Proprietary Information and Inventions Agreement 31 SCHEDULE 1 PURCHASERS AND AMOUNTS PURCHASED PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED - ------------------------ --------------- ------------------ Tudor BVI Future, Ltd. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 $1,842,667 182,440-456,106 Tudor Arbitrage Partners, L.P. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 $ 471,333 46,667-116,667 Raptor Global Fund Ltd. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 $1,218,000 120,593-301,486 Raptor Global Fund L.P. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 $ 468,000 46,336-115-841 Sequoia Capital VI 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor $ 273,000 27,029-67,574 Sequoia Technology Partners VI 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor $ 15,000 1,485-3,713 Sequoia XXIV 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor $ 12,000 1,188-2,970 PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED - ------------------------ --------------- ------------------ Accel IV L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui $ 229,000 22,673-56,683 Accel Investors '95 L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui $ 10,750 1,064-2,661 Accel Keiretsu L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui $ 4,750 470-1,176 Ellmore C. Patterson Partners One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui $ 5,500 545-1,361 AT&T Ventures 3000 Sand Hill Road Building 1, Suite 285 Menlo Park, CA 94025 Attn: Neal Douglas $ 257,201 25,465-63,664 OSCCO III, L.P. 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 Attn: Stephen E. Halprin $ 200,000 19,802-49,505 Gary M. Lauder 88 Mercedes Lane Atherton, CA 94027 $ 100,000 9,901-24,753 888 Group 555 California Street Suite 2200 San Francisco, CA 94104 Attn: David Hayes $ 125,000 12,376-30,941 PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED - ------------------------ --------------- ------------------ Daniel E. Steimle P.O. Box 928 Occidental, CA 95465 $ 500,000 49,505-123,763 Bradford J. Shafer Heartport, Inc. 200 Chesapeake Drive Redwood City, CA 94063 $ 50,000 4,950-12,376 J.F. Shea Co., Inc. 655 Brea Canyon Road Walnut, CA 91789-3010 $ 100,000 9,901-24,753 Mr. K. Philip Hwang 2345 Harris Way San Jose, CA 95131-1413 $1,000,000 99,009-247,525 TOTAL: $6,882,201 681,399-1,703,517 ---------- ----------------- ---------- ----------------- EXHIBIT A NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON EXERCISE OF THE CONVERSION RIGHTS SET FORTH IN THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON EXERCISE OF THE CONVERSION RIGHTS SET FORTH IN THIS NOTE CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER HAWS BEEN REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE SATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. HYBRID NETWORKS, INC. CONVERTIBLE SUBORDINATED NOTE $___________ Palo Alto, California September __, 1997 FOR VALUE RECEIVED, upon the terms and subject to the conditions set forth in this convertible subordinated note (this "NOTE"), HYBRID NETWORKS, INC., a Delaware corporation, with its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167 (the "COMPANY"), absolutely and unconditionally promises to pay to the order of _______________________, a ____________ company (the "HOLDER"), at the Holder's offices at c/o Tudor Global Trading, Inc., 40 Rowes Wharf, Boston, Massachusetts 02110, the principal amount of __________________________ dollars ($____________), together with interest as specified in Section 2(a). This Note is one of a limited number of Convertible Subordinated Notes (the "Convertible Subordinated Notes") in the aggregate principal amount of up to Eight Million Dollars ($8,000,000), issued pursuant to that certain Subordinated Promissory Note Purchase Agreement (the "Agreement") dated as of the date hereof by and among the Company and those certain purchasers identified on Schedule 1 thereto, including the Holder. The Company agrees to make all payments (including prepayments) on the Convertible Subordinated Notes in proportion to the respective principal amounts of each such note outstanding from time to time. SECTION 1. MATURITY; WAIVERS. The entire principal amount hereof, and all unpaid interest thereon, shall become due and payable on the Maturity Date (as defined in Section 3 hereof). The Company and any endorser and guarantor of this Note or the obligations represented hereby expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, assents to any extension or postponement of the time payment or any other indulgence, to any addition, substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. SECTION 2. INTEREST. This Note shall bear interest on the principal amount outstanding and unpaid from time to time (a) from the date hereof through and including the earlier of (i) March 30, 1998 and (ii) the date on which such principal amount, together with all accrued but unpaid interest thereon, is paid or discharged in full, if such date is on or before March 30, 1998, at the rate of 10% per annum, and (b) if all or any portion of said principal amount, together with all accrued but unpaid interest thereon, shall remain outstanding after March 30, 1998, then from and after March 30, 1998 through and including the date on which such principal amount, together with all accrued but unpaid interest thereon, is paid or discharged in full, at the rate of 18% per annum. Interest shall be calculated on the basis of a 360-day year and paid for the actual number of days elapsed and shall be payable quarterly in arrears on the last day of each quarter, commencing on September 30, 1998, with a final payment of all accrued and unpaid interest upon the Maturity Date. SECTION 3. PRINCIPAL PAYMENT; PREPAYMENT. All unpaid principal and interest outstanding hereunder, together with all fees and expenses (if any) payable hereunder, shall become immediately due and payable upon the earliest to occur of the following (the "MATURITY DATE"): (a) the closing of the first public offering of the Company's Common Stock, $.001 par value per share (the "Common Stock"), and/or shares of any other class of the Company's capital stock, pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"); (b) any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all of the Company's assets, or any merger, consolidation or reorganization as a result of which the Company is not the surviving corporation or, if the Company is the surviving corporation, as a result of which the holders of voting stock of the Company immediately prior to such merger, consolidation or reorganization do not represent a majority of the voting stock of the surviving corporation, or the dissolution of the Company, or the sale, in a single transaction or series of related transactions, of a majority of the Company's voting capital stock (whether newly issued or from treasury, or previously issued and then outstanding, or any combination thereof); (c) any Bankruptcy Event (as defined in Section 5(g) hereof); and (d) September 30, 1998. The Company shall have the right to prepay, in whole or in part, the unpaid principal amount of this Note on fifteen (15) business days' prior written notice to the Holder. Any notice of prepayment given pursuant to this Section 3 shall not act to restrict or limit any rights which the Holder may have at the time of receipt of such notice to convert this Note pursuant to, and in accordance with, Section 7 below. Any prepayment of the principal amount of this Note shall be made without premium or prepayment penalty, PROVIDED that the Company shall pay all accrued interest to the date of prepayment on the principal amount prepaid. All payments to be made by the Company hereunder shall be made in U.S. dollars in cash without setoff or counterclaim and without any withholding or deduction whatsoever. SECTION 4. REPRESENTATIONS, WARRANTIES OF THE COMPANY AND OF THE HOLDER. The representations and warranties of the Company and of the Holder contained in Sections 3 and 4 2 of the Purchase Agreement, respectively, are hereby incorporated by reference in their entirety and made a part of this Note as fully as if restated herein. SECTION 5. ACCELERATION EVENTS. If any of the following events or circumstances (each an "ACCELERATION EVENT") shall occur: (a) the Company's failure to meet its payment obligations when due under this Note, including without limitation, the due and punctual payment of any principal or interest due and payable hereunder; (b) The Company commits a material breach or default of any of the covenants or in the punctual performance of its other obligations under this Note, the Purchase Agreement or that certain Stock Purchase Warrant of even date herewith issued by the Company in favor of the Holder (the "WARRANT"); (c) any representation or warranty made by the Company herein or in the Purchase Agreement or the Warrant shall have been false in any material respect when made; (d) there shall remain undischarged for more than sixty (60) days any final judgment in excess of $5,000 or execution against the Company that together with other outstanding claims and execution actions against the Company exceed $100,000 in the aggregate; (e) the Company commits a breach or default in the due and punctual performance of any covenant or agreement with respect to indebtedness for borrowed money, including without limitation the Debentures (as defined below), and such breach or default permits the holder to accelerate a material amount of such indebtedness under the terms thereof, or the Company commits a material breach under any real property lease agreement or capital equipment lease agreement to which the Company is a party; (f) a reorganization, consolidation or merger of the Company with or into any other entity or entities in which the Company is the surviving corporation and as a result of which the holders of voting stock of the Company immediately prior to such reorganization, consolidation or merger represent a majority of the voting stock of the surviving corporation, if the surviving corporation or corporations in the merger or consolidation does not assume all of the Company's obligations under this Note and the Warrant (subject to the Holder's rights set forth in Section 3 hereof); or (g) the filing of a petition in bankruptcy or under any similar insolvency law by the Company, the making of an assignment for the benefit of creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against the Company and such petition is not dismissed within 60 days of the filing thereof (each a "Bankruptcy Event"); then, the Holder at its option at any time thereafter during the continuance of an Acceleration Event may declare the entire unpaid principal of this Note and all interest, fees and expenses (if any) payable on or in respect of this Note and the obligations evidenced hereby due and payable, and the same shall thereupon forthwith become and be due and payable to the Holder (an "ACCELERATION") without presentment, demand, protest, notice of protest or any other formalities of any kind, all of which are hereby expressly and irrevocably waived by the Company, PROVIDED THAT in the event of an Acceleration Event under Section 5(g) all such 3 amounts shall become and be immediately due and payable, and an Acceleration shall be deemed for all purposes hereof to have occurred, automatically and without any requirement of notice from the Holder. SECTION 6. COVENANTS OF THE COMPANY. The covenants of the Company contained in Section 6 of the Purchase Agreement are hereby incorporated by reference in their entirety and made a part of this Note as fully as if restated herein. SECTION 7. CONVERSION. This Note shall be convertible pursuant to the terms and provisions of this Section 7. SECTION 7.1. CONVERSION RIGHTS. At the time of any non-public sale of (i) shares of Common Stock (or any other class or series of capital stock of the Company), or (ii) any securities convertible into, or exchangeable for, or providing any right to purchase Common Stock (or any other class or series of capital stock of the Company) or securities convertible into or exchangeable for, shares of Common Stock (or any other class or series of capital stock of the Company), while this Note is outstanding (any such financing being referred to herein as a "PRIVATE EQUITY FINANCING"), the Holder may, but shall not be obligated to, convert all (but not less than all) of the outstanding principal amount of this Note, and, at the Holder's option, all (but not less than all) of the accrued and unpaid interest on this Note, into such number of whole shares of Conversion Stock (as defined in Section 7.2(d) below) as the principal amount (and accrued and unpaid interest, if the Holder elects to convert the same) will purchase at the Conversion Price (as defined below in Section 7.2(c) below), upon the terms and subject to the conditions hereinafter specified. The Company agrees to give the Holder written notice (a "FINANCING NOTICE") of the contemplation of a Private Equity Financing, including all of the material terms and conditions thereof, not later than fifteen (15) days prior to the contemplated completion thereof. Upon receipt of such Financing Notice, the Holder may, by delivery to the Company of a Conversion Notice (as defined in Section 7.2(b) below) not later than the date specified in the Financing Notice, which date shall not be earlier than the date seven (7) days after such Financing Notice and shall not be later than three (3) days prior to the contemplated completion of such Private Equity Financing, exercise its conversion rights hereunder. The Holder's Conversion Notice in connection with a contemplated Private Equity Financing may expressly provide that the exercise of conversion rights as set forth therein is contingent upon the completion of such Private Equity Financing on the terms and conditions described in the Company's notice thereof. SECTION 7.2. CERTAIN DEFINITIONS. For all purposes of this Section 7, the following terms shall have the respective meanings set forth below: (a) "COMMON STOCK" shall mean and include the Company's Common Stock authorized as at the date of this Note (as described in Section 3.4(b) of the Purchase Agreement) and shall include also any other capital stock of the Company of any class or series which has the right to participate in the distribution of earnings and assets of the company without Limitation as to amount; (b) "CONVERSION NOTICE" shall mean written notice by the Holder in substantially the form annexed hereto of the Holder's desire to exercise its conversion rights hereunder; 4 (c) "CONVERSION PRICE" shall mean the price for a share of Conversion Stock payable by the investors purchasing such shares in the Private Equity Financing in connection with which such Conversion Notice shall have been delivered; and (d) "CONVERSION STOCK" shall mean (i) the shares of Common Stock or other class or series of capital stock of the Company or (ii) the securities convertible into, exchangeable for or providing a right to purchase Common Stock or other class or series of capital stock of the Company or providing a right to purchase securities convertible into or exchangeable for shares of Common Stock or other class or series of capital stock of the Company, which shall be issued by the Company in any Private Equity Financing. 7.3. CONVERSION MECHANISM. (a) Conversion of this Note shall be made upon surrender of this Note to the Company at its principal place of business (or at such other office as the Company shall designate by notice in writing to the Holder from time to time), accompanied by written notice of the Holder's election to convert in substantially the form of the Conversion Notice annexed hereto. (b) The Company agrees that, at the time of such surrender and exercise of conversion rights in compliance with the provisions hereof, the shares of Conversion Stock issuable pursuant to such exercise shall be and be deemed to be issued to the Holder (or the Holder's permitted transferee) as the record owner of such shares as of the close of business of the Company on the date on which conversion rights under this Note shall have been exercised as aforesaid. In addition, the Holder shall thereupon be permitted to become a party to, and shall have the benefit of, all of the rights granted to (i) the other purchasers of Conversion Stock pursuant to each of the documents, instruments and agreements executed and delivered by and between and/or among the Company and such other purchasers of Conversion Stock in connection with the applicable Private Equity Financing and (ii) the Holders (as defined in that certain Hybrid Network, Inc. Amended and Restated Investor Rights Agreement dated as of the date hereof by and among the Company and the parties listed on the schedules thereto, including the Holder (the "INVESTOR RIGHTS AGREEMENT")) pursuant to the Investor Rights Agreement. (c) The Company covenants that all shares of Conversion Stock which may be issued upon the exercise of conversion rights under this Note will, upon such exercise, be validly issued, fully paid and non-assessable and free from all taxes, liens, charges and other encumbrances or restrictions on sale and free and clear of all pre-emptive rights in respect of the issue thereof. (d) The certificates for the shares of Conversion Stock so issued shall be delivered to the Holder (or the Holder's permitted designee) within a reasonable time, not exceeding ten (10) days, after the date on which the conversion rights under this Note shall have been so exercised, and shall bear the following legend or a substantially equivalent legend: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER HAS BEEN REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE 5 COMPANY, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. Such certificates may also bear any legend required under any applicable state securities laws. The Company may take such steps as it deems appropriate to cause the assignment and transfer restriction provided for in this Note to be complied with. (e) This Note may be converted once and only once. Unless the Holder shall have elected to convert accrued but unpaid interest hereon, all of such interest shall be paid to the Holder in cash immediately upon the conversion of the principal amount of this Note. (f) No fractional shares or scrip representing fractional shares shall be issued upon the exercise of conversion rights under this Note, and the Conversion Price with respect to any such fractional shares shall be payable to the Holder in cash by the Company within ten (10) days after the date of any such conversion. (g) Issuance of certificates for shares of Conversion Stock upon the exercise of conversion rights under this Note shall be made without charge to the Holder (or the Holder's permitted transferee) for any issue or transfer taxes or any other incidental expenses in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder (or the Holder's permitted transferee); PROVIDED, HOWEVER, that any income taxes or capital gains taxes or similar taxes shall be payable by the Holder. SECTION 7.4. CERTAIN OBLIGATIONS OF THE COMPANY. The Company will, in accordance with the laws of the State of Delaware, take such actions as may be necessary to ensure that the authorized amount of any class of stock from which Conversion Stock is to be issued shall, at the time of such conversion, be sufficient to permit the exercise of conversion rights under this Note and to ensure that, at the time of such conversion, the authorized amount of any class of stock into which the Conversion Stock is convertible shall be sufficient to permit the exercise of any such conversion rights applicable to the Conversion Stock. The Company will not, by amendment of its Certificate of Incorporation or through reorganization, consolidation, merger, dissolution, issuance of capital stock or sale of treasury stock or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the material performance or observance of any of the covenants, stipulations or conditions in this Note to be observed or performed by the company. The Company will at all times in good faith assist, insofar as it is able, in the carrying out of all of the provisions of this Note in a reasonable manner and in the taking of all other action which may be necessary in order to protect and preserve the rights of the Holder set forth herein. SECTION 7.5. EFFECT OF REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. (a) If, at any time while this Note is outstanding (subject in all events to the rights of Holder set forth in Section 3 hereof) there should be any reorganization, consolidation or merger of the Company with another entity as a result of which the Company is not the surviving corporation, or any sale, conveyance, lease or other transfer by the Company of all or substantially all of its property to any other entity, the Holder of this Note shall thereafter, upon 6 exercise of conversion rights hereunder, be entitled to receive the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such reorganization, consolidation or merger, as the case may be, to which the Conversion Stock (and any other securities and property) of the Company, deliverable upon the exercise of conversion rights hereunder, would have been entitled upon such consolidation, merger, sale or other transfer if such conversion rights had been exercised immediately prior to such consolidation, merger, sale or other transfer; and, in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder of this Note to the end that the provisions set forth herein shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise of conversion rights hereunder as if such conversions rights had been exercised immediately prior to such consolidation, merger, sale or other transfer and the Holder hereof had carried out the terms of the exchange as provided for by such consolidation or merger. (b) The Company shall not effect any such consolidation or merger unless, upon or prior to the consummation thereof, the successor corporation shall by written instrument have assumed the obligation to deliver to the Holder hereof such shares of stock, securities, cash or property as such Holder shall be entitled to purchase in accordance with Section 7.5(a) hereof (subject in all events to the rights of Holder set forth in Section 3 hereof). SECTION 7.6 NO RIGHTS OR RESPONSIBILITIES AS SHAREHOLDER. This Note neither entitles the Holder to any rights, nor subjects the Holder to any responsibilities, as a shareholder of the Company. SECTION 8. SUBORDINATION. SECTION 8.1 SUBORDINATION TO SENIOR INDEBTEDNESS. Notwithstanding any other provision of this Note, the payment of principal and interest on this Note is and shall be junior and subordinated in right of payment, to the extent and in the manner set forth in this Section 8, to the prior payment in full of all amounts due and owing upon all Senior Indebtedness, as defined in Section 8.2(a) below, at any time outstanding. Holder agrees to negotiate in good faith reasonable and customary terms of a subordination agreement with the Company's lender or lenders or proposed lender or lenders under a bank credit facility, pursuant to which subordination agreement payment of the principal and interest of the Notes shall be junior and subordinated in right of payment to payment of such bank credit facility; provided, that any subordination agreement with such lender or lenders acceptable to the Holders of a majority of the aggregate principal amount of the Notes then outstanding shall be binding upon all holders of Notes. SECTION 8.2 CERTAIN DEFINITION. For all purposes of this Note, the following terms shall have the respective meanings set forth below: (a) "SENIOR INDEBTEDNESS" shall mean all of the Company's indebtedness pursuant to those certain Senior Secured Convertible Debentures due 2002, dated as of April 30, 1997, in the original principal amount of $5,500,000 (the "Debentures"); PROVIDED, HOWEVER, that Senior Indebtedness shall include principal and interest under such Debentures at any time of determination only to the extent that the aggregate principal amount thereunder does not exceed 7 $5,500,000 MINUS the aggregate amount of all principal payments made by the Company, in respect thereof, PLUS accrued and unpaid interest under the Debentures; (b) "Subordinated Indebtedness" shall mean the indebtedness of the Company under the Convertible Subordinated Notes; and (c) "Standstill Period" shall mean, with respect to any Subordinated Indebtedness, the period commencing on the date on which the holder thereof shall have received written notice from the holders of Senior Indebtedness of the occurrence of a Default (as defined in the Debentures) under the Debentures and ending on the earlier of (i) 90 days after the commencement of such period, and (ii) the date on which such Default shall have been cured or waived. SECTION 8.3 PRIOR PAYMENT OF SENIOR INDEBTEDNESS IN BANKRUPTCY, ETC. In the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceedings relating to the Company or its debts or assets, and, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, if all Senior Indebtedness has not been paid in full at such time, (a) the holders of Subordinated Indebtedness shall demand, but only the holders of Senior Indebtedness may collect, payment of all Subordinated Indebtedness due from the Company, and (b) the holders of the Senior Indebtedness are hereby irrevocably authorized at any such meeting or in any such proceeding to collect any assets of the Company distributed, divided or applied by way of dividend or payment or any such securities issued on account of Subordinated Indebtedness and apply the same, or the proceeds of any realization upon the same that the holders of the Senior Indebtedness in their discretion elect to effect, to Senior Indebtedness until all Senior Indebtedness shall have been paid in full, rendering any surplus then remaining to the Holder of this Note. The holders of the Subordinated Indebtedness shall retain the right to vote and otherwise act in any such proceeding (including, without limitation, the right to vote to accept or reject any plan of partial or complete liquidation, reorganization, arrangement, composition or extension). SECTION 8.4 NO PAYMENT ON NOTES UNDER CERTAIN CONDITIONS. (a) During any Standstill Period, (i) no payment shall be made by the Company on the Subordinated Indebtedness or accepted by any holder of such Subordinated Indebtedness; and (ii) unless the holders of Senior Indebtedness shall have accelerated such Senior Indebtedness or shall have commenced an action or proceeding against the Company to enforce any of their rights in respect of the Senior Indebtedness, no action or proceeding shall be commenced by any holder of such Subordinated Indebtedness to collect payment thereof. The acceleration of any Subordinated Indebtedness by the holder thereof during any Standstill Period applicable thereto shall be deemed to be automatically rescinded upon the expiration of such Standstill Period if upon such expiration no Acceleration Event (other than failure by the Company to pay the principal amount so accelerated) exists under this Agreement. (b) Notwithstanding anything herein to the contrary, no Standstill Period shall commence within 90 days after the end of another Standstill Period nor may the provisions of this Section 8.4 or the Standstill Periods established hereby restrict or prohibit for more than 180 days in any 360-day period the Company from making or the holder thereof from accepting any payment of Subordinated Indebtedness or such holder from bringing any action or proceeding to collect any such payment. SECTION 8.5 PAYMENTS HELD IN TRUST. If, in violation of the terms of this Section 8, any holder of Subordinated Indebtedness receives payment thereof or any distribution with respect thereto before all Senior Indebtedness is paid in full, such payment or distribution shall be held in trust for and paid ratably to the holders of Senior Indebtedness or their representatives until all Senior Indebtedness shall have been paid in full. No such payments or distributions paid to the holders of Senior Indebtedness or their representatives by any holder of Subordinated Indebtedness shall be deemed to discharge any of such Subordinated Indebtedness. SECTION 8.6 SUBROGATION. Upon the payment of any Senior Indebtedness, the holders of the unpaid Subordinated Indebtedness shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. For purposes of such subrogation, no payments or distributions made to the holders of Senior Indebtedness of any cash, property or securities to which the holders of Subordinated Indebtedness would be entitled except for the subordination provisions of this Section 8 and no payment to the holders of Senior Indebtedness by the holders of Subordinated Indebtedness, as between the Company, its creditors (other than the holders of Senior Indebtedness) and the holders of Subordinated Indebtedness, shall be deemed to discharge any of the Senior Indebtedness with respect to which the holders of such Subordinated Indebtedness shall be subrogated pursuant to this Section 8.6. SECTION 8.7 SCOPE OF SUBORDINATION. The subordination provisions of this Section 8 are intended solely to define the relative rights of the holders of Subordinated Indebtedness and the holders of Senior Indebtedness. Nothing in this Section 8 or this Note shall impair, as between the Company, its creditors (other than the holders of Senior Indebtedness) and the holders of Subordinated Indebtedness, the unconditional and absolute obligation of the Company to timely pay the principal, interest, and other amounts and obligations owing under the terms of this Note or affect the relative rights of the holders of this Note and creditors of the Company (other than the holders of Senior Indebtedness), nor shall anything prevent any holder of Subordinated Indebtedness from accepting any payment with respect to such Subordinated Indebtedness or exercising all remedies otherwise permitted by application law upon default with respect to such Subordinated Indebtedness or this Note, subject to any rights under this Section 8 of the holders of Senior Indebtedness in respect of such payment. SECTION 8.8 NOTICES. The holders of Senior Indebtedness will promptly notify the holders of Subordinated Indebtedness in writing of the occurrence of any Default, and the holders of Subordinated Indebtedness will promptly notify the holders of Senior Indebtedness in writing of the occurrence of any Accelerated Event. The failure to give such notice shall not, however, deprive either the holders of Senior Indebtedness or the holders of Subordinated Indebtedness of any rights or remedies to which they are entitled hereunder. SECTION 9. EXCHANGE. This Note is exchangeable, upon the surrender hereof by the registered Holder at the principal office of the Company, for new promissory notes of like tenor and date representing in the aggregate the then outstanding principal balance hereof (together with interest theretofore accrued and unpaid), each of such new notes to evidence the portion of 9 such then outstanding principal balance (and accrued and unpaid interest, in such principal amount) as shall be designated by said registered Holder at the time of such surrender, but in no event in denominations of principal of less than $100,000. SECTION 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note, if mutilated, the Company will make and deliver a new promissory note of like tenor and date, and in the principal balance then outstanding, in lieu of this Note. SECTION 11. TITLE TO NOTE. This Note and all rights hereunder are assignable and transferable (subject to the legend set forth in the heading on the first page hereof) in whole or in part to, and the Holder may participate all or any portion of this Note to affiliates of the Holder or any entities for which the Holder or its affiliates serve as general partner and/or investment advisor or in a similar capacity, all mutual funds, or other pooled investment vehicles or entities, under the control or management of such Holder or the general partner or investment advisor thereof, or any affiliate of any of the foregoing. Any transfer or assignment shall occur at the office or agency of the Company by the registered Holder in person or by a duly authorized attorney, upon surrender of this Note together with an assignment hereof properly endorsed. Until transfer hereof on the registration books of the Company, the Company may treat the registered Holder as the owner hereof for all purposes. SECTION 12. COMMUNICATIONS AND NOTICES. All notices, demands, requests, certificates or other communications hereunder must be in writing, either delivered in hand or sent by private expedited courier for overnight delivery with signature required, or by facsimile transmission, by tested or otherwise authenticated telex or cable, in each such case, such notice, demand, request, certificate or other communications being deemed to have been given upon delivery or receipt, as the case may be, or by certified mail, postage prepaid, in which case, such notice, demand, request, certificate or other communications shall be deemed to have been given three (3) days after the date on which it is first deposited in the mails, and, if to the Company, shall be addressed to it at its principal place of business referred to in the first paragraph hereof, or at such other address as the Company may hereafter designate in writing by notice to the registered Holder, and, if so to such registered Holder, addressed to such Holder at the address of such Holder as shown on the books of the Company. SECTION 13. MISCELLANEOUS. (a) If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Sunday or a Saturday or shall be a legal holiday or a day on which banking institutions in the City of Boston, Massachusetts, are authorized or required by law to remain closed, then such action may be taken or right may be exercised on the next succeeding day which is not a Sunday, a Saturday or a legal holiday and not a day on which banking institutions in the City of Boston, Massachusetts, are authorized or required by law to remain closed. 10 (b) THIS NOTE MAY OT BE ASSIGNED BY THE COMPANY WITHOUT THE PRIOR WRITTEN CONSENT OF THE HOLDER. SUBJECT TO THE FOREGOING, THE NOTE SHALL BE BINDING UPON THE COMPANY'S SUCCESSORS IN TITLE AND ASSIGNS. THIS NOTE SHALL CONSTITUTE A CONTRACT UNDER SEAL AND, FOR ALL PURPOSES, SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO THE LAWS OF RULES OF LAW APPLICABLE TO CONFLICT OR CHOICE OF LAW). (c) The failure of the Holder to exercise any or all of its rights, remedies, powers or privileges hereunder in any instance shall not constitute a waiver thereof in that or any other instance. (d) The Company agrees promptly to pay all reasonable fees, expenses and disbursements incurred from time to time in connection with any amendment, modification, consent or waiver to or under this Note or the Warrant. (e) Should all or any part of the indebtedness represented by this Note be collected by action at law, or in bankruptcy, insolvency, receivership or other court proceedings, or should this Note be placed in the hands of attorneys for collection after default, the Company hereby promises to pay to the Holder, upon demand by the Holder at any time, in addition to the outstanding principal balance of and, accrued interest on, and all (if any) other amounts payable to or in respect of this Note, all court costs and reasonable attorneys' fees and other collection charges and expenses incurred or sustained by the Holder. IN WITNESS WHEREOF, the Company has caused this Convertible Subordinated Note to be signed in its corporate name and its corporate seal to be impressed hereon by its duly authorized officers. HYBRID NETWORKS, INC. [Seal] By: ------------------------------------- Name: Title: 11 FORM OF CONVERSION NOTICE (To be signed only on exercise of conversion rights) TO: HYBRID NETWORKS, INC. The undersigned, the registered Holder of the Convertible Subordinated Note dated September __, 1997 (the "Note"), of Hybrid Networks, Inc. (the "Company") hereby irrevocably elects to exercise its conversion rights under the provisions of Section 7 of the Note by conversion of [(i)] all of the $_______ of outstanding principal of the Note[, and [(ii)] all of the $________ of accrued and unpaid interest thereon, for ______* shares of ____ Stock of the Company, and requests that the certificates for such shares be issued in the name of, and delivered to, __________ _________, whose address is ____________ _____________. Dated: --------------------------- ----------------------------------------- (Signature must conform in all respects to name of registered holder as specified on the face of the Note) ----------------------------------------- (Address) Signed in the presence of: - ---------------------------------- *Insert here the number of shares as to which all of the outstanding principal of, and if it is to be converted, accrued and unpaid interest on, the Note is being converted. FORM OF ASSIGNMENT (To be signed only on transfer of Note) For value received, the undersigned hereby sells, assigns, and transfers unto ______ all right, title and interest in and to the within Convertible Subordinated Note, dated September ___, 1997, of Hybrid Networks, Inc., and appoints ________ Attorney to transfer such right on the books of said Company with full power of substitution in the premises. Dated: --------------------------- ----------------------------------------- (Signature must conform in all respects to name of registered holder as specified on the face of the Note) ----------------------------------------- (Address) Signed in the presence of: - ---------------------------------- EXHIBIT B NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR OTHER TRANSFER HAS BEEN REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. No. ___________________ Dated: September __, 1997 HYBRID NETWORKS, INC. COMMON STOCK PURCHASE WARRANT THIS IS TO CERTIFY THAT, for value received, ________________________ (the "NAMED HOLDER") and its registered successors and permitted assigns are entitled, subject to the terms and conditions set forth below, to purchase from HYBRID NETWORKS, INC., a Delaware corporation (the "CORPORATION"), at any time and from time to time after 9:00 A.M., Cupertino, California time, on the Initial Exercise Date (as defined in Section 1 below) and prior to 5:00 P.M., Cupertino, California time, on the Expiration Date (as defined in Section 1 below), any or all of the Warrant Shares (as defined in Section 1 below), at a purchase price per share equal to the Exercise Price (as defined in Section 1 below). The number and character of the Warrant Shares and the Exercise Price are subject to adjustment as provided herein. This Common Stock Purchase Warrant (this "WARRANT") is being issued in connection with (a) the Subordinated Note Purchase Agreement dated as of September 18, 1997 (the "PURCHASE AGREEMENT") by and among the Corporation, the Named Holder and the other persons (the "INVESTORS") that are purchasing Convertible Subordinated Notes pursuant to the Purchase Agreement and (b) the Convertible Subordinated Notes, dated as of the date hereof, made by the Corporation pursuant to the Purchase Agreement in favor of the Named Holder and the other Investors (the "CONVERTIBLE SUBORDINATED NOTES"). A copy of the Convertible Subordinated Notes are on file at the principal office of the Corporation. SECTION 1. DEFINITIONS. As used in this Warrant, the following terms shall have the respective meanings set forth below or elsewhere in this Warrant as referred to below: "ADDITIONAL STOCK" shall have the meaning set forth in Section 4.3(f). "COMMON STOCK" shall mean shares of the Common Stock of the Corporation, $.001 par value per share (as such par value may be amended from time to time). "CONVERSION FRACTION" shall have the meaning set forth in Section 2.3. "CONVERTIBLE SUBORDINATED NOTES" shall have the meaning set forth in the second paragraph of this Warrant. "CORPORATION" shall have the meaning set forth in the first paragraph of this Warrant. "DECREASED NUMBER" shall have the meaning set forth in Section 2.1 hereof. "DERIVATIVE SECURITY" shall have the meaning set forth in Section 4.3(e). "EFFECTIVE PRICE" shall have the meaning set forth in Section 4.3(a). "EXERCISE DATE" shall have the meaning set forth in Section 2.4 hereof. "EXERCISE PRICE" shall mean, as of the Initial Exercise Date and at any time thereafter, the Initial Exercise Price, as adjusted from time to time pursuant to the terms of this Warrant. "EXPIRATION DATE" shall mean September __, 2002. "FAIR MARKET VALUE" of a Warrant Share shall mean (i) in the case of the exercise of this Warrant, in whole or in part, after the consummation of an Initial Public Offering, the average of the last reported sale price per share of Stock on the Nasdaq-NMS or any national securities exchange in which such Stock is quoted or listed, as the case may be, for the three trading days immediately preceding the Exercise Date, or (ii) in the case of the exercise of this Warrant, in whole or in part, before the consummation of an Initial Public Offering, the fair market value of a share of Stock, as determined in good faith by the Board of Directors of the Corporation. "HOLDER" shall mean, as applicable, (i) the Named Holder, (ii) any successor of the Named Holder or (iii) any Person to whom this Warrant or any portion thereof shall have been transferred in accordance with the provisions of Section 9 hereof. "INITIAL EXERCISE DATE" shall mean the earlier to occur of (i) 180 days after the Issue Date, and (ii) the date of consummation of an Initial Public Offering; PROVIDED, HOWEVER, that, in the event of any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all of the Corporation's assets, or the merger, consolidation, reorganization or dissolution of the Corporation, or the sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting capital stock (whether newly issued or from treasury, or previously issued and then outstanding, or any combination thereof) (any of such events, a "DISPOSAL EVENT") occurring at any time prior to the earlier of (A) 180 days after the Issue Date or (B) the date of consummation of an Initial Public Offering, then the Initial Exercise Date shall be deemed to be the date that is five business days prior to the earliest to occur of any such Disposal Event. "INITIAL EXERCISE PRICE" shall mean $4.04 per share (subject to appropriate adjustment as provided in this Warrant); PROVIDED, HOWEVER, that, in the event that all of the following occur: (i) the Convertible Subordinated Notes are not paid in full by March 30, 1998 and (ii) the Corporation fails to pay interest at the rate of 18% per annum at any time that such interest is due and payable, then the Exercise Price shall automatically and without further action on the part of the Holder be reduced to $.01 per share (subject to appropriate adjustment in this Warrant, but in no event less than the par value of capital stock constituting the Warrant Shares) but the number 2 of Warrant Shares shall not be increased; PROVIDED FURTHER that in the event that the number of shares of Common Stock outstanding on a fully diluted basis as of the date hereof, and as of the date of closing (the "ACTUAL FULLY DILUTED SHARES"), is more than the number of shares of Common Stock on a fully diluted basis set forth in Section 3.4 of the Purchase Agreement and Section 3.4 of the Letter of Exceptions (the "REPRESENTED FULLY DILUTED SHARES") by an amount in excess of 25,000 shares of Common Stock, then (i) the Exercise price shall be reduced by a fraction, the numerator of which shall be equal to the excess of the Actual Fully Diluted Shares over the Represented Fully Diluted Shares and the denominator of which shall be the Actual Fully Diluted Shares (the "CAPITALIZATION RATIO") and (ii) the number of Warrant Shares shall be increased by the Capitalization Ratio. "INITIAL PUBLIC OFFERING" shall mean the closing of an underwritten public offering pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Securities Act covering the offer and sale of shares of Common Stock or any other class of capital stock of the Corporation. "INVESTOR RIGHTS AGREEMENT" shall mean that certain Hybrid Networks, Inc. Amended and Restated Investor Rights Agreement, dated as of the date of the Purchase Agreement, by and among the Corporation and the parties listed on the Schedules thereto, including the Named Holder. "ISSUE DATE" shall mean September __, 1997. "NAMED HOLDER" shall have the meaning set forth in the first paragraph hereof. "NOTES" shall mean the Convertible Subordinated Notes and any promissory notes of like tenor issued by the Corporation in exchange or replacement therefor, upon assignment or transfer thereof or otherwise pursuant to the terms of the Convertible Subordinated Notes. "MAXIMUM NUMBER" shall have the meaning set forth in Section 2.1 hereof. "PERSON" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "PURCHASE AGREEMENT" shall have the meaning set forth in the second paragraph of this Warrant. "REGISTRABLE SECURITIES" shall have the meaning ascribed to it in the Investor Rights Agreement. "RIGHT OF CO-SALE AGREEMENT" shall mean the Right of Co-Sale Agreement, dated as of the date of the Purchase Agreement, by and among the Corporation, the Investors and others. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "STOCK" shall mean (i) Common Stock, and/or (ii) to the extent that the Holder is entitled to receive, or receives, upon exercise of this Warrant any other capital stock of the Corporation 3 (other than Common Stock), or of any other Person or any other securities of the Corporation or of any other Person, in lieu of or in addition to Common Stock (whether as a result of any reclassification of Common Stock or any other Stock or reorganization, reclassification, merger, consolidation or sale of substantially all the assets of the Corporation or otherwise), such other capital stock or securities. "SUBJECT SHARES" shall have the meaning set forth in Section 2.3. "WARRANT" shall have the meaning set forth in the second paragraph of this Warrant. "WARRANT SHARES" shall mean the shares of Common Stock, as adjusted as provided in this Warrant, that are issuable upon the exercise of this Warrant. SECTION 2. EXERCISE OF WARRANT. SECTION 2.1 NUMBER OF WARRANT SHARES ISSUABLE UPON EXERCISE. Subject to adjustment as provided herein, the maximum number of Warrant Shares issuable upon exercise of this Warrant shall be ________________ [247,525 WARRANT SHARES WITH RESPECT TO EACH $1,000,000 IN PRINCIPAL AMOUNT OF CONVERTIBLE SUBORDINATED NOTE PURCHASED BY THE NAMED HOLDER PURSUANT TO THE PURCHASE AGREEMENT] (the "MAXIMUM NUMBER"); PROVIDED, HOWEVER, that in the event that the Notes are paid in full prior to September 1, 1998, the maximum number of Warrant Shares issuable upon exercise of this Warrant shall be decreased by 10% of the Maximum Number (rounding to the nearest whole Warrant Share any fractional share that would otherwise result from the decrease) in respect of each month prior to September 1998 during which the Notes no longer remain outstanding (the number of Warrant Shares resulting from any such decrease is referred to as the "DECREASED NUMBER") (so that, if the Notes are paid in full during August 1998, the Decreased Number would be equal to 90% of the Maximum Number; if the Notes are paid in full during March 1998, the Decreased Number would be equal to 40% of the Maximum Number); PROVIDED FURTHER, that in no event will the adjustment set forth above cause the Decreased Number to be less than _____________________ [99,009 WARRANT SHARES WITH RESPECT TO EACH $1,000,000 IN PRINCIPAL AMOUNT OF CONVERTIBLE SUBORDINATED NOTE PURCHASED BY THE NAMED HOLDER PURSUANT TO THE PURCHASE AGREEMENT]. The maximum number of Warrant Shares issuable upon exercise of this Warrant during any month prior to September 1, 1998 shall be equal to the Decreased Number that would result if the Notes were paid in full during that month; PROVIDED, HOWEVER, that, upon exercise of this Warrant during any month prior to September 1998, the Corporation shall issue to the Named Holder a new Warrant (the "REMAINDER WARRANT") of like tenor exercisable for a number of Warrant Shares equal to the difference between the Maximum Number and the number of Warrant Shares issued pursuant to the foregoing sentence. The Remainder Warrant shall become exercisable with respect to a number of Warrant Shares equal to 10% of the Maximum Number upon the first day of each successive calendar month after the date of exercise of this Warrant and prior to September 1, 1998 during which the Notes, or any portion of the Notes, remain outstanding. SECTION 2.2 METHOD OF EXERCISE. Subject to and upon all of the terms and conditions set forth in this Warrant, the Holder may exercise this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is then currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by presentation and surrender of this Warrant to the Corporation at its principal 4 office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4), together with (a) a properly completed and duly executed subscription form, in the form attached hereto, which subscription form shall specify the number of Warrant Shares for which this Warrant is then being exercised, and (b) payment of the aggregate Exercise Price payable hereunder in respect of the number of Warrant Shares for which this Warrant is then being exercised. Payment of such aggregate Exercise Price shall be made either (i) in cash or by money order, certified or bank cashier's check or wire transfer (in each case in lawful currency of the United States of America), (ii) in the event the Holder is also the holder of a Note and such outstanding principal amount of, and/or accrued but unpaid interest on, such Note is equal to or greater than the Exercise Price, by decreasing the outstanding principal amount of, and/or accrued but unpaid interest on, such Note by the amount of the Exercise Price, or (iii) by conversion of this Warrant as provided in Section 2.3. SECTION 2.3 CONVERSION OF WARRANT. (a) The Holder shall have the right to convert this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by the presentation and surrender of this Warrant to the Corporation at its principal office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4, together with a properly completed and duly executed conversion form, in the form attached hereto, which conversion form shall specify the number of Warrant Shares as to which this Warrant is being converted (the "SUBJECT SHARES"). Upon exercise of this conversion right, the holder hereof shall be entitled to receive that number of Warrant Shares equal to the quotient obtained by dividing [ (A - B) (X) ] by (A), where: A = the Fair Market Value of one Warrant Share on the date of conversion of this Warrant. B = the Exercise Price for one Warrant Share under this Warrant. X = the number of Subject Shares as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. (b) Upon conversion of this Warrant in accordance with this Section 2.3, the Holder shall be entitled to receive a certificate for the number of Warrant Shares acquired by the Holder as determined in accordance with the foregoing, and a new Warrant in substantially identical form and dated as of such conversion for the purchase of that number of Warrant Shares equal to the difference, if any, between (i) the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion and (ii) the number of Subject Shares as to which the Holder exercised its conversion right pursuant to this Section 2.3. No fractional shares may be issued upon any conversion of this Warrant. If any conversion would result in a fractional share (the "CONVERSION FRACTION"), then, at Holder's election either (A) the number of shares issued upon the conversion will be rounded down to the last whole share; or (B) the Holder will pay in cash an amount equal to the Exercise Price times a fraction equal to 1 less the Conversion Fraction, in which event the number of shares issued upon the conversion 5 (plus the cash payment) will be rounded up to the nearest whole share. For example, if the Fair Market Value is $10.00 and the Exercise Price is $4.04, then, upon exercise of the conversion right under this Section 2.3 with respect to 100 Subject Shares, the Holder would receive, at the Holder's election, either (1) 59 Warrant Shares without making any cash payment or (2) 60 Warrant Shares if the Holder elected to pay $2.42 in cash (60% of the Exercise Price for the extra share) and would receive a new Warrant for the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion less 100. SECTION 2.4 EFFECTIVENESS OF EXERCISE; OWNERSHIP. Each exercise of this Warrant by the Holder shall be deemed to have been effected immediately prior to the close of business on the date upon which all of the requirements of Sections 2.1 and 2.2 hereof with respect to such exercise shall have been complied within in full (each such date, an "EXERCISE DATE"). On the applicable Exercise Date with respect to any exercise of this Warrant by the Holder, the Corporation shall be deemed to have issued to the Holder, and the Holder shall be deemed to have become the holder of record and legal owner of, the number of Warrant Shares being purchased upon such exercise of this Warrant, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such number of Warrant Shares being purchased shall not then be actually delivered to the Holder. SECTION 2.5 DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this Warrant, and in any event within ten days thereafter, the Corporation, at its expense, will cause to be issued in the name of and delivered to the Holder, or as the Holder may direct (subject in all cases, to the provisions of Section 9 hereof), a certificate of certificates for the number of Warrant Shares purchased by the Holder on such exercise. SECTION 2.6 SHARES TO BE FULLY PAID AND NONASSESSABLE. All Warrant Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, free of all liens, taxes, charges and other encumbrances or restrictions on sale (other than those set forth herein), and free and clear of all preemptive rights. SECTION 2.7 FRACTIONAL SHARES. This Warrant may be exercised only for whole Warrant Shares. No fractional Warrant Shares or scrip representing fractional Warrant Shares shall be issued upon the exercise of this Warrant. SECTION 2.8 ISSUANCE OF NEW WARRANTS; CORPORATION ACKNOWLEDGMENT. Upon any partial exercise of this Warrant, the Corporation, at its expense, will forthwith issue and deliver to the Holder a new warrant or warrants of like tenor, registered in the name of the Holder, exercisable, in the aggregate and subject to the limitations provided for in this Warrant, for the then balance of the Warrant Shares with respect to which this Warrant has not been exercised. Moreover, the Corporation shall, at the time of any exercise of this Warrant, upon the request of the Holder, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; PROVIDED, HOWEVER, that if the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Corporation to afford to the Holder any such rights. SECTION 2.9 PAYMENT OF TAXES. The Corporation shall pay any transfer tax which may be payable in respect of any issuance of certificates (if applicable) representing any Warrant 6 Shares purchased upon exercise or conversion of this Warrant. The Corporation shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Warrant Shares, or any new or replacement shares in any name other than that of the Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate security or Warrant until such tax or other charge has been paid, or it has been established to the Company's satisfaction that no tax or other charge is due. SECTION 2.10 EXPIRATION. This Warrant and the Holder's rights hereunder, to the extent not previously exercised or converted, shall expire as of 5:00 P.M., California time, on the Expiration Date. SECTION 3. REGISTRATION AND OTHER RIGHTS. The Holder of this Warrant shall have the benefit of all rights available to the parties to the Investor Rights Agreement, including, without limitation, the right to cause the Corporation to register any and all Warrant Shares under the Securities Act and under any blue sky or securities laws of any jurisdiction within the United States, at the time and in the manner specified in the Investor Rights Agreement, and any and all Warrant Shares shall be deemed to be Registrable Securities for all purposes of and as provided in the Investor Rights Agreement and shall further have the benefit of all rights available under the Co-Sale Agreement. SECTION 4. ADJUSTMENTS. The number and character of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time receivable or issuable upon exercise or conversion of this Warrant) and the Exercise Price therefor, are subject to adjustment upon occurrence of the following events: SECTION 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, RECAPITALIZATIONS, ETC. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time issuable upon exercise of this Warrant) shall each be proportionally adjusted to reflect any stock dividends stock splits, reverse stock splits, combinations of shares, reclassifications, recapitalizations or other similar events altering the number of outstanding shares of Warrant Stock (or such other Stock or other assets). SECTION 4.2 ADJUSTMENT FOR CAPITAL REORGANIZATION, CONSOLIDATION, MERGER, SALE OR CONVERSION. If any reorganization of the capital stock of the Corporation, or any consolidation or merger of the Corporation with or into another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock will be entitled to receive stock, securities or assets with respect to or in exchange for their Common Stock, then, in each such case, the Holder, upon the exercise or conversion of this Warrant, at any time after the consummation of such capital reorganization, consolidation, merger or sale, shall receive, in lieu of the stock or other securities and property receivable upon the exercise or conversion, as applicable, of this Warrant prior to such consummation, the Stock or other assets to which the Holder would have been entitled upon such consummation if the Holder had exercised or converted, as applicable, this Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 4; and in each such case, the terms of this Warrant shall be applicable to the shares of Stock or other assets receivable upon the exercise or conversion, as applicable, of this Warrant after such consummation. 7 SECTION 4.3 ADJUSTMENT FOR ISSUANCE FOR ADDITIONAL STOCK. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall be further subject to adjustment from time to time as follows: (a) Upon each issuance by the Corporation of any Additional Stock (as defined below), after the Issue Date and before the consummation by the Company of an Initial Public Offering, for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such Additional Stock (except as provided in Section 4.1 above), (i) the Exercise Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 4.3) be adjusted to the Effective Price (as defined below) at which the Additional Stock is issued, and (ii) the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall forthwith be adjusted by dividing the number of Warrant Shares into which this Warrant is exercisable immediately before the adjustment provided for herein by a fraction the numerator of which shall be the Effective Price and the denominator of which shall be the Exercise Price immediately before the adjustment provided for herein. The "EFFECTIVE PRICE" for any issuance of Additional Stock shall mean the lesser of $4.04 or the quotient determined by dividing the total number of shares of Additional Stock issued (or deemed issued pursuant to Section 4.3(e)) by the Corporation in such issuance into the aggregate amount of consideration received by the Corporation therefor, as provided in this Section 4.3. (b) No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Section 4.3(e)(3) and 4.3(e)(4) below, no adjustment of the Exercise Price pursuant to this Section 4.3(a) shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment. (c) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (d) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (e) In the case of the issuance (whether before, on or after the Issue Date) of options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4.3. (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution 8 adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock converted thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities (assuming the satisfaction of any conditions to convertibility or exchangeability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Section 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or change of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided that no such recomputation shall have the effect of increasing or decreasing the Exercise Price to an amount other than the amount that would have existed on the recomputation date had the unexercised options or rights never been issued. (5) In determining the amount of consideration received by the Corporation for or upon the issuance of any Additional Stock or other securities for the purposes of this Section 4.3, the value of any options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible onto or exchangeable for Common Stock or 9 options to purchase or rights to subscribe for such convertible or exchangeable securities (each a "DERIVATIVE SECURITY") issued by the Corporation shall be deemed to be zero (so that the issuance itself of any such Derivative Security shall not be deemed to increase or decrease the consideration otherwise received by the Corporation under this Section 4.3, inasmuch as the rights under such Derivative Security shall be deemed to have been exercised immediately upon the issuance of such Derivative Security (as contemplated by Sections 4.3(e)(1) and 4.3(e)(2)). (f) "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been pursuant to Section 4.3(e)) by the Corporation after the Issue Date other than (1) Common Stock issued pursuant to a transaction described in Section 4.1 or 4.2 hereof: (2) An aggregate of up to 250,000 shares of, and/or options or rights to acquire shares of, Common Stock, issuable or issued to employees of the Corporation pursuant to an existing stock option plan or restricted stock plan of the Corporation; as provided in Section 4.3(e), the term "Additional Stock" shall not include any shares of capital stock that are issued upon the exercise of any options, warrants or rights excluded from the definition of Additional Stock pursuant to this Section (2); (3) shares of Common Stock issued or issuable (i) upon exercise or conversion of this Warrant, any securities issued pursuant to the Purchase Agreement or any options, warrants, convertible securities or other securities of the Corporation outstanding as of the Issue Date or (ii) upon conversion of shares of any series of Preferred Stock authorized as of the Issue Date. (g) No fractional shares shall be issued upon conversion of this Warrant or any portion thereof, and the number of Warrant Shares issuable as a result of any adjustment provided for in this Section 4.3 shall be rounded to the nearest whole share. SECTION 5. OFFICER'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the number and kind of Warrant Shares (or other Stock or assets), issuable hereunder from time to time, or in the Exercise Price, the Corporation, at its expense, will promptly cause an officer of the Corporation to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing the facts upon which such adjustment or readjustment is based. The Corporation will forthwith send a copy of each such certificate to the Holder in accordance with Section 10.4 below. SECTION 6. NOTICES OF RECORD DATE, ETC. In the event of (a) any taking by the Corporation of a record of the holders of Stock for the purpose of determining the holders thereof who are entitled to receive any shares of Stock as a dividend or other distribution or pursuant to a stock split, or 10 (b) any reorganization or the Corporation, or any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all the assets of the Corporation to, or the consolidation or merger of the Corporation with or into, any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, or (d) any sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting stock (whether newly issued, or from treasury, previously issued and then outstanding, or any combination thereof), then and in each such event the Corporation will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or stock split, and stating the amount and character of such dividend, distribution or stock split, or (ii) the date on which any such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of any one or more classes of Stock shall be entitled to exchange their shares of Stock for securities or other property deliverable on such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up or (iii) the date on which any such sale of a majority of the Corporation's voting stock is to take place and the material terms thereof, as the case may be. Such notice shall be mailed at least 15 days prior to the date specified in such notice on which any such action is to be taken. SECTION 7. EXCHANGE OF WARRANT. Subject to the provisions of Section 9 hereof (if and to the extent applicable), this Warrant shall be exchangeable, upon the surrender hereof by the Holder at the principal office of the Corporation, for new warrants of like tenor, each registered in the name of the Holder or in the name of such other Persons as they may direct, subject to Sections 9 and 10.5 (upon payment by the Holder of any applicable transfer taxes). Each of such new warrants shall be exercisable for such number of Warrant Shares as the Holder shall direct, PROVIDED that all of such new warrants shall represent, in the aggregate, the right to purchase the same number of Warrant Shares and cash, securities or other property, if any, which may be purchased by the Holder upon exercise of this Warrant at the time of its surrender. SECTION 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new warrant of like tenor. SECTION 9. TRANSFER PROVISIONS, ETC. By accepting this Warrant, Holder makes the representations set forth in 9.1, 9.2, 9.3 and 9.4 below and agrees to the restrictions set forth in 9.5, 9.6, 9.7 and 9.8 below, and, by exercising or converting this Warrant in whole or in part, the Holder agrees that Holder will then represent and will be deemed to represent that such representations are true and complete as of the date of such exercise or conversion. 11 SECTION 9.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is, and any Warrant Shares received by the Holder upon exercise or conversion of this Warrant will be, acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Holder has no present intention of selling, granting any participation in, or otherwise distributing any such securities. The Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of such securities. SECTION 9.2 INVESTMENT EXPERIENCE. The Holder is an investor in securities of companies in the development stage and acknowledges that the Holder is able to fend for itself, can bear the economic risk of the Holder's investment and has such knowledge and experience in financial or business matters that the Holder is capable of evaluating the merits and risks of the investment in this Warrant and the Warrant Shares. SECTION 9.3 ACCREDITED INVESTOR. The Holder is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. SECTION 9.4 RESTRICTED SECURITIES. The Holder understands that this Warrant and the Warrant Shares are characterized as restricted securities under the federal securities laws and applicable state securities laws inasmuch as such securities are being (or will be) acquired from the Corporation in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act, only in certain limited circumstances. SECTION 9.5 TRANSFER RESTRICTIONS. Without in any way limiting the representations set forth above, the Holder agrees not to make any transfer of all or any portion of this Warrant or the Warrant Shares unless and until (a) such transfer is registered under the Securities Act and all applicable state securities laws, or (ii) Holder shall have notified the Corporation of the proposed transfer and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed transfer, and, if the Corporation requests, Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such transfer will not require registration of such shares under the Securities Act and applicable state securities laws. SECTION 9.6 LEGENDS. (a) Each certificate representing any Warrant Shares issued upon exercise of this Warrant shall bear the legend set forth below, or a legend substantially equivalent thereto: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR DISPOSED OF UNLESS THEY ARE SO REGISTERED OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF COUNSEL AND AS TO THE FORM AND SUBSTANCE OF SUCH OPINION, AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." 12 (b) Each certificate representing any shares of Stock issued from time to time upon exercise of this Warrant shall also bear any legend required under any applicable state securities or blue sky laws. (c) The Corporation may issue appropriate "stop transfer" instructions and may take such other steps as it may deem appropriate to cause the restrictions referred to in this Section 9 to be complied with. SECTION 9.7 SURVIVAL. The obligations of the Holder (and/or of any transferee of this Warrant or any Warrant Shares issued from time to time upon exercise of this Warrant) under this Section 9 shall, with respect to any Warrant Shares issued from time to time upon exercise of this Warrant, survive the exercise, expiration or other termination, or transfer, of this Warrant indefinitely. SECTION 9.8 MECHANICS OF TRANSFER. Subject to the terms and conditions of this Warrant and subject to compliance with all applicable securities laws, any transfer of all or any portion of this Warrant, or of any interest therein, that is otherwise in compliance with applicable law shall be effected by surrendering this Warrant to the Corporation at its principal office, together with (i) a duly executed form of assignment, in the form attached hereto, (ii) payment of all applicable transfer taxes, if any. In the event of any such transfer of this Warrant, in whole, the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of this Warrant at the time of its transfer. In the event of any such transfer of any portion of this Warrant, (i) the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of the transferred portion of this Warrant at the time of such transfer, and (ii) the Corporation shall issue a new warrant of like tenor to the Holder, representing the right to purchase the number of Warrant Shares, and cash, securities or other property, if any, purchasable by the Holder upon exercise of the portion of this Warrant not transferred to such transferee. Until this Warrant or any portion thereof is transferred on the books of the Corporation, the Corporation may treat the Holder as the absolute holder of this Warrant and all right, title and interest therein for all purposes, notwithstanding any notice to the contrary. Notwithstanding the foregoing, neither this Warrant nor any rights hereunder may be transferred unless such transfer complies with all applicable securities laws and the provisions of this Section 9. SECTION 10. GENERAL. SECTION 10.1 AUTHORIZED SHARES; RESERVATION OF SHARES FOR ISSUANCE. At all times while this Warrant is outstanding, the Corporation shall maintain its corporate authority to issue, and shall have authorized and reserved for issuance upon exercise of this Warrant, such number of shares of Common Stock as shall be sufficient to perform its obligations under this Warrant (after giving effect to any and all adjustments to the number and kind of Warrant Shares purchasable upon exercise of this Warrant). SECTION 10.2 NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, 13 merger, dissolution, issuance or sale of securities, sale or other transfer of any of its assets or properties, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder hereunder against impairment. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Stock receivable upon the exercise of this Warrant above the amount payable therefor on such exercise, and (b) will take all action that may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Stock on the exercise of this Warrant. SECTION 10.3 NO RIGHTS AS STOCKHOLDER. The Holder shall not be entitled to vote or to receive dividends or to be deemed the holder of Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Holder any of the rights of a stockholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings (except to the extent otherwise provided in this Warrant), or to receive dividends or subscription rights, until the Holder shall have exercised the Warrant and been issued Warrant Shares in accordance with the provisions hereof. SECTION 10.4 NOTICES. All notices, demands, requests, certificates or other communications under this Warrant shall be in writing and shall be either mailed by first class mail, postage prepaid, in which case such notice, demand, request, certificate or other communication shall be deemed to have been given three business days after the date on which it is first deposited in the mails, or hand delivered or sent by facsimile transmission, by tested or otherwise authenticated telex or cable or by private expedited courier for overnight delivery with signature required, in each such case, such notice, demand, request, certificate or other communication being deemed to have been given upon delivery or receipt, as the case may be: (i) if to the Corporation, at 10161 Bubb Road, Cupertino, California 95014 Attention: Chief Financial Officer, or at such other address as the Corporation may have furnished in writing to the Holder; and (ii) if to the Holder, at the Holder's address appearing in the books maintained by the Corporation. SECTION 10.5 ASSIGNMENT. Notwithstanding anything contained herein to the contrary, this Warrant and all rights hereunder are assignable or transferable (subject to the legend set forth in the heading on the first page hereof), in whole or in part, by the Named Holder to affiliates of the Named Holder or any entities for which the Named Holder or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds, or other pooled investment vehicles or entities, under the control or management of such Named Holder or the general partner or investment advisor thereof, or any affiliates of any of the foregoing. 14 SECTION 10.6 AMENDMENT AND WAIVER. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Corporation and the Holder. SECTION 10.7 GOVERNING LAW. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of California. SECTION 10.8 COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Corporation shall bind its successors and assigns, whether so expressed or not. SECTION 10.9 SEVERABILITY. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.10 CONSTRUCTION. The definitions of this Warrant shall apply equally to both the singular and the plural forms of the terms defined. Wherever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The section and paragraph headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. SECTION 10.11 REMEDIES. The Holder and the Corporation, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will each be entitled to specific performance of its rights under this Warrant. The Holder and the Corporation each agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Warrant or where any provision hereof is invalidly asserted as a defense, the successful party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [rest of page intentionally left blank] 15 IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed in its corporate name by one of its officers thereunto duly authorized, all as of the day and year first above written. HYBRID NETWORKS, INC. By: --------------------------- Carl S. Ledbetter Chief Executive Officer 16 FORM OF SUBSCRIPTION (To be executed upon exercise of Warrant) To: HYBRID NETWORKS, INC. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to exercise thereunder, ________ shares of Common Stock, $.001 par value per share ("COMMON STOCK"), of Hybrid Networks, Inc., a Delaware corporation, and tenders herewith payment of $________, representing the aggregate purchase price for such shares based on the price per share provided for in such Warrant. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. Please issue a certificate or certificates for such shares of Common Stock in the following name or names and denominations and deliver such certificate or certificates to the person or persons listed below at their respective addresses set forth below: If said number of shares of Common Stock shall not be all the shares of Common Stock issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares of Common Stock less any fraction of a share of Common Stock paid in cash. Dated: , 19 ------------ -- ---------------------------------------- (Name of Holder) By: ------------------------------------ Its: ----------------------------------- Address: ------------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. NOTICE OF CONVERSION To: Hybrid Networks, Inc. (1) The undersigned hereby elects to convert that portion of the attached Warrant representing the right to purchase __________ shares of Common Stock of Hybrid Networks, Inc. into such number of shares of Common Stock of Hybrid Networks, Inc. as is determined pursuant to Section 2.3 of such Warrant, which conversion shall be effected pursuant to the terms of such Warrant. (2) The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, except in compliance with applicable federal and state securities laws. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. (3) The undersigned accepts such shares subject to the terms relating to registration rights under the Amended and Restated Investor Rights Agreement dated as of September 1997. - --------------------------------- (Date) ---------------------------------------- (Name of Holder) By: ------------------------------------ Its: ----------------------------------- Address: ------------------------------- ---------------------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. FORM OF ASSIGNMENT For value received, ____________________________ hereby sells, assigns and transfers unto _____________________________ (the "TRANSFEREE") the attached Warrant [__% of the attached Warrant], together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney to transfer said Warrant [said percentage of said Warrant] on the books of Hybrid Networks, Inc., a Delaware corporation, with full power of substitution in the premises. The Transferee, by signing below, hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the Transferee as of the date hereof, and that the Transferee agrees to be bound by the restrictions of Section 9 of the Warrant. If not all of the attached Warrant is to be so transferred, a new Warrant is to be issued in the name of the undersigned for the balance of said Warrant. Dated: , 19 --------------- -- ---------------------------------------- (Name of Holder) By: ------------------------------------ Its: ----------------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. AGREED TO AND ACCEPTED - ------------------------------------- Name of Transferee By: ---------------------------------- Its: --------------------------------- Address: ----------------------------- - ------------------------------------- EXHIBIT C HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SEPTEMBER 18, 1997 TABLE OF CONTENTS Page ---- 1. Registration Rights...................................................2 1.1 Definitions......................................................2 1.2 Company Registration.............................................3 1.3 Obligations of the Company.......................................4 1.4 Furnish Information..............................................5 1.5 Expenses of Company Registration.................................5 1.6 Underwriting Requirements........................................5 1.7 Delay of Registration............................................6 1.8 Indemnification..................................................6 1.9 Reports Under Securities Exchange Act of 1934....................8 1.10 Form S-3 Registration............................................8 1.11 Assignment of Registration Rights...............................11 1.12 "Market Stand-Off" Agreement....................................12 1.13 Termination of Registration Rights..............................12 2. Covenants of the Company.............................................12 2.1 Delivery of Financial Statements................................12 2.2 Termination and Assignment of Information Covenants.............13 2.3 Right of First Offer............................................13 3. Miscellaneous........................................................16 3.1 Successors and Assigns..........................................16 3.2 Governing Law...................................................16 3.3 Counterparts....................................................16 3.4 Titles and Subtitles............................................16 3.5 Notices.........................................................16 3.6 Expenses........................................................16 3.7 Amendments and Waivers..........................................17 3.8 Severability....................................................17 3.9 Aggregation of Stock............................................17 3.10 Entire Agreement; Amendment; Waiver.............................17 EXHIBIT C AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is entered into as of September18, 1997 by and among Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"), the investors listed on Schedule A hereto (each of which is herein referred to as a "SERIES A INVESTOR"), the investors listed on Schedule B hereto (each of which is herein referred to as a "SERIES B INVESTOR"), General Instrument Corporation of Delaware, a Delaware corporation (the "SERIES C INVESTOR"), the investors listed on Schedule C hereto (each of which is herein referred to as a "SERIES D INVESTOR"), Intel Corporation ("INTEL"), Howard L. Strachman ("STRACHMAN"), Eduardo J. Moura (Mr. Moura and Strachman are referred to collectively as the "FOUNDERS"), the current holders of the Company's Series G Preferred Stock (each of which is herein referred to as a "SERIES G INVESTOR"), Alex. Brown & Sons Incorporated (the "AGENT"), ITOCHU Corporation ("ITOCHU"), BG Services Limited ("BG") and the investors listed in Schedule D hereto (each of which is herein referred to as a "NOTE WARRANT INVESTOR"). RECITALS WHEREAS, the Company, the Series A Investors and the Founders entered into the Investor Rights Agreement dated as of September 16, 1992 (the "AGREEMENT") whereby, among other things, the Company granted rights thereunder to the Series A Investors; WHEREAS, the Agreement was amended in October and November 1994 whereby, among other things, the Company granted rights thereunder to the Series B Investors ; WHEREAS, the Agreement was further amended as of February 28, 1995 whereby, among other things, the Company granted certain registration rights to the Series C Investor; WHEREAS, the Agreement was further amended in May and June 1995 whereby, among other things, the Company granted rights thereunder to the Series D Investors; WHEREAS, the Agreement was further amended in December 1995 whereby, among other things, the Company granted rights thereunder to Intel (concurrently therewith the Company and Intel entered into the Series E/F Preferred Stock Purchase Agreement dated in December 1995 -- the "SERIES E/F AGREEMENT"); WHEREAS, the Agreement was further amended in February 1996 whereby, among other things, the Company granted Strachman certain rights of first offer thereunder; WHEREAS, the parties to the Convertible Note and Warrant Purchase Agreement among the Company and certain Series B Investors and Series D Investors dated in June 1996 (the "CONVERTIBLE NOTE AGREEMENT") and the parties to the Agreement For Sale of COMMON STOCK among the Company, the Founders and Certain Series D Investors dated in June 1996 (the "Common Stock Agreement"), which parties constituted the holders of at least a majority of the then Registrable Securities (as defined below), acknowledged that the holders of the securities issued pursuant to the Convertible Note Agreement and the shares of Common Stock sold by Strachman pursuant to the Common Stock Agreement were entitled to certain rights under this Agreement with respect to such securities and shares; WHEREAS, the Agreement was further amended in July 1996 whereby, among other things, the Company granted rights thereunder to the Series G Investors and the Agents; WHEREAS, the Agreement was further amended in February 1997 whereby, among other things, the Company granted rights thereunder to Itochu; WHEREAS, the Agreement was further amended in April 1997 whereby, among other things, the Company granted rights to London Pacific Life & Annuity Company ("London") in connection with the Company's issuance to London of the Company's Senior Secured Convertible Debenture due 2002 (the "DEBENTURE"); London subsequently transferred to BG the Debenture and London's rights under this Agreement; WHEREAS, pursuant to a Subordinated Note Purchase Agreement (the "SUBORDINATED NOTE AGREEMENT"), the Company is issuing to the Note Warrant Investors the Company's Subordinated Promissory Notes (the "SUBORDINATED NOTES") and warrants to purchase shares of the Company's Common Stock (the "NOTE WARRANTS"); and WHEREAS, pursuant to the Agreement, the holders of a majority of the Registrable Securities (as defined below) desire to amend the Agreement further to provide for, among other things, the grant of rights thereunder to the Note Warrant Investors as required under the terms of the Subordinated Note Agreement and to restate the Agreement as amended by this amendment and to supersede all prior amendments so that the Agreement as amended is set forth in its entirety in this Amended and Restated Investor Rights Agreement, and the Note Warrant Investors desire to obtain such rights and to enter into this Amended and Restated Investor Rights Agreement. NOW, THEREFORE, THE PARTIES HEREBY AGREE that this Amended and Restated Investor Rights Agreement amends the Agreement and restates in its entirety and supersedes all previous amendments to the Agreement so that the Agreement, as amended hereby ("THIS AGREEMENT"), is set forth herein in its entirety, and further agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (1) shares of Common Stock of the Company issuable or issued upon exercise of the Note Warrants or conversion of the Subordinated Notes, the Debenture or shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred 2 Stock, Series G Preferred Stock or Series H Preferred Stock of the Company (including, without limitation, shares of Series B Preferred Stock or Series D Preferred Stock issuable or issued upon exercise of any warrants issued or extended pursuant to the Convertible Note Agreement, the shares of Series G Preferred Stock issued upon conversion of the convertible notes issued pursuant to the Convertible Note Agreement, shares of Series B Preferred Stock issuable or issued upon exercise of any warrants issued pursuant to the Series E/F Agreement and shares of Series G Preferred Stock issuable or issued upon exercise of the warrant issued to the Agent pursuant to the engagement letter between the Company and the Agent relating to the offer and sale of Series G Preferred Stock), (2) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Note Warrants, Subordinated Notes, Debenture, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock or Common Stock, excluding in all cases, however, any Registrable Securities sold, transferred or otherwise assigned by a person or entity in a transaction in which his rights under this Section 1 are not assigned and (3) shares of Common Stock issuable upon conversion or exchange of securities convertible into, or exchangeable for, Common Stock upon conversion of the Subordinated Notes; (c) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof; and (e) The term "FORM S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion of incorporation of substantial information by reference to other documents filed by the Company with the SEC. 1.2 COMPANY REGISTRATION. (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration on Form S-4 (or any successor form) or a registration on any form which does not include substantially the same information (other than information as would be required under Item 507 of Regulation S-K under the Act with respect to selling stockholders) as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, 3 subject to the provisions of Section 1.6, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. (b) Upon any sale by the Company of shares of its Common Stock to the public in a firmly underwritten public offering, the Founders (and the Series B Investors and Series D Investors, to the extent they purchased shares of Common Stock from Strachman), on the date notice is provided to each Holder pursuant to subsection 1.2(a), shall be entitled to include any of their shares of Common Stock in any registration by the Company under this Section 1.2, if such persons agree to be bound by all other provisions of this Agreement and participate in any such registration on the same basis as each Holder in accordance with all applicable provisions of this Agreement. 1.3 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to 4 state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.4 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.2 and Section 1.10 for each Holder (which right may be assigned as provided in Section 1.11), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.6 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's Common Stock, the Company shall not be required under Section 1.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be first apportioned pro rata among the selling stockholders other than the Founders according to the total amount of securities entitled to be included therein owned by each selling stockholder other than the Founders or in such other proportions as shall mutually be agreed to by such selling stockholders, and the remaining securities, if any, to be so apportioned between the Founders). As a result of the 5 immediately preceding sentence, no securities owned by a Founder shall be entitled to be included in such offering unless the total amount of securities entitled to be included therein owned by each selling stockholder other than the Founders has not been reduced to less than the amount of Registrable Securities requested by such selling stockholders to be included in such offering in accordance with Section 1.2. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder", and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will severally indemnify and hold harmless the Company, each of its directors, each of its officers who has signed 6 the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.8(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.8(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.8. (d) If the indemnification provided for in this Section 1.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the 7 indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.10 FORM S-3 REGISTRATION. (a) In case the Company shall receive from any Holder or Holders who own, in the aggregate, at least 30% of the outstanding shares of Registrable Securities, a written request or requests that the Company effect a registration on Form S-3 and any related qualification 8 or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (i) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (ii) as soon as practicable effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.10(a): (1) if Form S-3 is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.10(a); provided, however, that the Company shall not utilize this right more than once in any 12-month period; (4) if the Company has, within the 12-month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.10(a); (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (iii) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Notwithstanding anything to the contrary in this Section 1.10(a), the Series C Investor will have rights under this Section 1.10(a), and any Holder of any shares of Series C Preferred Stock or any Registrable Securities issued with respect thereto will have rights under this Section 1.10(a) with respect to such shares or Registrable Securities, only for so long as the Series A Investors and the Series B Investor have rights under this Section 1.10(a). (b) In addition to the registration rights provided for in Sections 1.1, 1.2 and 1.10(a), the Note Warrant Investors that own any Note Warrants, Subordinated Notes or shares of Common Stock of the Company that have been issued upon exercise of any Note Warrants or conversion of any Subordinated Notes (such Note Warrant Investors are referred to herein as "NOTE/WARRANT HOLDERS") shall be entitled, collectively, to one demand shelf-registration as provided in this Section 1.10(b). For the purposes of this Section 1.10(b), (1) the term "NOTE/WARRANT SHARES" refers to shares of Common Stock of the Company that have been issued, or are issuable, 9 upon exercise of any Note Warrants or conversion of any Subordinated Notes, and (2) a Note/Warrant Holder shall be deemed to own the number of Note/Warrant Shares that are issuable upon the exercise of Note Warrants owned by such Note/Warrant Holder as well as the number of Note/Warrant Shares that are currently issued and outstanding and owned by such Note/Warrant Holder. In the event that, after the first anniversary of the consummation of the initial sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm underwritten offering of its securities to the general public, the Company shall receive from Note/Warrant Holders that own, in the aggregate, a majority of the Warrant Shares a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Note/Warrant Shares owned by such Note/Warrant Holder or Note/Warrant Holders, the Company will: (i) promptly give written notice of the proposed registration, and any related qualification or compliance, to all Note/Warrant Holders; and (ii) as soon as practicable effect such registration and all qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Note/Warrant Holder's or Note Warrant Holders' Note/Warrant Shares as are specified in such request, together with all or such portion of the Note/Warrant Shares of any Note/Warrant Holder or Note/Warrant Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 1.10(b): (1) if Form S-3 is not available for such offering by the Note/Warrant Holders other than as a result of a failure of the Company to comply with the reporting requirements of Sections 13 and 15 of the 1934 Act; (2) if the Company shall furnish to the Note/Warrant Holders requesting such registration a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement until, in the good faith judgment of the Board of Directors of the Company, it would no longer be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected (but in no event for a period of more than 90 days after receipt of the request of the Note/Warrant Holder or Note Warrant Holders under this Section 1.10(b)); (3) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. If Form S-3 is not available for such offering by the Note/Warrant Holders as a result of a failure of the Company to comply with the reporting requirements of Sections 13 and 15 of the 1934 Act, the Company shall effect such registration on Form S-1. (iii) Subject to the foregoing, the Company shall file a registration statement on Form S-3 covering the Note/Warrant Shares so requested to be registered as soon as practicable after receipt of the request or requests of the Note/Warrant Holder or Note/Warrant Holders and shall use its best efforts to cause the registration statement to become effective under the Act and to keep the registration statement continuously effective under the Act and available for the offer and sale of the Note/Warrant Shares covered thereby for 180 days (or such shorter period 10 ending when all Note/Warrant Shares covered by the registration statement have been sold or are no longer entitled to registration under this Section 1.10(b)). The Company will be deemed not to have used its best efforts to keep the registration statement effective and available for such offer and sale during the requisite period if the Company voluntarily takes any action that would result in Note/Warrant/Holders of Note/Warrant Shares covered thereby not being able to offer and sell such Note/Warrant Shares thereunder during any portion of that period unless (1) such action is required by applicable law or (2) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter causes the registration to become effective under the Act and available for such offer and sale. In the event that the effectiveness or availability of the registration statement is suspended during the requisite period, the Company will be obligated to extend the period of effectiveness and availability of the registration statement for a period that is at least equal to the period during which such effectiveness or availability was suspended. (iv) Each Note/Warrant Holder that causes the Company to register any of such Note/Warrant Shares and under this Section 1.10(b) shall immediately notify the Company in writing of any sales of Note/Warrant Sales under the registration statement and, if the effectiveness of the registration statement is terminated in accordance with this Section 1.10(b), shall return to the Company's transfer agent all stock certificates that represent any unsold Note Warrant Shares so that the transfer agent may affix any appropriate securities legends thereto. (v) Notwithstanding anything to the contrary in Section 3.7, any term of this Section 1.10(b) may be amended, and the observance of any term of this Section 1.10(b) may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Note/Warrant Holders that then own a majority of all Note/Warrant Shares then owned by Note/Warrant Holders. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the Company, each Note Warrant Holder and each future holder of any Note/Warrant Shares. (vi) Any Form S-3 registration statement required pursuant to this Section 1.10(b) shall not be required to include any Registrable Securities that are freely tradable by the Holders thereof without registration under the Act (including shares as to which paragraph (k) of Rule 144 under the Act applies but not shares that are subject to applicable holding period, volume limitation or manner of sale and notice requirements of paragraphs (d), (e), (f), (g), (h) and (i) of Rule 144). 1.11 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, (i) after such assignment or transfer, holds at least 50,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (ii) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, 11 that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. For the purposes of determining the number of shares of Registrable Securities held by any Note Warrant Investor, the shares of Registrable Securities held by such Note Warrant Investor shall be aggregated with the shares of Registrable Securities held by affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 1.12 "MARKET STAND-OFF" AGREEMENT. Each signatory to the Agreement or hereto or any prior or subsequent amendment to the Agreement or hereto hereby agrees that, during the period of duration specified by the Company and an underwriter of Common Stock of the Company not to exceed 180 days following the effective date of a registration statement of the Company filed under the Act (unless otherwise required by an underwriter), such signatory shall not, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration and except to the extent otherwise consented to by the Company and such underwriter. To the extent that any officer or director of the Company has not entered into a market stand-off agreement of equivalent duration and effect with respect to any Company securities beneficially owned by such officer or director, the Company shall use best efforts to require each officer and director of the Company to enter into such an agreement. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.13 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 after 6 years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. Notwithstanding anything to the contrary in this Section 1, except as provided otherwise in Section 1.10(b)(v), no Holder shall be entitled to cause the Company to register the sale or other transfer of Restricted Securities if and so long as the intended sale or other transfer may then be effectuated by such Holder in compliance with Rule 144 under the Act without violating the holding period, volume limitations or other restrictions of Rule 144. 12 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Series A Investor, Series B Investor, Series C Investor, Series D Investor, Intel, Series G Investor, Note Warrant Investor, Itochu and BG (each, for the purposes of this Section 2.1, an "INVESTOR"): (a) as soon as practicable, but in any event within 90 days after the end of each fiscal year of the Company, an income statement and statement of cash flows for such fiscal year, a balance sheet of the Company, and a statement of stockholder's equity as of the end of such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants selected by the Company; (b) as soon as practicable, but in any event within 45 days after the end of each of the first 3 quarters of each fiscal year of the Company, an unaudited profit or loss statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter. (c) only to Investors who hold more than 350,000 shares of Registrable Securities, within 30 days of the end of each month, an unaudited income statement, a statement of cash flows and an unaudited balance sheet for and as of the end of such month, prepared internally, in reasonable detail; (d) only to Investors who hold more than 350,000 shares of Registrable Securities, as soon as practicable, but in any event 90 days after the end of each fiscal year, a budget for the then current fiscal year, prepared on a monthly basis, including balance sheets and statements of cash flows for such months; and (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company certifying that such financials fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment. For the purposes of determining the number of shares of Registrable Securities held by any Note Warrant Investor, the shares of Registrable Securities held by such Note Warrant Investor shall be aggregated with the shares of Registrable Securities held by affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 2.2 TERMINATION AND ASSIGNMENT OF INFORMATION COVENANTS. The covenants set forth in Section 2.1 shall terminate and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. The information rights set forth in Section 2.1 13 may be assigned (but only with all related obligations) by an Investor to a transferee or assignee of Registrable Securities who, (a) after such assignment or transfer, holds at least 350,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (b) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such information rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, (i) the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership and (ii) the holdings of a Note Warrant Investor shall be aggregated with the holdings of affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Series A Investor, each Series B Investor, Intel, each Series D Investor, each Series G Investor, Itochu, BG, Strachman and each Note Warrant Holder a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, the term "INVESTOR" includes each Series A Investor, each Series B Investor, Intel, each Series D Investor, each Series G Investor, Itochu, BG, Strachman and each Note/Warrant Holder, and any general or limited partners and affiliates of any Series A Investor, any Series B Investor, Intel, any Series D Investor or any Note/Warrant Holder. Each Series A Investor, each Series B Investor, Intel and each Series D Investor shall be entitled to apportion the right of first offer hereby granted to such Investor among itself and its general or limited partners and affiliates in such proportions as such Investor deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("SHARES"), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions: (a) The Company shall deliver a written notice ("NOTICE") to the Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within 20 calendar days after receipt of the Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock or the Series H Preferred Stock 14 then held, by such Investor bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities). The Company shall promptly, in writing, inform each Investor which purchases all the shares available to it ("FULLY-EXERCISING INVESTOR") of any other Investor's failure to do likewise. During the 5-day period commencing after delivery of such information to such Fully-Exercising Investor(s), each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares not subscribed for by the Investors which is equal to the proportion that the number of shares of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, Series B Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the case may be, then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon exercise of the Note Warrants or conversion of the Debenture, Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock or the Series H Preferred Stock, as the case may be, then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed Shares. The rights of first offer in this Section 2.3 shall not be applicable to the Subordinated Notes or any securities that may be issued or issuable upon conversion of any Subordinated Notes, although the issuance of any securities upon conversion of the Subordinated Notes shall not reduce the number of Shares that any Note Warrant Holder shall be entitled to purchase, as compared to any other Investor, pursuant to such rights of first offer. (c) If all Shares which Investors are entitled to obtain pursuant to subsection 2.3(b) are not elected to be obtained as provided in subsection 2.3(b) hereof, the Company may, during the 120-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree, than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 120 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith. (d) The rights of first offer in this Section 2.3 shall not be applicable: (i) to the issuance or sale of shares of the Company's Common Stock (or options therefor) to service providers for the primary purpose of soliciting or retaining their services as approved by the vote or written consent of a majority of the Board of Directors. (ii) to consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Act pursuant to a registration statement on Form S-1; (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) to securities of the Company issued pursuant to the acquisition of (A) another corporation by the Company by merger or other reorganization whereby the 15 Company owns more than 50% of the voting power of such other corporation, or (B) substantially all the assets of another corporation; (v) to the issuance of securities pursuant to transactions involving technology licensing, research and development activities, distribution or manufacture of the company's products, lease of equipment by the Company, or any transactions with corporate partners, provided that each of the foregoing transactions is primarily for non-equity financing purposes and is approved by the Company's Board of Directors; (vi) to shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, recapitalization and the like by the Company following approval by the Board of Directors; or (vii) to the issuance of up to 255,000 shares of Common Stock to service providers for services performed for the benefit of the Company, which services were performed prior to the first issuance of the Series A Preferred Stock. (e) The rights of first offer in this Section 2.3 shall terminate and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever shall first occur. (f) The rights of first offer in this Section 2.3 and/or the right to register Registrable Securities pursuant to this Agreement or to register shares of Common Stock subject to registration rights pursuant to Section 1.2(b) ("1.2(b) SHARES") may be assigned (but only with all related obligations) by any Series A Investor, any Series B Investor, Intel, any Series D Investor, Strachman, any Series G Investor, Itochu, BG or any Note/Warrant Investor to a transferee or assignee from such person of Registrable Securities or Section 1.2(b) Shares who, (i) after such assignment or transfer, holds at least 350,000 shares of Registrable Securities or Section 1.2(b) Shares (subject in each case to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), and (ii) is not a person or entity deemed by the Board of Directors of the Company in its best judgment, to be a competitor or potential competitor of the Company; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities or Section 1.2 Shares held by a transferee or assignee for the purposes of this Section 2.3(f), (i) the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities or Section 1.2 Shares by gift, will or intestate succession) shall be aggregated together and with the partnership and (ii) the holdings of a Note Warrant Investor shall be aggregated with the holdings of affiliates of the Note Warrant Investor or any entities for which the Note Warrant Investor or its affiliates serve as general 16 partner and/or investment adviser or in a similar capacity, all mutual funds or other pooled investment vehicles or entities under the common control or management of such Note Warrant Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities or Section 1.2(b) Shares). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or facsimile transmission to such party to the facsimile number for such party on the signature page hereof (or, for parties not executing this Agreement, the facsimile number of such party on the stock records of the Company) or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof (or, for parties not executing this Agreement, the address of such party on the stock records of the Company), or at such other facsimile number or address as such party may designate by ten days' advance written notice to the other parties. 3.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 17 3.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 ENTIRE AGREEMENT. This Amended and Restated Investor Rights Agreement (including the Schedules hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 18 IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor Rights Agreement as of the date first above written. COMPANY: HYBRID NETWORKS, INC. By:/s/ Carl S Ledbetter --------------------------- Carl S. Ledbetter, Chief Executive Officer Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 19 IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor Rights Agreement as of the date first above written. COMPANY: HYBRID NETWORKS, INC. By:___________________________ Carl S. Ledbetter, Chief Executive Officer Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 INTEL CORPORATION By: /s/Company Officer --------------------------- Its: VP and Treasurer -------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Facsimile Number: (408) 765-6038 20 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By:/s/ Robert P. Forlenza ---------------------- Robert P. Forlenza, Vice President Address: c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By:/s/ Robert P Forlenza --------------------- Robert P. Forlenza, Vice President Address same as immediately above RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza ----------------------- Robert P. Forlenza, Vice President Address same as immediately above RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: /s/ Robert P. Forlenza ----------------------- Robert P. Forlenza, Vice President Address same as immediately above 21 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT INVESTORS: __________________________ Catherine P. Goodrich Address: 3787 Woodside Road Woodside, CA 94062 Facsimile Number: (415) 851-0726 22 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT J.F. SHEA CO., INC., By: /s/ Edmund Shea, Jr. --------------------------------- Edmund Shea, Jr. Address: 655 Brea Canyon Road P. O. Box 489 Walnut, CA 91789-0489 Facsimile Number: (909) 869-0840 23 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT OSCCO III, L.P. By: /s/ Stephen E. Halprin ----------------------------------- Stephen E. Halprin Address: One First Street, #15 Los Altos, CA 94022 Facsimile Number: (415) 917-0801 24 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Gary M. Lauder ------------------------------------- (Executing this Agreement as a Series B Investor) Address: 88 Mercedes Lane Atherton, CA 94027 Facsimile Number: (415) 323-2171 25 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT AT&T VENTURE COMPANY, L.P. By: AT&T Venture Partners, Its: General Partner By: /s/ Neal Douglas ------------------------------ Its: General Partner ----------------------------- Address: 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Facsimile Number: (415) 854-4923 26 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT SEQUOIA CAPITAL VI By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA TECHNOLOGY PARTNERS VI By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA XXIV By: /s/ Michael Moritz ----------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 27 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ACCEL IV L.P. ACCEL KEIRETSU L.P. By: Accel IV Associates L.P. By: Accel Partners & Co., Inc. Its: General Partner Its: General Partner By: /s/ G. Carter Sednaoui By: /s/ G. Carter Sednaoui ----------------------- ------------------------- Its: General Partner Its: Chief Financial Officer ---------------------- ------------------------ Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS By: /s/ G. Carter Sednaoui By: /s/ Company Officer ----------------------- ----------------------- Its: General Partner Its: General Partner ---------------------- ---------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 28 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Howard L. Strachman ----------------------------------- Howard L. Strachman Address: c/o Ultracom Communications 21580 Stevens Creek Blvd. Suite 207 Cupertino, CA 95014 Facsimile Number: (408) 863-0363 29 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Eduardo J. Moura ------------------------------------ Eduardo J. Moura Address: 10161 Bubb Road Cupertino, CA 95014-4167 Facsimile Number: (408) 725-2439 30 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ITOCHU Corporation By: --------------------------------- Its: -------------------------------- Address: 5-1, Kita-Aoyama 2-chome Minato-ku, Tokyo 107-77 Japan Facsimile Number: 011-81-3-3497-3131 31 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT BG SERVICES LIMITED By: --------------------------------- Its: -------------------------------- Address: c/o Minden House 6 Minden Place St. Helier Jersey, Channel Islands Attention: Ron Green Facsimile Number: (0) 1534-607799 32 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Daniel E. Steimle ----------------------------- Daniel E. Steimle 33 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT 888 GROUP /s/ David Hayes By: /s/ Company Officer --------------------------- Its: /s/ Company Officer --------------------------- 34 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ Bradford J. Shafer ------------------------------ Bradford J. Shafer 35 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT /s/ K. Philip Hwang ------------------------------ K. Philip Hwang 36 SCHEDULE A Hybrid Networks, Inc. Series A Investors ------------------ ------------------ # of Shares of Name Series A Preferred Stock - ---- ------------------------ Catherine P. Goodrich 63,090 J.F. Shea Co., Inc. 378,541 Subhash Bal 25,236 Stewart H. Greenfield 63,090 James Marver 25,236 Walter Baumgartner 63,090 The Cypress Fund Alexander Cilento 63,090 Krivonos Fmly Lv Tst 50,472 IRA FBO Susan Harman Neithold 62,926 OSCCO III, L.P. 752,404 TOTAL 1,547,175 SCHEDULE B Hybrid Networks, Inc. Series B Preferred Investors ---------------------------- ---------------------------- # of Shares of Series B Preferred Stock --------------------------------------- Subject to Issuance on Name Issued Exercise of Warrants - ---- ------ ----------------------- Gary M. Lauder 442,857 171,429 OSCCO III, L.P. 72,426 16,213 J.F. Shea Co., Inc. 36,438 18,219 Intel 248,187 -- TOTAL 799,908 205,861 SCHEDULE C Hybrid Networks, Inc. Series D Investors ------------------ ------------------
# of Shares of Series D Preferred Stock ------------------------------------------------- Subject to Subject to Issuance Issuance on # of Shares on Exercise of Exercise of of Series G # of Issued Original Warrants New Warrants Preferred Stock* 1.2(b) Shares ------ -------------------- ------------- ---------------- -------------- AT&T Venture Company, L.P. 571,428 285,714 71,355 130,548 58,015 Sequoia Capital VI 1,040,001 520,000 129,866 237,598 105,587 Sequoia Technology Partners VI 57,143 28,572 7,136 13,055 5,802 Sequoia 1995 45,714 22,857 5,708 10,444 4,641 Accel Investors '95 L.P. 49,153 24,571 6,137 11,227 4,989 Accel IV L.P. 1,046,858 523,429 130,722 239,164 106,283 Accel Keiretsu L.P. 21,714 10,857 2,711 4,961 2,205 Ellmore C. Patterson Partners 25,143 12,572 3,140 5,744 2,553 OSCCO III, L.P. 223,444 111,722 31,951 58,456 22,685 J.F. Shea Co., Inc. 112,414 56,207 18,587 34,007 11,413 Susan Harmon Niethold 7,000 3,500 874 1,599 710 Gary M. Lauder -- -- 42,813 78,329 -- TOTALS 3,200,002 1,600,001 451,000 825,132 324,883
- ------------------- * Issued upon conversion of convertible notes at the closing of the sale of shares of Series G Preferred Stock to the purchasers pursuant to the Series G Agreement. SCHEDULE D Hybrid Networks, Inc. Note Warrant Investors ---------------------- # of Shares of Common Stock for which Name Note Warrants May Become Exercisable - ---- ------------------------------------- Tudor BVI Futures, Ltd. 182,440-456,106 Tudor Arbitrage Partners, L.P. 46,667-116,667 Raptor Global Fund, Ltd. 120,593-301,486 Raptor Global Fund, L.P. 46,336-115,841 Sequoia Capital VI 27,029-67,574 Sequoia Technology Partners VI 1,485-3,713 Sequoia XXIV 1,188-2,970 Accel IV L.P. 22,673-56,683 Accel Investors '95 L.P. 1,064-2,661 Accel Keiretsu L.P. 470-1,176 Ellmore C. Patterson Partners 545-1,361 AT&T Ventures 25,465-63,664 OSCCO III, L.P. 19,802-49,505 Gary M. Lauder 9,901-24,753 888 Group 12,376-30,941 Daniel E. Steimle 49,505-123,763 Bradford J. Shafer 4,950-12,376 J.F. Shea Co., Inc. 9,901-24,753 K. Philip Hwang 99,009-247,525 EXHIBIT D RIGHT OF CO-SALE AGREEMENT This Right of Co-Sale Agreement (this "AGREEMENT") is made and entered into as of September 18, 1997 by and among Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"); those parties listed on EXHIBIT A attached hereto (the "INVESTORS") to whom the Company has agreed to issue, pursuant to the Purchase Agreement (defined below), warrants to purchase shares of the Company's Common Stock, par value $.001 per share (the "COMMON STOCK"); and those stockholders, stock option holders and warrant holders of the Company listed on EXHIBIT B attached hereto (the "STOCKHOLDERS"). R E C I T A L S A. Each Stockholder currently owns shares of the Company's Common Stock (the "COMMON STOCK") and/or options or warrants to purchase that number of shares of the Company's Common Stock or securities convertible into that number of shares of Common Stock. B. Each Investor is acquiring from the Company, pursuant to the Subordinated Notes Purchase Agreement by and among the Company and the Investors dated as of September 18, 1997 (the "PURCHASE AGREEMENT"), certain warrants (the "WARRANTS") to purchase subject to certain terms and conditions up to that maximum number of shares of Common Stock set forth opposite such Investor's name on EXHIBIT A and certain Convertible Subordinated Notes of the Company (the "CONVERTIBLE SUBORDINATED NOTES"). C. To induce the Investors to purchase such securities from the Company and to enter into the Purchase Agreement, each Stockholder has agreed to grant the Investors certain rights of co-sale with respect to the shares of Stock (defined below) currently owned by such Stockholder, all on the terms and conditions set forth in this Agreement. The Stock currently owned by each Stockholder is set forth opposite such Stockholder's name on EXHIBIT B. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises herein contained, and for other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the following meanings: 1.1 The "STOCK" owned at any time by a Stockholder or Investor refers to all shares of Common Stock that the Stockholder or Investor, as applicable, then owns or has the right to acquire on a fully diluted basis, including all shares of Common Stock issued and outstanding at the relevant time plus (a) all shares of Common Stock that may be issued upon exercise of any options, warrants and other rights of any kind that are then exercisable and (b) all shares of Common Stock that may be issued upon conversion of (i) any convertible securities, including, without limitation, Preferred Stock and convertible debt securities then outstanding, including, without limitation, the Convertible Subordinated Notes, or (ii) any convertible securities issuable upon exercise of outstanding options, warrants or other rights that are then exercisable. For the purposes of this definition, the Stock owned by an Investor with respect to the Investor's unexercised Warrants at any time will be the number of shares of Common Stock that would be issuable upon exercise of the Warrants if the Initial Exercise Date (as defined in the Warrant) had occurred. 1.2 "OFFERED STOCK" means all shares of Stock proposed to be Transferred by a Stockholder. 1.3 "TRANSFER" and "TRANSFERRED" mean and include any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, including but not limited to transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, EXCEPT FOR: (a) any bona fide pledge if the pledgee executes a counterpart copy of this Agreement and becomes bound thereby as if such pledgee were a Stockholder; (b) any transfers of Stock by gift during a Stockholder's lifetime or on a Stockholder's death by will or intestacy to such Stockholder's "immediate family" (as defined below) or to a trust for the benefit of Stockholder or Stockholder's immediate family, provided that each transferee or other recipient executes a counterpart copy of this Agreement and becomes bound thereby as a Stockholder. For purposes of this Agreement, the term "IMMEDIATE FAMILY" means Stockholder's spouse, lineal descendant (whether natural or adopted) or antecedent, brother or sister, or the spouse of any of the foregoing. (c) any transfer of Stock by a Stockholder made: (i) pursuant to a statutory merger or statutory consolidation of the Company with or into another corporation or corporations; (ii) pursuant to the winding up and dissolution of the Company; or (iii) at, and pursuant to, an Initial Public Offering. (d) any transfers of (i) any Warrants, Convertible Subordinated Notes, (ii) any Stock issued or issuable upon the exercise or conversion of any Warrants or Convertible Subordinated Notes or (iii) any Stock by an Investor pursuant to the exercise of such Investor's Right of Co-Sale (as defined in Section 3.1 hereof). 1.4 "INITIAL PUBLIC OFFERING" means the closing of an underwritten public offering pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, covering the offer and sale of shares of Common Stock or any other class of capital stock of the Company. 2. NOTICE OF PROPOSED TRANSFER. Before any Stockholder may effect any Transfer of any Offered Stock involving in one transaction or in the aggregate as a result of a series of transactions 15% or more of the total shares of capital stock of the Company that are then outstanding (including all shares of Common Stock then outstanding, all shares of Common Stock that are issuable upon the exercise of outstanding options, warrants and other rights of any kind that are then exercisable and all shares of Common Stock that may be issued upon conversion of (i) any outstanding convertible securities, including, without limitation, Preferred Stock and convertible debt securities that are then convertible, including, without limitation, the Convertible Subordinated Notes, or (ii) any convertible securities issuable upon exercise of outstanding options, warrants or other rights that are then exercisable; for the purposes of the foregoing, the shares deemed outstanding with respect to unexercised Warrants will be the number of shares of Common Stock that would be issuable upon exercise of the Warrants if the Initial Exercise Date (as defined in the Warrants) had occurred), such Stockholder (the "SELLING STOCKHOLDER") must give at the same time to the Company and the Investors a written notice signed by the Selling Stockholder (the "SELLING STOCKHOLDER'S NOTICE") stating (a) the Selling Stockholder's bona fide intention to transfer such Offered Stock; (b) the number of shares of Offered -2- Stock proposed to be transferred to each proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (c) the name, address and relationship, if any, to the Selling Stockholder of each Proposed Transferee; (d) the bona fide cash price or, in reasonable detail, other consideration, per share for which the Selling Stockholder proposes to transfer such Offered Stock to each Proposed Transferee (the "OFFERED PRICE"); and (e) any other material terms and conditions relating to such Proposed Transfer. Upon the request of the Company or any Investor, the Stockholder will promptly furnish to the Company and to the Investors such other information as may be reasonably requested to establish that the offer and Proposed Transferee(s) are bona fide. If one or more Stockholders propose to Transfer Stock in a series of transactions that involves in the aggregate 15% or more of the total shares of stock of the Company that are then outstanding, then each Selling Stockholder proposing to Transfer Stock in each transaction in the series will give the Selling Stockholder Notice provided for in this Section 2 with respect to such transaction and the Right of Co-Sale provided for in Section 3, the Put Rights provided for in Section 5.2 and other rights provided for herein will apply to each such transaction. If a Proposed Transaction is one of a series of transactions to which this Section 2 applies but one or more transactions in the series shall have already occurred before any Selling Stockholder Notice was given with respect to such earlier transaction or transaction, then each such earlier Transfer by each such Selling Stockholder will be deemed a Prohibited Transaction to which the Put Rights provided for in Section 5.2 shall apply. For purposes of complying with this Section 2 and Section 5, the Company will maintain a record of all transactions to which this Agreement applies. 3. RIGHT OF CO-SALE. 3.1 RIGHT OF CO-SALE. Each Investor will have the right to participate in the sale of any Offered Stock in the manner set forth herein (the "RIGHT OF CO-SALE"). Pursuant to this Section 3 as a condition to any Transfer of any such Offered Stock by a Stockholder, each Investor may transfer to the Proposed Transferee(s) identified in the Selling Stockholder's Notice at the same price per share upon the same terms and conditions as set forth in the Selling Stockholder's Notice. such Investor's Pro Rata Share of the Offered Stock, by giving written notice to the Selling Stockholder, within ten days after the date of the Selling Stockholder's Notice, specifying the number of shares and type of Stock that such Investor desires to transfer to the Proposed Transferee(s) by exercising the Right of Co-Sale. For purposes of this Section 3, an Investor's "PRO RATA SHARE" refers to a fraction, the numerator of which is the number of shares of Stock then owned by such Investor, and the denominator of which is the sum of the number of shares of Stock then owned by all Investors having a Right of Co-Sale hereunder plus the number of shares of Stock held by the Selling Stockholder who proposes the Transfer. 3.2 CONSUMMATION OF CO-SALE. Each Investor that exercises its Right of Co-Sale as provided in Section 3.1 will deliver to the Selling Stockholder at the closing of the Transfer of Offered Stock to the Proposed Transferee(s) (the "CLOSING") one or more certificates, properly endorsed for Transfer, representing the Stock to be Transferred by such Investor. At the Closing, such certificates or other instruments will be transferred and delivered to the Proposed Transferee(s) in consummation of the Transfer of the Offered Stock pursuant to the terms and conditions specified in the Selling Stockholder's Notice, and the Selling Stockholder will remit, or will cause to be remitted, to Investor at Closing that portion of the proceeds of the Transfer to which Investor is entitled by reason of such Investor's participation in such Transfer pursuant to the Right of Co-Sale. 4. MULTIPLE SERIES, CLASSES OR TYPES OF STOCK. If the Offered Stock consists of more than one series or class or type of Stock, each Investor will have the right to transfer hereunder such Investor's Pro Rata Share of each such series, class or type of Stock; provided, however, that (a) if such Investor does not hold any of such series, class or type of Stock, and the Proposed -3- Transferee or Proposed Transferees are not willing, at the Closing, to purchase some other series, class or type of Stock from such Investor as part of such Investor's Pro Rata Share, or (b) if the Proposed Transferee or Proposed Transferees are not willing to purchase any Stock from such Investor at the Closing (each such circumstance being referred to herein as an "INCOMPLETE CO-SALE"), then such Investor will have the put right (the "PUT RIGHT") set forth in Section 5.2 hereof. 5. REFUSAL TO TRANSFER; PUT RIGHT. 5.1 REFUSAL TO TRANSFER. Any attempt by any Selling Stockholder to transfer any Stock in violation of any provision of this Agreement will be void. The Company will not (a) transfer on its books any Stock that has been sold, gifted or otherwise transferred in violation of this Agreement, or (b) treat as owner of such Stock, or accord the right to vote to or pay dividends to any purchaser, donee or other transferee to whom such Stock may have been so transferred. 5.2 PUT RIGHT. If a Selling Stockholder transfers any Stock in contravention of an Investor's Right of Co-Sale under this Agreement (a "PROHIBITED TRANSFER"), or if an Incomplete Co-Sale occurs with respect to an Investor and the provisions of Section 5 hereof apply, such Investor may require such Selling Stockholder to purchase from such Investor, for cash or such other consideration as the Selling Stockholder received in the Prohibited Transfer or Incomplete Co-Sale, that number of shares of Stock (either (i) shares of the same class, series or type as transferred in the Prohibited Transfer or Incomplete Co-Sale, if such Investor then owns Stock of such class, series or type, or (ii) if such Investor does not then own such Stock, then shares of Common Stock) having a purchase price equal to the aggregate purchase price such Investor would have received in the Closing of such Prohibited Transfer or Incomplete Co-Sale if such Investor had exercised and been able to consummate such Investor's Right of Co-Sale with respect thereto (the Investor's "PUT RIGHT"). An Investor may exercise such Investor's Put Right by delivery of written notice to the Selling Stockholder and the Company (a "PUT NOTICE") within ten days after such Investor becomes aware of the Prohibited Transfer or Incomplete Co-Sale. The closing of such sale to the Selling Stockholder under such Investor's Put Right will occur within seven days after the date of such Investor's Put Notice. Notwithstanding the foregoing provisions of this Section 5.2, if the Prohibited Transfer is one of a series of transactions to which Section 2 applies but which occurred before any Selling Stockholder Notice was given with respect thereto, then (a) the Company will promptly give to each Selling Stockholder in such earlier transaction a notice that such Selling Stockholder is required to give within ten days to the Company and the Investors (and such Selling Stockholder will be required to give such notice within such ten-day period) a written notice signed by the Selling Stockholder (the "SELLING STOCKHOLDER PUT NOTICE") stating with respect to such earlier transaction the information provided for in Sections 2(a), (b), (c), (d) and (e); (b) each Investor may exercise such Investor's Put Right with respect to such earlier transaction by delivering a Put Notice to the Selling Stockholder and the Company within ten days after such Selling Stockholder Put Notice is given; and (c) the closing of the sale by the Selling Stockholder under such Investor's Put Right will occur within seven days after the date of such Investor's Put Notice. 6. RESTRICTIVE LEGEND AND STOP-TRANSFER ORDERS. 6.1 LEGEND. Each Stockholder understands and agrees that, in addition to such legends as may reflect any transfer restrictions under the applicable securities laws, the Company will cause the legend set forth below, or a legend substantially equivalent thereto, to be placed upon any certificate(s) or other documents or instruments evidencing ownership of Stock by the Stockholder (other than Stock referred to in Section 1.3(d)): -4- THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RIGHTS OF CO-SALE AS SET FORTH IN A CO-SALE AGREEMENT ENTERED INTO BY THE HOLDER OF THESE SHARES, THE COMPANY AND CERTAIN SHAREHOLDERS OF THE COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. SUCH RIGHTS OF CO-SALE ARE BINDING ON TRANSFEREES OF THESE SHARES. 6.2 STOP TRANSFER INSTRUCTIONS. Each Stockholder agrees, to ensure compliance with the restrictions referred to herein, that the Company may issue appropriate "stop transfer" certificates or instructions and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its records. 7. TERMINATION AND WAIVER. 7.1 TERMINATION. The Investor's Right of Co-Sale will terminate upon the earliest to occur of: the following: (a) immediately prior to the closing of an Initial Public Offering; (b) the date on which this Agreement is terminated by a writing executed by the Company and Investors that then own at least a majority of the shares of Stock then owned by all the Investors; or (c) the dissolution of the Company. 7.2 WAIVER. The application of the Right of Co-Sale of an Investor as to any proposed Transfer by a Selling Stockholder of any Stock may be waived in advance of or after such transfer by the written agreement of Investors that own at least a majority of the shares of Stock then owned by all the Investors, in which case such waiver will be binding as to all Investors. The Company and the Investors will have the absolute right to exercise or refrain from exercising any right or rights that each such party may have by reason of this Agreement, including without limitation the right to purchase or participate in the sale of Offered Stock. Neither the Company nor any Investor will incur any liability to any other party hereto with respect to exercising or refraining from exercising any such right or rights. Any waiver by a party of its rights hereunder will be effective only if evidenced by a written instrument executed by such party or its authorized representative. 8. MISCELLANEOUS PROVISIONS. 8.1 NOTICES. Any notice required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given to such party under this Agreement on the earliest of the following: (a) the date of personal delivery; (b) the next business day after transmission by facsimile or telecopier, addressed to the other party at its facsimile number or telecopier address, with confirmation of transmission; (c) the next business day after deposit with a return receipt express courier for United States deliveries, or three business days after such deposit for deliveries outside of the United States; or (d) three business days after deposit in the United States mail by first class mail for United States deliveries. All notices not delivered personally or by facsimile will be sent with postage and/or other charges prepaid and properly addressed to the party to be notified at the address set forth below such party's signature on this Agreement or on EXHIBIT A hereto, or at such other address as such other party may designate by written notice to the other parties hereto. All notices for delivery outside the United States will be sent by facsimile or by express courier. Any notice given hereunder to more than one person will be deemed to have been given, for purposes of counting time periods hereunder, on the date effectively given to the last party required to be given such notice. Notices to the Company will be marked "Attention: Chief Financial Officer." -5- 8.2 BINDING ON SUCCESSORS AND ASSIGNS. This Agreement, and the rights and obligations of the parties hereunder, will inure to the benefit of, and be binding upon, (i) their respective successors, assigns, heirs, executors, administrators and legal representatives or (ii) any Person to whom a Stockholder transfers any stock in a transfer referred to in Section 1.3(a) or (b); but this Agreement and such rights will not inure to the benefit of or be binding upon any other transferees. Notwithstanding the immediately preceding sentence of this Section 8.2, the rights under this Agreement may be assigned, in whole or in part, by an Investor to an affiliate of such Investor or any entities for which the Note Warrant Investor or its affiliates serve as general partner and/or investment adviser or in a similar capacity, all material funds or other pooled investment vehicles or entities under the common control or management of such Investor, or the general partner or investment adviser thereof, or any affiliate of the foregoing. 8.3 SEVERABILITY. If any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible and such invalidity, illegality or unenforceability will not affect any other provision of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had (to the extent not enforceable) never been contained herein. 8.4 AMENDMENT. This Agreement may be amended only by means of a written instrument executed by the Company, by Investors that own at least a majority of the shares of Stock then owned by all the Investors and by each of the Stockholders. 8.5 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts, excluding that body of law pertaining to conflict of laws. 8.6 OBLIGATION OF COMPANY; BINDING NATURE OF EXERCISE. The Company agrees to use its best efforts to enforce the terms of this Agreement, to inform each Investor of any breach hereof (to the extent the Company has knowledge thereof) and to assist each Investor in the exercise of such Investor's rights and performance of such Investor's obligations hereunder. 8.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all such counterparts together will constitute one and the same instrument. 8.8 ENTIRE AGREEMENT. This Agreement, including all Exhibits hereto, each of which is incorporated herein by reference, constitutes the entire agreement of the parties with respect to the specific subject matter hereof and supersedes in their entirety all other agreements or understandings between or among the parties hereto with respect to such specific subject matter. 8.9 CALCULATION; BINDING EFFECT OF COMPANY NOTICES. All calculations of an Investor's Pro Rata Share will be made by the Company as of the date of the Company's notice in which such Pro Rata Share appears. The Pro Rata Share of an Investor as shown on any notice required hereunder to be delivered by the Company will be binding upon the parties hereto absent fraud or error. 8.10 HEADINGS. The captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement. Unless otherwise stated, all references herein to Sections and Exhibits will refer to Sections of and Exhibits to this Agreement. -6- IN WITNESS WHEREOF, the parties have executed this Right of Co-Sale Agreement as of the day and year first above written. "COMPANY" HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter -------------------------------- Its: President and CEO -------------------------------- "INVESTORS AND/OR STOCKHOLDERS" TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza ---------------------------- Robert P. Forlenza, Vice President TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By: /s/ Robert P. Forlenza ---------------------------- Robert P. Forlenza, Vice President RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza --------------------------- Robert P. Forlenza, Vice President RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: /s/ Robert P. Forlenza --------------------------- Robert P. Forlenza, Vice President -7- IN WITNESS WHEREOF, the parties have executed this Right of Co-Sale Agreement as of the day and year first above written. "COMPANY" HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter ------------------------------- Its: President and CEO ------------------------------ "STOCKHOLDER" INTEL CORPORATION By: /s/ Company Officer ------------------------------- Its: VP and Treasurer ------------------------------ -8- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT SEQUOIA CAPITAL VI By: /s/ Michael Moritz ------------------------------- Its: ------------------------------ SEQUOIA TECHNOLOGY PARTNERS VI By: /s/ Michael Moritz ------------------------------- Its: ------------------------------ SEQUOIA XXIV By: /s/ Michael Moritz ------------------------------- Its: ------------------------------ -9- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ Daniel E. Steimle ----------------------------------- Daniel E. Steimle -10- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT ACCEL IV L.P. By: /s/ G. Carter Sednaoui ----------------------------------------- Its: General Partner ---------------------------------------- ACCEL INVESTORS '95 L.P. By: /s/ G. Carter Sednaoui ----------------------------------------- Its: General Partner ---------------------------------------- ACCEL KEIRETSU L.P. By: /s/ G. Carter Sednaoui ----------------------------------------- Its: Chief Financial Officer ---------------------------------------- ELLMORE C. PATTERSON PARTNERS By: /s/ Company Officer ----------------------------------------- Its: General Partner ---------------------------------------- -11- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT AT & T VENTURES By: /s/ Neal Douglas ---------------------------------------- Its: General Partner --------------------------------------- -12- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT OSCCO III, L.P. By: /s/ Stephen Halprin ----------------------------------------- Its: General Partner ---------------------------------------- -13- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT GARY LAUDER By: /s/ Gary Lauder ----------------------------------------- Its: ---------------------------------------- -14- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT 888 GROUP By: /s/ David Hayes ----------------------------------------- Its: /s/ Company Officer ---------------------------------------- /s/ Company Officer -15- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ Bradford J. Shafer --------------------------------------- Bradford J. Shafer -16- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ K. Philip Hwang --------------------------------------- K. Philip Hwang -17- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT J. F. SHEA CO., INC. By: /s/ Edmund Shea, Jr. ----------------------------------------- Its: Vice President ---------------------------------------- -18- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ Carl Ledbetter --------------------------------------- Carl Ledbetter -19- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT INTEL CORPORATION By: ----------------------------------------- Its: ---------------------------------------- -20- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ Howard Strachman --------------------------------------- Howard Strachman -21- SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT /s/ Eduardo Moura --------------------------------------- Eduardo Moura -22- EXHIBIT A LIST OF INVESTORS MAXIMUM NUMBER OF SHARES OF COMMON STOCK THAT MAY BE ISSUED AT ANY TIME PURCHASER NAME & ADDRESS UPON EXERCISE OF WARRANTS - ------------------------- ------------------------------------ Tudor BVI Future, Ltd. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 456,106 Tudor Arbitrage Partners, L.P. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 116,667 Raptor Global Fund Ltd. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 301,486 Raptor Global Fund L.P. c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 115,841 Sequoia Capital VI 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor 67,574 Sequoia Technology Partners VI 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor 3,713 Sequoia XXIV 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Tami Taylor 2,970 Accel IV L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui 56,683 Accel Investors '95 L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui 2,661 Accel Keiretsu L.P. One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui 1,163 Ellmore C. Patterson Partners One Palmer Square Princeton, NJ 08542 Attn: Carter Sednaoui 1,361 AT&T Ventures 3000 Sand Hill Road Building 1, Suite 285 Menlo Park, CA 94025 Attn: Neal Douglas 63,664 OSCCO III, L.P. 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 Attn: Stephen E. Halprin 49,505 Gary M. Lauder 88 Mercedes Lane Atherton, CA 94027 24,753 888 Group 555 California Street Suite 2200 San Francisco, CA 94104 Attn: David Hayes 30,941 Daniel E. Steimle P.O. Box 928 Occidental, CA 95465 123,763 2 Bradford J. Shafer c/o Heartport, Inc. 200 Chesapeake Drive Redwood City, CA 94063 12,376 J.F. Shea Co., Inc. 655 Brea Canyon Road Walnut, CA 91789-3010 24,753 Mr. K. Philip Hwang 2345 Harris Way San Jose, CA 95131-1413 247,525 TOTAL: 1,703,517 --------- 3 EXHIBIT B LIST OF STOCKHOLDERS
Fully Diluted Without Bridge Warrants* Name Bridge Warrants (Maximum)** Total ----- ---------------------- ----------------- ------- Sequoia Capital VI Sequoia Technology Partners VI Sequoia XXIV 2,292,594 74,258 2,366,852 Dan Steimle 300,000 123,763 423,763 Accel IV L.P. Accel Investors '95 L.P. Accel Keiretsu L.P. 2,321,166 61,881 2,383,047 Ellmore C. Patterson Partners OSCCO III, L.P. 1,306,325 49,505 1,355,830 Carl Ledbetter 1,776,381 -- 1,776,381 Intel Corporation 3,258,949 -- 3,258,949 Howard Strachman 2,475,117 -- 2,475,117 Eduardo Moura 1,856,338 -- 1,856,338 ------------- ------------ ---------- Total 15,586,870 309,407 15,896,277 - -------------------
* Number includes all shares subject to oustanding exercisable or convertible securities. The number that is currently exercisable or convertible may be less depending on when calculation is made. **Reflects "Maximum Number" as defined in Warrant; the number deemed exercisable (as provided in the Agreement) may be less. EXHIBIT E EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT ------------------------ _____________, 199_ Hybrid Networks, Inc. 10201 Bubb Road Cupertino, CA 95014 The following confirms an agreement between me and Hybrid Networks, Inc., a Delaware corporation (the "Company"), which is a material part of the consideration for my employment by the Company: 1. I understand that the Company possesses and will possess Proprietary Information which is important to its business. For purposes of this Agreement, "Proprietary Information" is information that was or will be developed, created, or discovered by or on behalf of the Company, or which became or will become known by, or was or is conveyed to the Company, which has commercial value in the Company's business. "Proprietary Information" includes, but is not limited to, information about high speed digital interactive channels, algorithms, circuits, layouts, trade secrets, computer programs, designs, technology, ideas, know-how, processes, formulas, compositions, data, techniques, improvements, inventions (whether patentable or not), works of authorship, business and product development plans, the salaries and terms of compensation of other employees, customers and other information concerning the Company's actual or anticipated business, research or development, or which is received in confidence by or for the Company from any other person. I understand that my employment creates a relationship of confidence and trust between me and the Company with respect to Proprietary Information. 2. I understand that the Company possesses or will possess "Company Materials" which are important to its business. For purposes of this Agreement, "Company Materials" are documents or other media or tangible items that contain or embody Proprietary Information or any other information concerning the business, operations or plans of the Company, whether such documents have been prepared by me or by others. "Company Materials" include, but are not limited to, blueprints, drawings, photographs, charts, graphs, notebooks, customer lists, computer disks, tapes or printouts, sound recordings and other printed, typewritten or handwritten documents, as well as samples, prototypes, models, products and the like. 3. In consideration of my employment by the Company and the compensation received by me from the Company from time to time, I hereby agree as follows: a. All Proprietary Information and all title, patents, patent rights, copyrights, mask work rights, trade secret rights, and other intellectual property and rights anywhere in the world (collectively "Rights") in connection therewith shall be the sole property of the Company. I hereby assign to the Company any Rights I may have or acquire in such Proprietary Information. At all times, both during my employment by the Company and after its termination, I will keep in confidence and trust and will not use or disclose any Proprietary Information or anything relating to it without the prior written consent of an officer of the Company. Nothing contained herein will prohibit an employee from disclosing to anyone the amount of his or her wages. b. All Company Materials shall be the sole property of the Company. I agree that during my employment by the Company, I will not remove any Company Materials from the business premises of the Company or deliver any Company Materials to any person or entity outside the Company. I further agree that, immediately upon the termination of my employment by me or by the Company for any reason, or during my employment if so requested by the Company, I will return all Company Materials, apparatus, equipment and other physical property, or any reproduction of such property, excepting only (i) my personal copies of records relating to my compensation; (ii) my personal copies of any materials previously distributed generally to stockholders of the Company; and (iii) my copy of this Agreement. c. I will promptly disclose in writing to my immediate supervisor, or to any persons designated by the Company, all "Inventions", (which term includes improvements, inventions, works of authorship, trade secrets, technology, circuits, layouts, algorithms, computer programs, formulas, compositions, ideas, designs, processes, techniques, know-how and data, whether or not patentable) made or conceived or reduced to practice or developed by me, either alone or jointly with others, during the term of my employment. I will also disclose to the President of the Company Inventions conceived, reduced to practice or developed by me within six (6) months of the termination of my employment with the Company; such disclosures shall be received by the Company in confidence (to the extent they are not assigned in (d) below) and do not extend the assignment made in Section (d) below. I will not disclose Inventions covered by Section 3.c to any person outside the Company unless I am requested to do so by management personnel of the Company. d. I agree that all Inventions which I make, conceive, reduce to practice or develop (in whole or in part, either alone or jointly with others) during my employment shall be the sole property of the Company to the maximum extent permitted by Section 2870 of the California Labor Code, if applicable, a copy of which is attached and hereby assign such Inventions and all Rights therein to the Company. No assignment in this Agreement shall extend to inventions, the assignment of which is prohibited by Labor Code section 2870. The Company shall be the sole owner of all Rights in connection therewith. e. I agree to perform, during and after my employment, all acts deemed necessary or desirable by the Company to permit and assist it, at the Company's expense, in evidencing, perfecting, obtaining, maintaining, defending and enforcing Rights and/or my assignment with respect to such Inventions in any and all countries. Such acts may include, but are not limited to, execution of documents and assistance or cooperation in legal proceedings. I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents, as my agents and attorneys-in-fact to act for and in my behalf and instead of me, to execute and file any documents and to do all other lawfully permitted acts to further the above purposes with the same legal force and effect as if executed by me. f. Any assignment of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "Moral Rights"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, I hereby waive such Moral Rights and consent to any action of the Company that would violate such Moral Rights in the absence of such consent. I will confirm any such waivers and consents from time to time as requested by the Company. 2. g. I have attached hereto a complete list of all existing Inventions to which I claim ownership as of the date of this Agreement and that I desire to specifically clarify are not subject to this Agreement, and I acknowledge and agree that such list is complete. If no such list is attached to this Agreement, I represent that I have no such Inventions at the time of signing this Agreement. h. During the term of my employment and for one (1) year thereafter, I will not encourage or solicit any employee or consultant of the Company to leave the Company for any reason. However, this obligation shall not affect any responsibility I may have as an employee of the Company with respect to the bona fide hiring and firing of Company personnel. i. I agree that during my employment with the Company I will not either directly or indirectly, whether as a director, officer, consultant, employee or adviser or in any other capacity (i) render any services respecting high speed digital networking technology and services ("Services") to any business, agency, partnership or entity engaged in a similar business in the United States other than the Company ("Restricted Business"), or (ii) make or hold any investment in any Restricted Business in the United States, whether such investment be by way of loan, purchase of stock or otherwise, PROVIDED that there shall be excluded from the foregoing the ownership of not more than 5% of the listed or traded stock of any publicly-held corporation. The provisions of this paragraph shall apply both during normal working hours and at all other times including, but not limited to, nights, weekends and vacation time, while I am employed by the Company. j. I represent that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith or in conflict with my employment with the Company. 4. I agree that this Agreement is not an employment contract and that I have the right to resign and the Company has the right to terminate my employment at any time, for any reason, with or without cause. 5. I agree that this Agreement does not purport to set forth all of the terms and conditions of my employment, and that as an employee of the Company I have obligations to the Company which are not set forth in this Agreement. 6. I agree that my obligations under paragraphs 3(a) through 3(f) and paragraph 3(h) of this Agreement shall continue in effect after termination of my employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary on my part, and that the Company is entitled to communicate my obligations under this Agreement to any future employer or potential employer of mine. 7. I agree that any dispute in the meaning, effect or validity of this Agreement shall be resolved in accordance with the laws of the State of California without regard to the conflict of laws provisions thereof. I further agree that if one or more provisions of this Agreement are held to be illegal or unenforceable under applicable California law, such illegal or unenforceable portion(s) shall be limited or excluded from this Agreement to the minimum extent required so that this Agreement shall otherwise remain in full force and effect and enforceable in accordance with its terms. 8. This Agreement shall be effective as of the date I execute this Agreement and shall be binding upon me, my heirs, executors, assigns, and administrators and shall inure to the benefit of the Company, its subsidiaries, successors and assigns. 3. 9. This Agreement can only be modified by a subsequent written agreement executed by the President of the Company. I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY ME. Dated: _________________, 19__ ________________________________________ Accepted and Agreed to: HYBRID NETWORKS, INC. By: ________________________________________ 4. ATTACHMENT A ------------ Hybrid Networks, Inc. 10201 Bubb Road Cupertino, CA 95014 Ladies and Gentlemen: 1. The following is a complete list of Inventions relevant to the subject matter of my employment by Hybrid Networks, Inc. (the "Company") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my employment by the Company that I desire to clarify are not subject to the Company's Proprietary Information and Inventions Agreement. _____ No Inventions _____ See below: _____ Additional sheets attached 2. I propose to bring to my employment the following materials and documents of a former employer: _____ No materials or documents _____ See below: _________________________ Employee ATTACHMENT B ------------ SECTION 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE SHALL ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER. (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; (2) Result from any work performed by the employee for his employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. EX-10.15 6 ADDENDUM NO. 1 TO COLLABORATION AGREEMENT ADDENDUM NO.1 TO THE COLLABORATION AGREEMENT This addendum No.1 to the Collaboration Agreement dated 25th day of November, 1996 among Hybrid Networks Inc., Sharp Corporation and Itochu Corporation ("Agreement") is made and enter into as of the same day mentioned above. RECITALS: WHEREAS, Sharp may elect to manufacturer third party cable modems in addition to the New Cable Modems (N-series cable modems) which result from the Agreement. AGREEMENT: If and when Sharp elects to manufacture such third party cable modems, then Hybrid shall have the option to use a separate source of OEM supply other than Sharp. Hybrid will be allowed to have the New Cable Modems produced by another supplier, such as a local contract manufacturer. The Sharp's technology incorporated therein may be used by Hybrid under the royalty bearing license agreement as foreseen in the Section 6 of the Agreement. IN WITNESS WHEREOF, the Parties shall cause this Addendum No.1 to be executed by duly authorized officers. Hybrid Networks, Inc. By: /s/ Carl S. Ledbetter ---------------------------- Its: CEO --------------------------- Sharp Corporation Itochu Corporation By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] --------------------------------- -------------------------- Its: Division Deputy General Manager Its: Department Officer -------------------------------- ------------------------- [ILLEGIBLE] EX-10.20 7 EXH. 10-20: LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------ HYBRID NETWORKS, INC. LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------ TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION............................................ 1 1.1 Definitions........................................................ 1 1.2 Accounting and Other Terms......................................... 8 2. LOAN AND TERMS OF PAYMENT............................................... 8 2.1 Revolving Advances................................................. 8 2.2 Overadvances....................................................... 9 2.3 Interest Rates, Payments, and Calculations......................... 9 2.4 Crediting Payments................................................. 10 2.5 Fees............................................................... 10 2.6 Additional Costs................................................... 10 3. CONDITIONS OF CREDIT EXTENSIONS......................................... 10 3.1 Conditions Precedent to Initial Credit Extension................... 10 3.2 Conditions Precedent to all Credit Extensions...................... 11 4. CREATION OF SECURITY INTEREST........................................... 11 4.1 Grant of Security Interest......................................... 11 4.2 Delivery of Additional Documentation Required...................... 11 4.3 Right to Inspect................................................... 12 5. REPRESENTATIONS AND WARRANTIES.......................................... 12 5.1 Due Organization and Qualification................................. 12 5.2 Due Authorization; No Conflict..................................... 12 5.3 No Prior Encumbrances.............................................. 12 5.4 Bona Fide Eligible Accounts........................................ 12 5.5 Merchantable Inventory............................................. 12 5.6 Name; Location of Chief Executive Office........................... 12 5.7 Litigation......................................................... 13 5.8 No Material Adverse Change in Financial Statements................. 13 5.9 Solvency........................................................... 13 5.10 Regulatory Compliance.............................................. 13 5.11 Environmental Condition............................................ 13 5.12 Taxes.............................................................. 14 5.13 Subsidiaries....................................................... 14 5.14 Government Consents................................................ 14 5.15 Full Disclosure.................................................... 14 6. AFFIRMATIVE COVENANTS................................................... 14 6.1 Good Standing...................................................... 14 6.2 Government Compliance.............................................. 14 6.3 Financial Statements, Reports, Certificates........................ 15 6.4 Inventory; Returns................................................. 15 6.5 Taxes.............................................................. 15 6.6 Insurance.......................................................... 16 6.7 Principal Depository............................................... 16 6.8 Quick Ratio........................................................ 16 6.9 Tangible Net Worth................................................. 16 6.10 Debt Net Worth..................................................... 16 6.11 Profitability...................................................... 17 i 6.12 Further Assurances................................................. 17 7. NEGATIVE COVENANTS...................................................... 17 7.1 Dispositions....................................................... 17 7.2 Changes in Business, Ownership, Management or Business Locations... 17 7.3 Mergers or Acquisitions............................................ 17 7.4 Indebtedness....................................................... 17 7.5 Encumbrances....................................................... 18 7.6 Distributions...................................................... 18 7.7 Investments........................................................ 18 7.8 Transactions with Affiliates....................................... 18 7.9 Subordinated Debt.................................................. 18 7.10 Compliance......................................................... 18 8. EVENTS OF DEFAULT....................................................... 18 8.1 Payment Default.................................................... 19 8.2 Covenant Default................................................... 19 8.3 Material Adverse Change............................................ 19 8.4 Attachment......................................................... 19 8.5 Insolvency......................................................... 19 8.6 Other Agreements................................................... 20 8.7 Subordinated Debt.................................................. 20 8.8 Judgments.......................................................... 20 8.9 Misrepresentations................................................. 20 9. BANK'S RIGHTS AND REMEDIES.............................................. 20 9.1 Rights and Remedies................................................ 20 9.2 Power of Attorney.................................................. 21 9.3 Accounts Collection................................................ 22 9.4 Bank Expenses...................................................... 22 9.5 Bank's Liability for Collateral.................................... 22 9.6 Remedies Cumulative................................................ 22 9.7 Demand; Protest.................................................... 22 10. NOTICES................................................................. 23 11. CHOICE OF LAW AND VENUE................................................. 23 12. GENERAL PROVISIONS...................................................... 23 12.1 Successors and Assigns............................................. 23 12.2 Indemnification.................................................... 24 12.3 Time of Essence.................................................... 24 12.4 Severability of Provisions......................................... 24 12.5 Amendments in Writing, Integration................................. 24 12.6 Counterparts....................................................... 24 12.7 Survival........................................................... 24 12.8 Confidentiality.................................................... 24 ii This LOAN AND SECURITY AGREEMENT is entered into as of October 16, 1997, by and between VENTURE BANKING GROUP, a division of Cupertino National Bank ("Bank") and HYBRID NETWORKS, INC. ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance under the Committed Revolving Line. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Persons, managers and members, provided that for purposes of this Agreement, with respect to Borrower, Affiliate shall mean only Borrower, Borrower's Subsidiaries and each of Borrower's and its Subsidiaries senior executive officers, directors, partners and for any subsidiary that is a limited liability company, such Subsidiary's managers and members. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation and negotiation of the Loan Documents not to exceed $6,000 without the prior consent of Borrower; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding), whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment (except Equipment that Borrower does not own, which Equipment Borrower leases from third parties), containing such information. 1 "Borrowing Base" means an amount equal to seventy-five percent (75%) of Eligible Accounts as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Committed Revolving Line" means a credit extension of up to Four Million Dollars ($4,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries on a separate company basis as at such date. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries on a separate company basis, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Default Rate" has the meaning assigned in Section 2.3(b). 2 "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower exceed thirty percent (30%) of the total of all Accounts but only to the extent that such obligations exceed 30% of all Accounts, except as approved in writing by Bank or except as set forth on the Schedule; (d) Accounts with respect to which the account debtor does not have its principal place of business in the United States; (e) Accounts with respect to which the account debtor is a federal, state or local governmental entity or any department, agency, or instrumentality thereof; (f) Accounts with respect to which Borrower is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts, etc.) or except as set forth on the Schedule; (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or progress billings, or other terms by reason of which the payment by the account debtor may be conditional; (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower or except as set forth on the Schedule; (i) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (j) Accounts owing from distributors that have not been pre-approved by Bank or except as set forth on the Schedule; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that Bank approves on a case-by-case basis. (Bank acknowledges approving Accounts owing by entities listed in the Schedule, that are otherwise Eligible Accounts.) 3 "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest, except Equipment that Borrower does not own, which Equipment Borrower leases from third parties. "Equity Event" means the receipt by Borrower of not less than Thirty Two Million Dollars ($32,000,000) from the sale or issuance of its equity securities in its initial public offering. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief for creditors. "Intellectual Property Collateral" means all of Borrower's right, title and interest in and to the following: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents, or Trademarks and all license fees and royalties arising from such use to the extent permitted by such license or rights (subject to the exclusions set forth in the last paragraph of Exhibit A attached hereto); (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. 4 "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any non-negotiable documents of title representing any of the above. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, in favor of Bank, and any other present or future agreement entered into between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, negotiable documents of title, and chattel paper. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections, including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, now or hereafter existing, created or acquired. "Payment Date" means the fifteenth (15th) day of each month, commencing on the first such date after the Closing Date and ending on the Revolving Maturity Date. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; 5 (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. (f) Any renewal, extension or refinancing of any Indebtedness described in clauses (a) through (e), above provided the terms of such renewal, extension or refinancing are not more burdensome than the original Indebtedness and the principal amount of such renewal, extension or refinancing does not exceed the principal amount of the original Indebtedness. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) Investments in: (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the rating of A or higher from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, or, as to such certificates of deposit held by Bank of America, for thirty (30) days after the Closing Date, and (iv) investments in securities issued by wholly-owned Subsidiaries of Borrower; (c) Investments consisting of (i) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower's Board of Directors; (d) Investments (including debt obligations) received in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; and (e) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions to, customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (e) shall not apply to Investments by Borrower in any Subsidiary. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule (including the Lien of London Pacific Life and Annuity Company or its assigns) or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are maintained on Borrower's Books in accordance with GAAP, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; 6 (d) Liens that are not prior to the Lien of Bank which constitute rights of set-off of a customary nature or banker's Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with arrangement entered into with banks in the ordinary course of business; (e) Liens on insurance proceeds in favor of insurance companies granted solely as security for financed premiums; (f) Liens related to leases or subleases and licenses or sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license, provided that such leases, subleases, licenses and sublicenses do not prohibit the grant of the security interest granted hereunder (subject to the exclusions set forth in the last paragraph of Exhibit A attached hereto); and (g) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) and (e) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien (or proceeds of such property) and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently published in the Western edition of The Wall Street Journal, as the "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, as of any applicable date, the consolidated cash, cash equivalents, accounts receivable and investments with maturities of fewer than ninety (90) days of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" means the date immediately preceding the first anniversary of the Closing Date. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means with respect to any Person, corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "Tangible Net Worth" means, as of any applicable date, the consolidated total assets of Borrower and its Subsidiaries minus, without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, 7 patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (ii) Total Liabilities of Borrower and its Subsidiaries. "Total Liabilities" means, as of any applicable date, all obligations that should, in accordance with GAAP, be classified as liabilities on the consolidated balance sheet of Borrower on a separate company basis, including in any event all Indebtedness. "Trademarks" means any trademark and service mark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks now or hereafter existing, created or acquired. 1.2 Accounting and Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall refer to the financial statements of Borrower prepared on a separate company basis and shall include the notes and schedules thereto. The terms "including" / "includes" shall always be read as meaning "including (or includes) without limitation," when used herein or in any other Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1 Revolving Advances (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed the lesser of the Committed Revolving Line or the Borrowing Base, less in each case the face amount of any outstanding Letters of Credit (as hereafter defined), including drawn but unreimbursed Letters of Credit. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account. Borrower shall deliver to Bank a promissory note in substantially the form of Exhibit C. (c) The Committed Revolving Line shall terminate on the Revolving Maturity Date, at which time all Advances under this Section 2.1 shall be immediately due and payable. 2.1.1 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued letters of credit ("Letters of Credit") for the account of Borrower in an aggregate outstanding face amount not to exceed the lesser of the Committed Revolving Line or the Borrowing Base, minus in each case the outstanding Advances, and in any case not to exceed Two Million Five Hundred Thousand Dollars ($2,500,000). Each Letter of Credit shall have an expiry date 8 no later than one hundred eighty (180) days after the Revolving Maturity Date, provided that Borrower's Letter of Credit reimbursement obligation shall be secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement, including without limitation an issuance fee equal to two percent (2%) of the face amount of each Letter of Credit. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (d) Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Revolving Committed Line for Letters of Credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such Letter of Credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such Letter of Credit remains outstanding. If a hedge for a currency exchange rate is in place for any Letter of Credit, no reserve shall be required for such Letter of Credit. 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest on the average daily balance thereof, at a per annum rate equal to the Prime Rate. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence and continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded 9 by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence and during the continuance of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence and continuance of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment, whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to Twenty Thousand Dollars ($20,000), which fee shall be due on the Closing Date and shall be fully earned and non-refundable; (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, not to exceed Seven Hundred and Fifty Dollars ($750) per audit, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents, provided that such audits will be conducted no more often than every six months unless an Event of Default has occurred and is continuing and such appraisals of collateral and financial analysis shall be conducted only upon the occurrence and during the continuance of an Event of Default. (c) Bank Expenses. Upon demand from Bank, including, without limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses without Borrower's prior consent, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): 10 (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any State or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 Term. Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Revolving Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF CREDIT EXTENSIONS 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) agreement to provide insurance; (d) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (e) an audit of Borrower's Accounts, the results of which shall be satisfactory to Bank; (f) a financing statement (Form UCC-1); (g) a warrant to purchase stock executed as of the Closing Date; 11 (h) subordination agreements with respect to the Debenture and the Subordinated Notes (as each term is defined in the Schedule) executed as of the Closing Date; and (i) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt payment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule and except for Permitted Liens, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. From and after the occurrence and continuance of an Event of Default, Borrower acknowledges that Bank may place a "hold" on any Deposit Account pledged as Collateral to secure the Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Subject to Section 12.8, Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral; provided, however, Bank shall have the right to appraise the Collateral only upon the occurrence and continuance of an Event of Default. 12 5. REPRESENTATIONS AND WARRANTIES Except as set forth in the Schedule, Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified, except for states as to which any failure to so qualify would not have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's corporate powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default would reasonably be expected to have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business and will not, without at least thirty (30) days prior written notice to Bank, do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 13 5.8 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.9 Solvency. Borrower is solvent and Borrower is able to pay its debts (including trade debts) as they mature. 5.10 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could reasonably be expected to have a Material Adverse Effect. 5.11 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release or other disposition of hazardous waste or hazardous substances into the environment. 5.12 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed on a timely basis, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.13 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 14 5.14 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted except where any failure to do so would not reasonably be expected to have a Material Adverse Effect. 5.15 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results). 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which would reasonably be expected to have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. (a) Borrower shall deliver to Bank: (i) as soon as available, but in any event within thirty (30) days after the end of each month (and after the Equity Event, within thirty (30) days after the end of each fiscal quarter), a Borrower prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by a Responsible Officer; (ii) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (iii) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (iv) promptly upon 15 receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that would reasonably be expected to result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (v) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. (b) Within thirty (30) days after the last day of each month, if Advances or Letters of Credit are outstanding under this Agreement, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable. (c) Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit E hereto. After an Equity Event, the Compliance Certificate shall be submitted on a quarterly basis or within five (5) days after filing Form 10-K with the SEC. (d) Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all inventory related returns, and disputes and claims regarding inventory, where the inventory related return, dispute or claim involves more than One Hundred Twenty-Five Thousand Dollars ($125,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, within two (2) business days after demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment or deposit if the amount or validity of such payment is (i)contested in good faith by appropriate proceedings, (ii) is reserved against (to the extent required by GAAP) by Borrower and (iii) no lien other than a Permitted Lien results. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's business in amounts and of a type that are customary to businesses similar to Borrower's. 16 (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. So long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy of the replacement or repair of destroyed or damaged property; provided, that after the occurrence and during the continuance of an Event of Default, all proceeds payable under any such policy shall, at the option of Bank, be payable to Bank for application to the Obligations. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each calendar month, beginning with the month ending October 31, 1997, a ratio of Quick Assets to Current Liabilities, of at least 1.25 to 1.0. After the Equity Event, Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities, of at least 1.25 to 1.0. 6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth plus Subordinated Debt of not less than Three Million Five Hundred Thousand Dollars ($3,500,000). After the Equity Event, Borrower shall maintain, as of the last day of each fiscal quarter, a Tangible Net Worth plus Subordinated Debt of not less than Three Million Five Hundred Thousand Dollars ($3,500,000). 6.10 Debt Net Worth. Borrower shall maintain as of the last day of each calendar month, beginning with the month ending October 31, 1997, a ratio of (i) Total Liabilities less Subordinated Debt to (ii) Tangible Net Worth plus Subordinated Debt of not more than 1.75 to 1.0 After the Equity Event, Borrower shall maintain as of the last day of each fiscal quarter, a ratio of Debt to Tangible Net Worth of at least 1.75 to 1.0. 6.11 Profitability. Borrower may incur losses not to exceed: (i) $3,800,000 for the fiscal quarter ending September 30, 1997; (ii) $2,600,000 for the fiscal quarter ending December 31, 1997; (iii) $1,500,000 for the fiscal quarter ending March 31, 1998; and (iv) $300,000 for the fiscal quarter ending June 30, 1998. 6.12 Registration of Intellectual Property Rights. (a) Borrower shall, consistent with Borrower's reasonable business practices, register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual 17 property rights listed on Exhibits A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement; provided, however, Borrower shall register its pending patents as soon as is reasonably practicable, consistent with Borrower's reasonable business practices. Borrower shall, consistent with Borrower's reasonable business practices, register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the United States in the Intellectual Property Collateral. (c) Borrower shall, to the extent such Trademarks, Patents and Copyrights are material to Borrower's business as determined by Borrower's reasonable business practices (i) use commercially reasonable efforts to protect, defend and maintain the validity and enforceability of the registrations and applications for registration of the Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Borrower determines that reasonable business practices suggest that abandonment, forfeit or dedication is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.12 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.12. 6.13 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, without the prior written consent of Bank, which may be granted or withheld in Bank's sole discretion, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 Dispositions. Except as set forth in the Schedule, convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of inventory in the ordinary course of business, (ii) of licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business, (iii) of worn-out or obsolete Equipment, or (iv) constituting Permitted Liens. 18 7.2 Changes in Business, Ownership, Management or Business Locations. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and its Subsidiaries and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership or management other than a sale by Borrower of equity Securities of Borrower or as set forth in the Schedule. Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person; provided that this Section 7.3 shall not apply to transactions among Subsidiaries or among Borrower and its Subsidiaries in which Borrower is the surviving entity. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, without Bank's prior written consent. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock; provided, that (i) Borrower may declare and make any dividend payment or other distribution payable in its equity securities, (ii) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange therefor and (iii) Borrower may repurchase stock from former employees, officers, directors or consultants of Borrower in accordance with the terms of repurchase or similar agreements between Borrower and such employees, officers, directors or consultants provided that an Event of Default has not occurred and is continuing, or would exist after giving effect to such repurchase or similar transaction. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person and except as set forth in the Schedule. 19 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt, to the extent such amendment has a material adverse effect on Bank or changes any of the terms of payment. 7.10 Compliance. Become an "investment company" or a company controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2 Covenant Default. (a) If Borrower fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants contained in Article 7 of this Agreement, or if Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any such default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within fifteen (15) days after Borrower's actual knowledge thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period or cannot after diligent attempts by Borrower be cured within such fifteen (15) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days after Borrower's actual knowledge) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 Material Adverse Change. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral; provided that the foregoing is not intended to waive any rights available to Borrower under law. 20 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any material portion of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within thirty (30) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within sixty (60) days (provided that no Credit Extensions will be made from the date of commencement of an Insolvency Proceeding up to the date of the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is an uncured and unwaived default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount equal to or in excess of Five Hundred Thousand Dollars ($500,000) or that would reasonably be expected to have a Material Adverse Effect; 8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is required pursuant to the terms of such Subordinated Debt which Subordinated Debt has been approved by Bank or is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made from the date of such judgment until to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or writing delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 21 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence and during the continuance of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any outstanding Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (f) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (h) Sell the Collateral at either a public or sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order Bank deems appropriate; 22 (i) Bank may credit bid and purchase at any public sale, or at any sale as permitted by law; and (j) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable and (f) dispose of the Collateral; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide Advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account and Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and, if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following upon the occurrence and during the continuance of an Event of Default: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. The foregoing notwithstanding, if Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, immediately following payment of all outstanding Obligations hereunder, as required under the terms of this Agreement, then Bank may make payment of the same or any part thereof. Any amounts so paid or deposited by Bank, except for reserves under the Committed Revolving Line, shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 23 9.5 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014-4167 Attn: Daniel Steimle FAX: (408) 725-0990 If to Bank: Venture Banking Group Three Palo Alto Square, Suite 150 Palo Alto, CA 94306 Attn: Jon Krogstad FAX: (650) 843-6969 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 24 11. CHOICE OF LAW AND VENUE The Loan Documents shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall indemnify, defend, protect and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 25 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 Confidentiality. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Advance, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, and (v) as Bank may deem appropriate in connection with the enforcement of its remedies hereunder. Confidential information hereunder shall not include information that either (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter --------------------- Title: President and CEO ------------------ VENTURE BANKING GROUP, a division of Cupertino National Bank By: /s/ Company Officer --------------------- Title: ------------------ 26 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; (e) All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. The Collateral shall not include Equipment that Borrower does not own, which Equipment Borrower leases from third parties. Notwithstanding the foregoing, the term "Collateral" shall not include any general intangibles or contracts of Borrower (whether owned or held as licensee or lessee, or otherwise) to the extent that (i) such general intangibles or contracts are not assignable or capable of being encumbered as a matter of law or under the terms of the license, lease or other agreement applicable thereto (but solely to the extent that such restriction shall be enforceable under applicable law) without the consent of the licensor or lessor thereof or other applicable party thereto and (ii) such consent has not been obtained: provided, however, that the foregoing grant of security interest shall extend to, and the term "Collateral" shall include, (A) any general intangible or contract which is an Account or a proceed of, or otherwise related to the enforcement or collection of, any Account or goods which are the subject of any Account, and (B) any and all proceeds of any general intangibles or contracts which are otherwise excluded to the extent that the assignment or encumbrance of such proceeds is not so restricted, and (C) upon obtaining the consent of any such licensor, lessor or other applicable party with respect to any such otherwise excluded general intangibles or contracts, such general intangibles or contracts as well as any and all proceeds thereof that might theretofore have been excluded from such grant of a security interest and the term "Collateral". EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: _______________________ FAX#: ______________ TIME: _______________________ FROM: ____________________________________________________________________ CLIENT NAME (BORROWER) REQUESTED BY: ____________________________________________________________ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ____________________________________________________ PHONE NUMBER: ____________________________________________________________ FROM ACCOUNT # ________________________ TO ACCOUNT # _____________ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $_______________________________ PRINCIPAL PAYMENT (ONLY) $_______________________________ INTEREST PAYMENT (ONLY) $_______________________________ PRINCIPAL AND INTEREST (PAYMENT) $_______________________________ OTHER INSTRUCTIONS: ______________________________________________________ __________________________________________________________________________ All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: ------------------ The following person is authorized to request the loan payment transfer/ loan advance on the advance designated account and is known to me. __________________________________ ____________________________ Authorized Requester Phone # __________________________________ ____________________________ Received by (Bank) Phone # _____________________________________ Authorized Signature (Bank) EXHIBIT C REVOLVING PROMISSORY NOTE $4,000,000 Palo Alto, California Date: October 16, 1997 HYBRID NETWORKS, INC. ("Borrower"), for value received, hereby promises to pay to the order of VENTURE BANKING GROUP, a division of Cupertino National Bank ("Bank"), in lawful money of the United States of America, pursuant to that certain Loan and Security Agreement dated as of October 16, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $4,000,000 or, if lesser, (ii) the principal amount of all Advances outstanding as of the maturity date hereof. This Note is one of the Notes referred to in the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. Borrower further promises to pay interest on each Advance hereunder in like funds on the principal amount hereof from time to time outstanding from the date hereof until paid in full, at a rate or rates per annum and payable on the dates determined pursuant to the Loan Agreement. Payment on this Note shall be applied in the manner set forth in the Loan Agreement. The Loan Agreement contains provisions for acceleration of the maturity of Advances hereunder upon the occurrence of certain stated events and also provides for optional and mandatory prepayments of principal hereof prior to any stated maturity upon the terms and conditions therein specified. All Advances made by Bank to Borrower pursuant to the Loan Agreement shall be recorded by Bank on the books and records of Bank. The failure of Bank to record any Advance or any prepayment or payment made on account of the principal balance hereof shall not limit or otherwise affect the obligation of Borrower under this Note and under the Loan Agreement to pay the principal, interest and other amounts due and payable under the Advances. Any principal or interest payments on this Note not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at the Default Rate. Upon the occurrence and continuance of a default hereunder or an Event of Default under the Loan Agreement, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Bank, be immediately collectible by or on behalf of Bank pursuant to the Loan Agreement and applicable law. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including reasonable attorneys' fees, costs and expenses. The right to plead any and all statutes of limitations as a defense to any demand hereunder is hereby waived to the full extent permitted by law. The amount of this Note is secured by the Collateral identified and described as security therefor in the Loan Agreement. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflicts of laws principles that would cause the application of the laws of any other jurisdiction. The provisions of this Note shall inure to the benefit of and be binding upon any successor to Borrower and shall extend to any holder hereof. HYBRID NETWORKS, INC. By: ____________________________ Printed Name:___________________ Title: _________________________ EXHIBIT D BORROWING BASE CERTIFICATE ______________________________________________________________________________ Borrower: Hybrid Networks, Inc. Commitment Amount: $4,000,000 _______________________________________________________________________________ ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $____________ 2. Additions (please explain on reverse) $____________ 3. TOTAL ACCOUNTS RECEIVABLE $____________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $____________ 5. Balance of 50% over 90 day accounts $____________ 6. Concentration Limits (Accounts exceeding 30% total A/R) $____________ 7. Foreign Accounts (unless pre-approved) $____________ 8. Governmental Accounts $____________ 9. Contra Accounts $____________ 10. Promotion or Demo Accounts $____________ 11. Intercompany/Employee Accounts $____________ 12. Other (please explain on reverse) $____________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____________ 14. Eligible Accounts (#3 minus #13) $____________ 15. LOAN VALUE OF ACCOUNTS (75% of #14) $____________ BALANCES 16. Maximum Loan Amount $____________ 17. Total Funds Available [Lesser of #15 or #16] $____________ 18. Present balance owing on Line of Credit $____________ 19. RESERVE POSITION (#17 minus #18) $____________ The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Venture Banking Group. COMMENTS: BANK USE ONLY ---- --- ---- Rec'd By: ____________ Auth. Signer HYBRID NETWORKS, INC. Date: ________________ Verified: ____________ Auth. Signer By: ____________________________ Date:_________________ Authorized Signer ______________________ - EXHIBIT E COMPLIANCE CERTIFICATE TO: VENTURE BANKING GROUP FROM: HYBRID NETWORKS, INC. The undersigned authorized officer of Hybrid Networks, Inc. (the "Officer") hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in compliance in all material respects for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that no borrowings may be requested by Borrower at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. Please indicate compliance status by circling Yes/No under "Complies" column. Reporting Covenant Required Complies ------------------ -------- -------- Financial statements Within 30 days* Yes No Annual (CPA Audited) FYE within 120 days or within 5 days Yes No after filing with SEC 10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No A/R & A/P Agings Monthly within 30 days Yes No A/R Audit Initial and Semi-Annual Yes No * After the Equity Event, within 30 days of each quarter end or within 5 days after filing with the SEC. Financial Covenant Required Actual Complies ------------------ ---------- ---------- -------- Maintain on a Monthly Basis:** Minimum Quick Ratio 1.25:1.0 _____:1.0 Yes No Minimum Adjusted Net Worth1 $3,500,000 $________ Yes No Minimum Debt/Tangible Net Worth1 1.75:1.0 ______:___ Yes No Profitability: Quarterly ________ 2 $________ Yes No ** After the Equity Event, Financial Covenants to be maintained on a quarterly basis. 1 Tangible Net Worth plus Subordinated Debt 2 Permitted losses not to exceed: $3,800,000 for quarter ending September 30, 1997; $2,600,000 for quarter ending December 31, 1997; $1,500,000 for quarter ending March 31, 1998; and $300,000 for quarter ending June 30, 1998. Comments Regarding Exceptions: See Attached. BANK USE ONLY Sincerely, Received by:_____________________ AUTHORIZED SIGNER ___________________________________ Signature Date:____________________________ ___________________________________ Verified:________________________ Title AUTHORIZED SIGNER ___________________________________ Date:____________________________ Date Compliance Status: Yes No Hybrid Networks, Inc. (the "Company") Schedule of Exceptions to Loan and Security Agreement (the "Agreement") with Venture Banking Group Unless otherwise defined herein, all capitalized terms in this Schedule have the same meaning given to such terms in the Agreement. Unless otherwise noted, references to sections herein refer to the corresponding sections of the Agreement. Sections or headings are provided for convenience only. Nothing in this Schedule constitutes an admission of any liability or obligation of the Company to any third party, nor an admission to any third party against the Company's interests. Unless otherwise stated, all statements made herein are made as of the date of execution of the Agreement. "Eligible Accounts" (c) Bank acknowledges approving Accounts owing by: AT&T (f) Bank acknowledges approving Accounts owing by: AT&T (h) Bank acknowledges approving Accounts owing by: AT&T Itochu Network Systems Tec (j) Bank acknowledges approving Accounts owing by: Alcatel Itochu "Eligible Foreign Accounts" Bank acknowledges approving Accounts owing by: Alcatel "Permitted Indebtedness" (Indebtedness Existing on the Closing Date) A. Senior Secured Convertible Debenture Due 2002, issued April 30, 1997 in an aggregate principal amount of $5,500,000, held by BG Services Limited (the "Debenture"). B. Subordinated Promissory Notes issued September 25, 1997, in an aggregate principal amount of approximately $6.9 million ("Subordinated Notes"). C. Equipment Lease with Comdisco, Inc. dated August 1, 1995 with a maximum face amount of $500,000 (the "1995 Comdisco Lease"). D. Equipment Lease with Comdisco, Inc. dated August 19, 1996 with a maximum face amount of $1,000,000 (the "1996 Comdisco Lease"). E. The Company is soliciting additional equipment leases with an aggregate maximum face amount of up to $2,000,000 from Pentech Financial Services, Phoenix Capital, Leasing Technologies International, IMF Financial Corp. and certain other parties (the "Additional Leases"). "Permitted Investment" (a) The Company made an installment sale of $850,000 to Internet Ventures, which sale is expected to be fully paid in March 1998. "Permitted Liens" A. Liens in substantially all assets of the Company granted to the holder of the Debenture. B. Liens in equipment financed under the 1995 Comdisco Lease. C. Liens in equipment financed under the 1996 Comdisco Lease. D. Liens in equipment to be financed under the Additional Leases. Section 4.1 (Grant of Security Interest) The security interest granted under the Agreement shall constitute a valid, first priority security interest to the extent that such security interest can be perfected by the filings contemplated by the Agreement, and such filings are made with the appropriate filing offices. Section 5.1 (Due Organization and Qualification) The Company is not currently qualified to do business in Illinois and is in the process of considering whether such qualification is necessary. Section 5.7 (Litigation) A. The Company has determined that third parties may be infringing its patent rights and/or may have misappropriated its trade secrets, know-how and other proprietary rights. The Company has sent letters to certain third parties notifying them that they may be infringing such rights, although the Company has not yet determined if it will assert any claims against these parties or others. The Company is currently evaluating its intellectual property strategies. There can be no assurance that such strategies will not involve potential litigation or that such litigation, if brought, will not have a material adverse effect upon the Company. B. The Company has received two United States Patents: (i) 5,347,304 dated September 13, 1994 (the "304 Patent") and (ii) 5,586,121 dated December 17, 1996. On November 16, 1994 the Company filed an application for the reissuance of the 304 Patent, which was subsequently allowed for reissuance by the Patent and Trademark Office ("PTO") on August 19, 1997. Such reissue application was formally protested by International Business Machines Corporation ("IBM") and John Powers, Jr. ("Powers"). On December 12, 1996 the Company filed a Complaint For Damages and Equitable Relief (the "Complaint") in the Superior Court of the District of Columbia against both IBM and Powers. (Civil Action No. 96CA009725). The suit arose out of IBM's filing an Invention Disclosure with the PTO following the Company's filing for reissue of its '304 patent. In April 1997, the Company settled its claims against IBM. The claims against the other defendant in the suit, John T. Powers were dismissed without prejudice as to either party. In connection with the settlement, the Company agreed to fully dismiss its complaint against IBM with prejudice and IBM agreed to designate certain portions of the deposition of its witness, Steven B. Phillips, Esq. as non-confidential and not to assert any claims against the Company arising out of the suit. As of September 18, 1997, IBM and the Company have settled the Complaint and the Complaint against Powers was voluntarily dismissed without prejudice. C. The Company has been notified by Keen Yee that he believes that certain of the Company's products utilize technology invented by Mr. Yee and included in certain patents issued to him. Aside from the letter from Mr. Keen Y. Yee dated December 18, 1996 objecting to the Company's use of certain technology developed by Mr. Yee and allegedly infringing upon certain patent rights ('789, '499 and '476) of Mr. Yee's, the Company is not aware of any further action taken by Mr. Yee against the Company, and the Company does not believe, after reasonable inquiry that the Company has or is infringing upon the intellectual property rights of Mr. Yee. There can be no assurance , however, that Mr. Yee will not assert claims against the Company or that he will not prevail with respect to such claims. D. The Company's trademark of "Cyber Manager" was contested by Cyber Interactive by letter of its counsel to the Company dated March 12, 1996. On March 3, 1997, the Company sent an e-mail to Cyber Interactive stating the Company's position that the parties have different rights in different markets but offering to negotiate an agreement with Cyber Interactive. No further action has been taken or threatened by Cyber Interactive since that date. The Company has notified Hybrid Communications, Inc. ("HCI") that it is the Company's position that HCI's web site use of the "Hybrid" name violates the Company's intellectual property rights. HCI notified the Company on April 12, 1995 (via e-mail) that it had already changed its web page to "Hybrid City/Downtown" and was not in violation. The Company has taken no further action against HCI in this matter. The Company holds a trademark for HYBRIDWARE (Reg. No. 2,065,404) and CYBERMASTER (Reg. No. 2,058,030). Section 6.1 Good Standing See section 5.1. Section 7.2 Changes in Business Up to approximately 25% of the Company's equity securities is intended to be sold to the public in an initial public offering, and any equity securities sold in such offering will be tradable by the public. Section 7.8 Transactions with Affiliates A. The Company has entered into consulting agreements with certain persons who may also be stockholders. B. Certain Sequoia entities and Daniel Steimle were among the purchasers of the Subordinated Notes. C. Network Systems Technologies, of which Eduardo Moura is an officer, has an outstanding receivable for $482,299. D. Employment Agreement with Carl Ledbetter dated as of January 15, 1996. Employment offer letters from the Company which contain severance arrangements, including offer letters to Victor Godbole, Daniel Steimle and William Fry. E. Certain of the Company's officers and employees are eligible for commissions and/or bonuses (including stock grants) based upon the Company's financial performance and personal objectives. F. All of the Company's full-time employees and dependents are eligible to participate in benefit plans covering medical insurance, dental insurance, life insurance, long term disability insurance and worker's compensation insurance. The Company has adopted (a) the 1997 Employee Stock Purchase Plan, the 1997 Directors Stock Option Plan, and the 1997 Equity Incentive Plan, to become effective upon the Company's initial public offering; and (b) the 1992 Stock Issuance Plan, the Executive Officer Incentive Plan, the 1993 Equity Incentive Plan and the 1996 Equity Incentive Plan. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR OTHER TRANSFER HAS BEEN REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. No.___________________ Dated: October 16, 1997 HYBRID NETWORKS, INC. Common Stock Purchase Warrant THIS IS TO CERTIFY THAT, for value received, Venture Banking Group, a division of Cupertino National Bank (the "Bank"), and its registered successors and permitted assigns are entitled, subject to the terms and conditions set forth below, to purchase from HYBRID NETWORKS, INC., a Delaware corporation (the "Corporation"), at any time and from time to time after 9:00 A.M., Cupertino, California time, on the Initial Exercise Date (as defined in Section 1 below) and prior to 5:00 P.M., Cupertino, California time, on the Expiration Date (as defined in Section 1 below), any or all of the Warrant Shares (as defined in Section 1 below), at a purchase price per share equal to the Exercise Price (as defined in Section 1 below). The number and character of the Warrant Shares and the Exercise Price are subject to adjustment as provided herein. This Common Stock Purchase Warrant (this "Warrant") is being issued in connection with a Loan and Security Agreement between the Corporation and the Bank. Section 1. Definitions. As used in this Warrant, the following terms shall have the respective meanings set forth below or elsewhere in this Warrant as referred to below: "Additional Stock" shall have the meaning set forth in Section 4.3(f). "Bank" shall have the meaning set forth in the first paragraph hereof. "Common Stock" shall mean shares of the Common Stock of the Corporation, $.001 par value per share (as such par value may be amended from time to time). "Conversion Fraction" shall have the meaning set forth in Section 2.3. "Corporation" shall have the meaning set forth in the first paragraph of this Warrant. "Derivative Security" shall have the meaning set forth in Section 4.3(e). "Effective Price" shall have the meaning set forth in Section 4.3(a). "Exercise Date" shall have the meaning set forth in Section 2.4 hereof. "Exercise Price" shall mean, as of the Initial Exercise Date and at any time thereafter, the Initial Exercise Price, as adjusted from time to time pursuant to the terms of this Warrant. "Expiration Date" shall mean October 16, 2002. "Fair Market Value" of a Warrant Share shall mean (i) in the case of the exercise of this Warrant, in whole or in part, after the consummation of an Initial Public Offering, the average of the last reported sale price per share of Stock on the Nasdaq-NMS or any national securities exchange in which such Stock is quoted or listed, as the case may be, for the three trading days immediately preceding the Exercise Date, or (ii) in the case of the exercise of this Warrant, in whole or in part, before the consummation of an Initial Public Offering, the fair market value of a share of Stock, as determined in good faith by the Board of Directors of the Corporation. "Holder" shall mean, as applicable, (i) the Bank, (ii) any successor of the Named Holder or (iii) any Person to whom this Warrant or any portion thereof shall have been transferred in accordance with the provisions of Section 9 hereof. "Initial Exercise Date" shall mean the earlier to occur of (i) 180 days after the Issue Date, or (ii) the date of consummation of an Initial Public Offering; provided, however, that, in the event of any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all of the Corporation's assets, or the merger, consolidation, reorganization or dissolution of the Corporation, or the sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting capital stock (whether newly issued or from treasury, or previously issued and then outstanding, or any combination thereof) (any of such events, a "Disposal Event") occurring at any time prior to the earlier of (A) 180 days after the Issue Date or (B) the date of consummation of an Initial Public Offering, then the Initial Exercise Date shall be deemed to be the date that is five business days prior to the earliest to occur of any such Disposal Event. "Initial Exercise Price" shall mean $4.04 per share (subject to appropriate adjustment as provided in this Warrant). "Initial Public Offering" shall mean the closing of an underwritten public offering pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Securities Act covering the offer and sale of shares of Common Stock or any other class of capital stock of the Corporation. "Investor Rights Agreement" shall mean that certain Hybrid Networks, Inc. Amended and Restated Investor Rights Agreement, dated as of September 18, 1997, by and among the Corporation and certain holders of the Corporation's securities, as amended pursuant to an amendment entered into by the Corporation, the Bank and holders of a majority of the Registrable Securities outstanding (as defined in the Investor Rights Agreement), and as further amended from time to time in accordance with the terms thereof. 2 "Issue Date" shall mean October 16, 1997. "Person" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Registrable Securities" shall have the meaning ascribed to it in the Investor Rights Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended. "Stock" shall mean (i) Common Stock, and/or (ii) to the extent that the Holder is entitled to receive, or receives, upon exercise of this Warrant any other capital stock of the Corporation (other than Common Stock), or of any other Person or any other securities of the Corporation or of any other Person, in lieu of or in addition to Common Stock (whether as a result of any reclassification of Common Stock or any other Stock or reorganization, reclassification, merger, consolidation or sale of substantially all the assets of the Corporation or otherwise), such other capital stock or securities. "Subject Shares" shall have the meaning set forth in Section 2.3. "Warrant" shall have the meaning set forth in the second paragraph of this Warrant. "Warrant Shares" shall mean the shares of Common Stock, as adjusted as provided in this Warrant, that are issuable upon the exercise of this Warrant. Section 2. Exercise of Warrant. Section 2.1 Number of Warrant Shares Issuable Upon Exercise. Subject to adjustment as provided herein, the maximum number of Warrant Shares issuable upon exercise of this Warrant shall be 7,178. Section 2.2 Method of Exercise. Subject to and upon all of the terms and conditions set forth in this Warrant, the Holder may exercise this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is then currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by presentation and surrender of this Warrant to the Corporation at its principal office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4), together with (a) a properly completed and duly executed subscription form, in the form attached hereto, which subscription form shall specify the number of Warrant Shares for which this Warrant is then being exercised, and (b) payment of the aggregate Exercise Price payable hereunder in respect of the number of Warrant Shares for which this Warrant is then being exercised. Payment of such aggregate Exercise Price shall be made either (i) in cash or by money order, certified or bank cashier's check or wire transfer (in each case in lawful currency of the United States of America), (ii) in the event the Holder is also the holder of a Note and such outstanding principal amount of, and/or accrued but unpaid interest on, such Note is equal to or greater than the Exercise Price, by decreasing the outstanding principal amount of, and/or accrued but unpaid interest on, such Note by the amount of the Exercise Price, or (iii) by conversion of this Warrant as provided in Section 2.3. 3 Section 2.3 Conversion of Warrant. (a) The Holder shall have the right to convert this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by the presentation and surrender of this Warrant to the Corporation at its principal office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4, together with a properly completed and duly executed conversion form, in the form attached hereto, which conversion form shall specify the number of Warrant Shares as to which this Warrant is being converted (the "Subject Shares"). Upon exercise of this conversion right, the holder hereof shall be entitled to receive that number of Warrant Shares equal to the quotient obtained by dividing [ (A - B) (X) ] by (A), where: A = the Fair Market Value of one Warrant Share on the date of conversion of this Warrant. B = the Exercise Price for one Warrant Share under this Warrant. X = the number of Subject Shares as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. (b) Upon conversion of this Warrant in accordance with this Section 2.3, the Holder shall be entitled to receive a certificate for the number of Warrant Shares acquired by the Holder as determined in accordance with the foregoing, and a new Warrant in substantially identical form and dated as of such conversion for the purchase of that number of Warrant Shares equal to the difference, if any, between (i) the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion and (ii) the number of Subject Shares as to which the Holder exercised its conversion right pursuant to this Section 2.3. No fractional shares may be issued upon any conversion of this Warrant. If any conversion would result in a fractional share (the "Conversion Fraction"), then, at Holder's election either (A) the number of shares issued upon the conversion will be rounded down to the last whole share; or (B) the Holder will pay in cash an amount equal to the Exercise Price times a fraction equal to 1 less the Conversion Fraction, in which event the number of shares issued upon the conversion (plus the cash payment) will be rounded up to the nearest whole share. For example, if the Fair Market Value is $10.00 and the Exercise Price is $4.04, then, upon exercise of the conversion right under this Section 2.3 with respect to 100 Subject Shares, the Holder would receive, at the Holder's election, either (1) 59 Warrant Shares without making any cash payment or (2) 60 Warrant Shares if the Holder elected to pay $2.42 in cash (60% of the Exercise Price for the extra share) and would receive a new Warrant for the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion less 100. Section 2.4 Effectiveness of Exercise; Ownership. Each exercise of this Warrant by the Holder shall be deemed to have been effected immediately prior to the close of business on the date upon which all of the requirements of Sections 2.1 and 2.2 hereof with respect to such exercise shall have been complied within in full (each such date, an "Exercise Date"). On the applicable Exercise Date with respect to any exercise of this Warrant by the Holder, the 4 Corporation shall be deemed to have issued to the Holder, and the Holder shall be deemed to have become the holder of record and legal owner of, the number of Warrant Shares being purchased upon such exercise of this Warrant, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such number of Warrant Shares being purchased shall not then be actually delivered to the Holder. Section 2.5 Delivery of Stock Certificates on Exercise. As soon as practicable after the exercise of this Warrant, and in any event within ten days thereafter, the Corporation, at its expense, will cause to be issued in the name of and delivered to the Holder, or as the Holder may direct (subject in all cases, to the provisions of Section 9 hereof), a certificate of certificates for the number of Warrant Shares purchased by the Holder on such exercise. Section 2.6 Shares to be Fully Paid and Nonassessable. All Warrant Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, free of all liens, taxes, charges and other encumbrances or restrictions on sale (other than those set forth herein), and free and clear of all preemptive rights. Section 2.7 Fractional Shares. This Warrant may be exercised only for whole Warrant Shares. No fractional Warrant Shares or scrip representing fractional Warrant Shares shall be issued upon the exercise of this Warrant. Section 2.8 Issuance of New Warrants; Corporation Acknowledgment. Upon any partial exercise of this Warrant, the Corporation, at its expense, will forthwith issue and deliver to the Holder a new warrant or warrants of like tenor, registered in the name of the Holder, exercisable, in the aggregate and subject to the limitations provided for in this Warrant, for the then balance of the Warrant Shares with respect to which this Warrant has not been exercised. Moreover, the Corporation shall, at the time of any exercise of this Warrant, upon the request of the Holder, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; provided, however, that if the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Corporation to afford to the Holder any such rights. Section 2.9 Payment of Taxes. The Corporation shall pay any transfer tax which may be payable in respect of any issuance of certificates (if applicable) representing any Warrant Shares purchased upon exercise or conversion of this Warrant. The Corporation shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Warrant Shares, or any new or replacement shares in any name other than that of the Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate security or Warrant until such tax or other charge has been paid, or it has been established to the Company's satisfaction that no tax or other charge is due. Section 2.10 Expiration. This Warrant and the Holder's rights hereunder, to the extent not previously exercised or converted, shall expire as of 5:00 P.M., California time, on the Expiration Date. Section 3. Registration Rights. The Holder of this Warrant shall have the benefit of the rights available to the parties to the Investor Rights Agreement to cause the Corporation to 5 register any and all Warrant Shares under the Securities Act and under any blue sky or securities laws of any jurisdiction within the United States, at the time and in the manner specified in the Investor Rights Agreement, as provided in the amendment to that agreement entered into by the Bank, the Company and the holders of majority of the Registrable Securities outstanding (as defined in the Investor Rights Agreement), and any and all Warrant Shares shall be deemed to be Registrable Securities for all purposes of and as provided in the Investor Rights Agreement. Section 4. Adjustments. The number and character of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time receivable or issuable upon exercise or conversion of this Warrant) and the Exercise Price therefor, are subject to adjustment upon occurrence of the following events: Section 4.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time issuable upon exercise of this Warrant) shall each be proportionally adjusted to reflect any stock dividends stock splits, reverse stock splits, combinations of shares, reclassifications, recapitalizations or other similar events altering the number of outstanding shares of Warrant Stock (or such other Stock or other assets). Section 4.2 Adjustment for Capital Reorganization, Consolidation, Merger, Sale or Conversion. If any reorganization of the capital stock of the Corporation, or any consolidation or merger of the Corporation with or into another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock will be entitled to receive stock, securities or assets with respect to or in exchange for their Common Stock, then, in each such case, the Holder, upon the exercise or conversion of this Warrant, at any time after the consummation of such capital reorganization, consolidation, merger or sale, shall receive, in lieu of the stock or other securities and property receivable upon the exercise or conversion, as applicable, of this Warrant prior to such consummation, the Stock or other assets to which the Holder would have been entitled upon such consummation if the Holder had exercised or converted, as applicable, this Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 4; and in each such case, the terms of this Warrant shall be applicable to the shares of Stock or other assets receivable upon the exercise or conversion, as applicable, of this Warrant after such consummation. Section 4.3 Adjustment for Issuance for Additional Stock. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall be further subject to adjustment from time to time as follows: (a) Upon each issuance by the Corporation of any Additional Stock (as defined below), after the Issue Date and before the consummation by the Company of an Initial Public Offering, for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such Additional Stock (except as provided in Section 4.1 above), (i) the Exercise Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 4.3) be adjusted to the Effective Price (as defined below) at which the Additional Stock is issued, and (ii) the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall forthwith be adjusted by dividing the number of Warrant Shares into which this Warrant is exercisable immediately before the adjustment 6 provided for herein by a fraction the numerator of which shall be the Effective Price and the denominator of which shall be the Exercise Price immediately before the adjustment provided for herein. The "Effective Price" for any issuance of Additional Stock shall mean the lesser of $4.04 or the quotient determined by dividing the total number of shares of Additional Stock issued (or deemed issued pursuant to Section 4.3(e)) by the Corporation in such issuance into the aggregate amount of consideration received by the Corporation therefor, as provided in this Section 4.3. (b) No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Section 4.3(e)(3) and 4.3(e)(4) below, no adjustment of the Exercise Price pursuant to this Section 4.3(a) shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment. (c) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (d) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (e) In the case of the issuance (whether before, on or after the Issue Date) of options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4.3. (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock converted thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities (assuming the satisfaction of any conditions to convertibility or exchangeability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) or upon the exercise of options to purchase or rights to subscribe for 7 such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Section 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or change of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided that no such recomputation shall have the effect of increasing or decreasing the Exercise Price to an amount other than the amount that would have existed on the recomputation date had the unexercised options or rights never been issued. (5) In determining the amount of consideration received by the Corporation for or upon the issuance of any Additional Stock or other securities for the purposes of this Section 4.3, the value of any options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible onto or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (each a "Derivative Security") issued by the Corporation shall be deemed to be zero (so that the issuance itself of any such Derivative Security shall not be deemed to increase or decrease the consideration otherwise received by the Corporation under this Section 4.3, inasmuch as the rights under such Derivative Security shall be deemed to have been exercised immediately upon the issuance of such Derivative Security (as contemplated by Sections 4.3(e)(1) and 4.3(e)(2)). (f) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been pursuant to Section 4.3(e)) by the Corporation after the Issue Date other than (1) Common Stock issued pursuant to a transaction described in Section 4.1 or 4.2 hereof: 8 (2) An aggregate of up to 250,000 shares of, and/or options or rights to acquire shares of, Common Stock, issuable or issued to employees of the Corporation pursuant to an existing stock option plan or restricted stock plan of the Corporation; as provided in Section 4.3(e), the term "Additional Stock" shall not include any shares of capital stock that are issued upon the exercise of any options, warrants or rights excluded from the definition of Additional Stock pursuant to this Section (2); (3) shares of Common Stock issued or issuable (i) upon exercise or conversion of this Warrant, any securities issued pursuant to the Purchase Agreement or any options, warrants, convertible securities or other securities of the Corporation outstanding as of the Issue Date or (ii) upon conversion of shares of any series of Preferred Stock authorized as of the Issue Date. (g) No fractional shares shall be issued upon conversion of this Warrant or any portion thereof, and the number of Warrant Shares issuable as a result of any adjustment provided for in this Section 4.3 shall be rounded to the nearest whole share. Section 5. Officer's Certificate as to Adjustments. In each case of any adjustment or readjustment in the number and kind of Warrant Shares (or other Stock or assets), issuable hereunder from time to time, or in the Exercise Price, the Corporation, at its expense, will promptly cause an officer of the Corporation to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing the facts upon which such adjustment or readjustment is based. The Corporation will forthwith send a copy of each such certificate to the Holder in accordance with Section 10.4 below. Section 6. Notices of Record Date, etc. In the event of (a) any taking by the Corporation of a record of the holders of Stock for the purpose of determining the holders thereof who are entitled to receive any shares of Stock as a dividend or other distribution or pursuant to a stock split, or (b) any reorganization or the Corporation, or any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all the assets of the Corporation to, or the consolidation or merger of the Corporation with or into, any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, or (d) any sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting stock (whether newly issued, or from treasury, previously issued and then outstanding, or any combination thereof), then and in each such event the Corporation will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or stock split, and stating the amount and character of such dividend, distribution or stock split, or (ii) the date on which any such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any 9 is to be fixed, as of which the holders of record of any one or more classes of Stock shall be entitled to exchange their shares of Stock for securities or other property deliverable on such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up or (iii) the date on which any such sale of a majority of the Corporation's voting stock is to take place and the material terms thereof, as the case may be. Such notice shall be mailed at least 15 days prior to the date specified in such notice on which any such action is to be taken. Section 7. Exchange of Warrant. Subject to the provisions of Section 9 hereof (if and to the extent applicable), this Warrant shall be exchangeable, upon the surrender hereof by the Holder at the principal office of the Corporation, for new warrants of like tenor, each registered in the name of the Holder or in the name of such other Persons as they may direct, subject to Sections 9 and 10.5 (upon payment by the Holder of any applicable transfer taxes). Each of such new warrants shall be exercisable for such number of Warrant Shares as the Holder shall direct, provided that all of such new warrants shall represent, in the aggregate, the right to purchase the same number of Warrant Shares and cash, securities or other property, if any, which may be purchased by the Holder upon exercise of this Warrant at the time of its surrender. Section 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new warrant of like tenor. Section 9. Transfer Provisions, etc. By accepting this Warrant, Holder makes the representations set forth in 9.1, 9.2, 9.3 and 9.4 below and agrees to the restrictions set forth in 9.5, 9.6, 9.7 and 9.8 below, and, by exercising or converting this Warrant in whole or in part, the Holder agrees that Holder will then represent and will be deemed to represent that such representations are true and complete as of the date of such exercise or conversion. Section 9.1 Purchase Entirely for Own Account. This Warrant is, and any Warrant Shares received by the Holder upon exercise or conversion of this Warrant will be, acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Holder has no present intention of selling, granting any participation in, or otherwise distributing any such securities. The Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of such securities. Section 9.2 Investment Experience. The Holder is an investor in securities of companies in the development stage and acknowledges that the Holder is able to fend for itself, can bear the economic risk of the Holder's investment and has such knowledge and experience in financial or business matters that the Holder is capable of evaluating the merits and risks of the investment in this Warrant and the Warrant Shares. Section 9.3 Accredited Investor. The Holder is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. 10 Section 9.4 Restricted Securities. The Holder understands that this Warrant and the Warrant Shares are characterized as restricted securities under the federal securities laws and applicable state securities laws inasmuch as such securities are being (or will be) acquired from the Corporation in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act, only in certain limited circumstances. Section 9.5 Transfer Restrictions. Without in any way limiting the representations set forth above, the Holder agrees not to make any transfer of all or any portion of this Warrant or the Warrant Shares unless and until (a) such transfer is registered under the Securities Act and all applicable state securities laws, or (ii) Holder shall have notified the Corporation of the proposed transfer and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed transfer, and, if the Corporation requests, Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such transfer will not require registration of such shares under the Securities Act and applicable state securities laws. Section 9.6 Legends. (a) Each certificate representing any Warrant Shares issued upon exercise of this Warrant shall bear the legend set forth below, or a legend substantially equivalent thereto: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR DISPOSED OF UNLESS THEY ARE SO REGISTERED OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF COUNSEL AND AS TO THE FORM AND SUBSTANCE OF SUCH OPINION, AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." (b) Each certificate representing any shares of Stock issued from time to time upon exercise of this Warrant shall also bear any legend required under any applicable state securities or blue sky laws. (c) The Corporation may issue appropriate "stop transfer" instructions and may take such other steps as it may deem appropriate to cause the restrictions referred to in this Section 9 to be complied with. Section 9.7 Survival. The obligations of the Holder (and/or of any transferee of this Warrant or any Warrant Shares issued from time to time upon exercise of this Warrant) under this Section 9 shall, with respect to any Warrant Shares issued from time to time upon exercise of this Warrant, survive the exercise, expiration or other termination, or transfer, of this Warrant indefinitely. Section 9.8 Mechanics of Transfer. Subject to the terms and conditions of this Warrant and subject to compliance with all applicable securities laws, any transfer of all or any portion of 11 this Warrant, or of any interest therein, that is otherwise in compliance with applicable law shall be effected by surrendering this Warrant to the Corporation at its principal office, together with (i) a duly executed form of assignment, in the form attached hereto, (ii) payment of all applicable transfer taxes, if any. In the event of any such transfer of this Warrant, in whole, the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of this Warrant at the time of its transfer. In the event of any such transfer of any portion of this Warrant, (i) the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of the transferred portion of this Warrant at the time of such transfer, and (ii) the Corporation shall issue a new warrant of like tenor to the Holder, representing the right to purchase the number of Warrant Shares, and cash, securities or other property, if any, purchasable by the Holder upon exercise of the portion of this Warrant not transferred to such transferee. Until this Warrant or any portion thereof is transferred on the books of the Corporation, the Corporation may treat the Holder as the absolute holder of this Warrant and all right, title and interest therein for all purposes, notwithstanding any notice to the contrary. Notwithstanding the foregoing, neither this Warrant nor any rights hereunder may be transferred unless such transfer complies with all applicable securities laws and the provisions of this Section 9. Section 10. General. Section 10.1 Authorized Shares; Reservation of Shares for Issuance. At all times while this Warrant is outstanding, the Corporation shall maintain its corporate authority to issue, and shall have authorized and reserved for issuance upon exercise of this Warrant, such number of shares of Common Stock as shall be sufficient to perform its obligations under this Warrant (after giving effect to any and all adjustments to the number and kind of Warrant Shares purchasable upon exercise of this Warrant). Section 10.2 No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, sale or other transfer of any of its assets or properties, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder hereunder against impairment. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Stock receivable upon the exercise of this Warrant above the amount payable therefor on such exercise, 12 and (b) will take all action that may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Stock on the exercise of this Warrant. Section 10.3 No Rights as Stockholder. The Holder shall not be entitled to vote or to receive dividends or to be deemed the holder of Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Holder any of the rights of a stockholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings (except to the extent otherwise provided in this Warrant), or to receive dividends or subscription rights, until the Holder shall have exercised the Warrant and been issued Warrant Shares in accordance with the provisions hereof. Section 10.4 Notices. All notices, demands, requests, certificates or other communications under this Warrant shall be in writing and shall be either mailed by first class mail, postage prepaid, in which case such notice, demand, request, certificate or other communication shall be deemed to have been given three business days after the date on which it is first deposited in the mails, or hand delivered or sent by facsimile transmission, by tested or otherwise authenticated telex or cable or by expedited courier for overnight delivery with signature required, in each such case, such notice, demand, request, certificate or other communication being deemed to have been given upon delivery or receipt, as the case may be: (i) if to the Corporation, at 10161 Bubb Road, Cupertino, California 95014 Attention: Chief Financial Officer, or at such other address as the Corporation may have furnished in writing to the Holder; and (ii) if to the Holder, at the Holder's address appearing in the books maintained by the Corporation. Section 10.5 Assignment. Notwithstanding anything contained herein to the contrary, this Warrant and all rights hereunder are assignable or transferable (subject to the legend set forth in the heading on the first page hereof), in whole or in part, by the Bank to affiliates of the Bank. Section 10.6 Amendment and Waiver. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Corporation and the Holder. Section 10.7 Governing Law. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of California. 13 Section 10.8 Covenants to Bind Successor and Assigns. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Corporation shall bind its successors and assigns, whether so expressed or not. Section 10.9 Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 10.10 Construction. The definitions of this Warrant shall apply equally to both the singular and the plural forms of the terms defined. Wherever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The section and paragraph headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. Section 10.11 Remedies. The Holder and the Corporation, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will each be entitled to specific performance of its rights under this Warrant. The Holder and the Corporation each agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Warrant or where any provision hereof is invalidly asserted as a defense, the successful party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [rest of page intentionally left blank] 14 IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed in its corporate name by one of its officers thereunto duly authorized, all as of the day and year first above written. HYBRID NETWORKS, INC. By: --------------------------- Carl S. Ledbetter Chief Executive Officer 15 FORM OF SUBSCRIPTION (To be executed upon exercise of Warrant) To: HYBRID NETWORKS, INC. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to exercise thereunder, shares of Common Stock, $.001 par value per share -------- ("Common Stock"), of Hybrid Networks, Inc., a Delaware corporation, and tenders herewith payment of $ , representing the aggregate purchase -------- price for such shares based on the price per share provided for in such Warrant. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. Please issue a certificate or certificates for such shares of Common Stock in the following name or names and denominations and deliver such certificate or certificates to the person or persons listed below at their respective addresses set forth below: If said number of shares of Common Stock shall not be all the shares of Common Stock issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares of Common Stock less any fraction of a share of Common Stock paid in cash. Dated: , 19 ------------- -- ------------------------------ (Name of Holder) By: --------------------------- Its: -------------------------- Address: ---------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. NOTICE OF CONVERSION To: Hybrid Networks, Inc. (1) The undersigned hereby elects to convert that portion of the attached Warrant representing the right to purchase shares of ---------- Common Stock of Hybrid Networks, Inc. into such number of shares of Common Stock of Hybrid Networks, Inc. as is determined pursuant to Section 2.3 of such Warrant, which conversion shall be effected pursuant to the terms of such Warrant. (2) The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, except in compliance with applicable federal and state securities laws. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. (3) The undersigned accepts such shares subject to the terms relating to registration rights under the Investor Rights Agreement (as defined in the Warrant). - ------------------------ (Date) ------------------------------ (Name of Holder) By: --------------------------- Its: -------------------------- Address: ---------------------- ------------------------------ NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. FORM OF ASSIGNMENT For value received, hereby sells, assigns ---------------------------- and transfers unto (the "Transferee") the ----------------------------- attached Warrant [ % of the attached Warrant], together with all right, -- title and interest therein, and does hereby irrevocably constitute and appoint attorney to transfer said Warrant ---------------------------- [said percentage of said Warrant] on the books of Hybrid Networks, Inc., a Delaware corporation, with full power of substitution in the premises. The Transferee, by signing below, hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the Transferee as of the date hereof, and that the Transferee agrees to be bound by the restrictions of Section 9 of the Warrant. If not all of the attached Warrant is to be so transferred, a new Warrant is to be issued in the name of the undersigned for the balance of said Warrant. Dated: , 19 ------------- -- ------------------------------ (Name of Holder) By: --------------------------- Its: -------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. Agreed to and Accepted - ------------------------------ Name of Transferee By: - ------------------------------ Its: - ------------------------------ Address: - ------------------------------ - ------------------------------ SUBORDINATION AGREEMENT This Subordination Agreement is made as of October 16, 1997, by and between the undersigned creditor ("Creditor"), and VENTURE BANKING GROUP, a division of Cupertino National Bank ("Bank"). Recitals A. Hybrid Networks, Inc. ("Borrower") has requested and/or obtained certain loans or other credit accommodations from Bank to Borrower which are or may be from time to time secured by assets and property of Borrower. B. Creditor has extended loans or other credit accommodations to Borrower, and/or may extend loans or other credit accommodations to Borrower from time to time. C. In order to induce Bank to extend credit to Borrower and, at any time or from time to time, at Bank's option, to make such further loans, extensions of credit, or other accommodations to or for the account of Borrower, or to purchase or extend credit upon any instrument or writing in respect of which Borrower may be liable in any capacity, or to grant such renewals or extension of any such loan, extension of credit, purchase, or other accommodation as Bank may deem advisable, Creditor is willing to subordinate: (i) all of Borrower's indebtedness and obligations to Creditor, whether presently existing or arising in the future (the "Subordinated Debt") to all of Borrower's indebtedness and obligations to Bank; and (ii) all of Creditor's security interests, if any, to all of Bank's security interests in the Borrower's property. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Creditor subordinates to Bank any security interest or lien that Creditor may have in any property of Borrower. Notwithstanding the respective dates of attachment or perfection of the security interest of Creditor and the security interest of Bank, the security interest of Bank in the Collateral, as defined in the Loan and Security Agreement, of even date herewith, between Borrower and Bank (the "Loan Agreement"), shall at all times be prior to the security interest of Creditor. 2. All Subordinated Debt is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding, and all obligations under the Loan Agreement (the "Senior Debt"), subject to the following Section 3; provided, however, the Subordinated Debt shall only be subordinated to the Senior Debt in an amount up to Five Million Dollars ($5,000,000) of principal, plus costs and interest. 3. Creditor will not demand or receive from Borrower (and Borrower will not pay to Creditor) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Creditor exercise any remedy with respect to the Collateral, nor will Creditor commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Creditor shall be entitled to receive each regularly scheduled payment of principal and interest in respect of the Subordinated Debt, including any installment payment and/or payment of the entire outstanding principal amount thereof on the maturity date thereof, provided that an Event of Default, as defined in the Loan Agreement, has not occurred and is not continuing and would not exist immediately after such payment. The foregoing notwithstanding, after the occurrence and during the continuation of an event of default under the Subordinated Debt, Creditor shall be entitled to accelerate the Subordinated Debt, and exercise its remedies thereunder, but not 1 earlier than one hundred eighty (180) days after Bank has received written certification from Creditor that (1) an event of default has occurred in respect of the Subordinated Debt, and (2) such event permits an acceleration of the Subordinated Debt; provided, that for one hundred eighty (180) days after the date that Bank notifies Creditor that a default has occurred under the Senior Debt, Creditor shall not be permitted to exercise its remedies on account of the Subordinated Debt and provided, further, that any payment, distribution or other amounts received pursuant to the exercise of such remedies by Creditor shall first be delivered to Bank, in the form received, for application to the Senior Debt, until the Senior Debt has been repaid in full. 4. Creditor shall promptly deliver to Bank in the form received (except for endorsement or assignment by Creditor where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Creditor with respect to the Subordinated Debt other than in accordance with this Agreement. The foregoing notwithstanding, after the occurrence and during the continuation of an event of default under the Subordinated Debt, Creditor shall be entitled to accelerate the Subordinated Debt, and exercise its remedies thereunder, but not earlier than one hundred eighty (180) days after Bank has received written certification from Creditor that (1) an event of default has occurred in respect of the Subordinated Debt, and (2) such event permits an acceleration of the Subordinated Debt; provided, that for one hundred eighty (180) days after the date that Bank notifies Creditor that a default has occurred under the Senior Debt, Creditor shall not be permitted to exercise its remedies on account of the Subordinated Debt and provided, further, that any payment, distribution or other amounts received pursuant to the exercise of such remedies by Creditor shall first be delivered to Bank, in the form received, for application to the Senior Debt, until the Senior Debt has been repaid in full. 5. In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, these provisions shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Creditor. 6. For so long as any of the Senior Debt remains unpaid, Creditor irrevocably appoints Bank as Creditor's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Creditor or in the name of Bank, for the use and benefit of Bank, without notice to Creditor, in any bankruptcy, insolvency or similar proceeding involving Borrower, at Bank's option, to file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Creditor if Creditor does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims. 7. Creditor shall immediately affix a legend to the instruments evidencing the Subordinated Debt stating that the instruments are subject to the terms of this Agreement. Without Bank's prior written consent, amendment of the documents evidencing or relating to the Subordinated Debt shall not directly or indirectly modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated Debt or the subordination of the security interest or lien that Creditor may have in any property of Borrower. By way of example, such instruments shall not be amended to (i) increase the rate of interest with respect to the Subordinated Debt, or (ii) accelerate the payment of the principal or interest or any other portion of the Subordinated Debt. 8. This Agreement shall remain effective for so long as Borrower owes any amounts to Bank under the Loan Agreement or otherwise. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Agreement and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made and Creditor shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any 2 time and from time to time, without notice to Creditor, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Bank's rights hereunder. To the extent permitted by law, Creditor waives the benefits, if any, of Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. 9. Provided that the Senior Debt has been indefeasibly finally paid and discharged, Creditor shall be subrogated to the rights of Bank to receive payments or distributions of cash, property or securities payable or distributable on account of the Senior Debt, to the extent of all payments and distributions paid over to or for the benefit of Bank pursuant to this Agreement. In no event, however, shall Creditor have any rights or claims against Bank for any alleged impairment of Creditor's subrogation rights, Creditor acknowledging that any actions taken by Bank with respect to the Senior Debt or the Collateral are authorized and consented to by Creditor. No payments or distributions made to Bank to which Creditor would be entitled except for the subordination provisions of this Agreement, and no payment to Bank by Creditor, as between Borrower, its creditors (other than Bank) and Creditor shall be deemed to discharge any of the Senior Debt. 10. This Agreement shall bind any successors or assignees of Creditor and shall benefit any successors or assigns of Bank. This Agreement is solely for the benefit of Creditor and Bank and not for the benefit of Borrower or any other party. Creditor further agrees that if Borrower is in the process of refinancing a portion of the Senior Debt with a new lender, and if Bank makes a request of Creditor, Creditor shall agree to enter into a new subordination agreement with the new lender on substantially the terms and conditions of this Agreement. 11. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 12. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws principles. Creditor and Bank submit to the exclusive jurisdiction of the state and federal courts located in Santa Clara County, California. CREDITOR AND BANK WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN. 13. This Agreement represents the entire agreement with respect to the subject matter hereof, and supersedes all prior negotiations, agreements and commitments. Creditor is not relying on any representations by Bank or Borrower in entering into this Agreement, and Creditor has kept and will continue to keep itself fully apprised of the financial and other condition of Borrower. This Agreement may be amended only by written instrument signed by Creditor and Bank. 14. In the event of any legal action to enforce the rights of a party under this Agreement, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 3 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. "Creditor" "Bank" HOLDERS OF CONVERTIBLE SUBORDINATED VENTURE BANKING GROUP, a division of NOTES OF HYBRID NETWORKS, INC. DATED Cupertino National Bank SEPTEMBER 25, 1997 By: Tudor BVI Futures, Ltd. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza By: /s/ Company Officer ---------------------- ----------------------- Robert P. Forlenza Vice President By: ----------------------- By: Tudor Arbitrage Partners, L.P. By: Tudor Global Trading, Inc. General Partner By: /s/ Robert P. Forlenza ---------------------- Robert P. Forlenza Vice President By: Raptor Global Fund, Ltd. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza ---------------------- Robert P. Forlenza Vice President By: Raptor Global Fund, L.P. By: Tudor Investment Corporation, Investment Adviser By: /s/ Robert P. Forlenza ---------------------- Robert P. Forlenza Vice President The undersigned approves of the terms of this Agreement. "Borrower" HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter ---------------------- Title: President and CEO ---------------------- 4 SUBORDINATION AGREEMENT This Subordination Agreement is made as of October 16, 1997, by and between the undersigned creditor ("Creditor"), and VENTURE BANKING GROUP, a division of Cupertino National Bank ("Bank"). Recitals A. Hybrid Networks, Inc. ("Borrower") has requested and/or obtained certain loans or other credit accommodations from Bank to Borrower which are or may be from time to time secured by assets and property of Borrower. B. Creditor has extended loans or other credit accommodations to Borrower, and/or may extend loans or other credit accommodations to Borrower from time to time. C. In order to induce Bank to extend credit to Borrower and, at any time or from time to time, at Bank's option, to make such further loans, extensions of credit, or other accommodations to or for the account of Borrower, or to purchase or extend credit upon any instrument or writing in respect of which Borrower may be liable in any capacity, or to grant such renewals or extension of any such loan, extension of credit, purchase, or other accommodation as Bank may deem advisable, as of October 31, 1997, Creditor is willing to subordinate: (i) all of Borrower's indebtedness and obligations to Creditor, whether presently existing or arising in the future (the "Subordinated Debt") to all of Borrower's indebtedness and obligations to Bank; and (ii) all of Creditor's security interests, if any, to all of Bank's security interests in the Borrower's property. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Creditor subordinates to Bank any security interest or lien that Creditor may have in any property of Borrower. Notwithstanding the respective dates of attachment or perfection of the security interest of Creditor and the security interest of Bank, the security interest of Bank in the Collateral, as defined in the Loan and Security Agreement, of even date herewith, between Borrower and Bank (the "Loan Agreement"), shall at all times be prior to the security interest of Creditor. 2. All Subordinated Debt is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding, and all obligations under the Loan Agreement (the "Senior Debt"), subject to the following Section 3; provided, however, the Subordinated Debt shall be subordinated to the Senior Debt only in an amount up to Five Million Dollars ($5,000,000) of principal, plus costs and interest. 3. Creditor will not demand or receive from Borrower (and Borrower will not pay to Creditor) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Creditor exercise any remedy with respect to the Collateral, nor will Creditor commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Creditor shall be entitled to receive each regularly scheduled payment of principal and interest that constitutes Subordinated Debt, provided that an Event of Default, as defined in the Loan Agreement, has not occurred and is not continuing and would not exist immediately after such payment. The foregoing notwithstanding, after the occurrence and during the continuation of an event of default under the Subordinated Debt, Creditor shall be entitled to accelerate the Subordinated Debt, and exercise its remedies thereunder, but not earlier than one hundred eighty (180) days after Bank has received written certification from Creditor that (1) an event of default has occurred in respect of the Subordinated Debt, and (2) such event permits an acceleration 1 of the Subordinated Debt; provided, that for one hundred eighty (180) days after the date that Bank notifies Creditor that a default has occurred under the Senior Debt (provided, that only one (1) such one hundred eighty (180) day period shall apply to Creditor within any continuous three hundred sixty (360) day period unless all defaults in any such one hundred eighty (180) day period are cured before such one hundred eighty (180) day period expires), Creditor shall not be permitted to exercise its remedies on account of the Subordinated Debt and provided, further, that any payment, distribution or other amounts received pursuant to the exercise of such remedies by Creditor shall first be delivered to Bank, in the form received, for application to the Senior Debt, until the Senior Debt has been repaid in full. 4. Creditor shall promptly deliver to Bank in the form received (except for endorsement or assignment by Creditor where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Creditor with respect to the Subordinated Debt other than in accordance with this Agreement. 5. In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, these provisions shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Creditor. 6. Until an Equity Event (as defined in the Loan Agreement) and for so long as any of the Senior Debt remains unpaid, Creditor irrevocably appoints Bank as Creditor's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Creditor or in the name of Bank, for the use and benefit of Bank, without notice to Creditor, to perform at Bank's option the following acts in any bankruptcy, insolvency or similar proceeding involving Borrower: (i) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Creditor if Creditor does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims; and (ii) To accept or reject any plan of reorganization or arrangement on behalf of Creditor and to otherwise vote Creditor's claims in respect of any Subordinated Debt in any manner that Bank deems appropriate for the enforcement of its rights hereunder. 7. Creditor shall immediately affix a legend to the instruments evidencing the Subordinated Debt stating that the instruments are subject to the terms of this Agreement. Without Bank's prior written consent, amendment of the documents evidencing or relating to the Subordinated Debt shall not directly or indirectly modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated Debt or the subordination of the security interest or lien that Creditor may have in any property of Borrower. By way of example, such instruments shall not be amended to (i) increase the rate of interest with respect to the Subordinated Debt, or (ii) accelerate the payment of the principal or interest or any other portion of the Subordinated Debt. 8. This Agreement shall remain effective for so long as Borrower owes any amounts to Bank under the Loan Agreement or otherwise. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Agreement and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made and Creditor shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, without notice to Creditor, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any 2 documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Bank's rights hereunder. To the extent permitted by law, Creditor waives the benefits, if any, of Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. 9. This Agreement shall bind any successors or assignees of Creditor and shall benefit any successors or assigns of Bank. This Agreement is solely for the benefit of Creditor and Bank and not for the benefit of Borrower or any other party. Creditor further agrees that if Borrower is in the process of refinancing a portion of the Senior Debt with a new lender, and if Bank makes a request of Creditor, Creditor shall agree to enter into a new subordination agreement with the new lender on substantially the terms and conditions of this Agreement. 10. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 11. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws principles. Creditor and Bank submit to the exclusive jurisdiction of the state and federal courts located in Santa Clara County, California. CREDITOR AND BANK WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN. 12. This Agreement represents the entire agreement with respect to the subject matter hereof, and supersedes all prior negotiations, agreements and commitments. Creditor is not relying on any representations by Bank or Borrower in entering into this Agreement, and Creditor has kept and will continue to keep itself fully apprised of the financial and other condition of Borrower. This Agreement may be amended only by written instrument signed by Creditor and Bank. 13. In the event of any legal action to enforce the rights of a party under this Agreement, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 14. Creditor's subordination shall be effective as of October 31, 1997. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. "Creditor" "Bank" BG SERVICES LIMITED VENTURE BANKING GROUP, a division of Cupertino National Bank By: /s/ Company Officer By: /s/ Company Officer ---------------------- ----------------------- Title: ------------------- Title: -------------------- 3 The undersigned approves of the terms of this Agreement. "Borrower" HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter ------------------------ Title: President and CEO --------------------- 4 EX-11.01 8 EX-11.01 COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.01 HYBRID NETWORKS, INC. COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ----------------------- 1994 1995 1996 1996 1997 --------- --------- --------- ----------- ---------- (UNAUDITED) Weighted average common shares outstanding for the period................................................. 2,226 2,223 2,535 2,542 2,575 Common equivalent shares pursuant to Staff Accounting Bulletin No. 83........................................ 654 654 654 654 654 --------- --------- --------- ----------- ---------- Shares used in per share calculation..................... 2,880 2,877 3,189 3,196 3,229 --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Net loss................................................. $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Net loss per share....................................... $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ----------
There is no difference between primarily and fully dilutive loss per share for each period. EX-23.02 9 EX-23.02 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-36001) of our report dated October 16, 1997, except for Note 16, for which the date is October 21, 1997, on our audits of the financial statements and financial statement schedules of Hybrid Networks, Inc. We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." Coopers & Lybrand L.L.P. San Jose, California October 21, 1997 EX-27.01 10 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HYBRID NETWORKS, INC. BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 SEP-30-1997 6,886 5,314 0 0 1,348 6,629 0 675 943 2,068 9,302 13,535 1,736 2,811 558 1,044 10,539 16,190 2,358 9,970 0 0 0 0 12 13 2 2 7,695 (18) 10,539 16,190 2,962 9,152 2,962 9,152 3,130 8,214 8,576 10,824 0 0 0 0 28 379 (8,515) (10,082) 0 0 0 0 0 0 0 0 0 0 (8,515) (10,082) (2.67) (3.12) 0 0
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