-----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, QUhGA6a+YhpcN3k5bDgem4I26rThWbpV0BFmvXQ+AbFAZZKiP3IINQmwdk9NLFqj 8d/o+7q+rRPkaSfD6Uz44A== 0001047469-98-018658.txt : 19980508 0001047469-98-018658.hdr.sgml : 19980508 ACCESSION NUMBER: 0001047469-98-018658 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980507 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-4 SEC ACT: SEC FILE NUMBER: 333-52083 FILM NUMBER: 98612920 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-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HYBRID NETWORKS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3661 77-0252931 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer incorporation or organization) Classification Code Number) identification no.)
------------------------------ 10161 BUBB ROAD CUPERTINO, CALIFORNIA 95014 (408) 725-3250 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ CARL S. LEDBETTER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER HYBRID NETWORKS, INC. 10161 BUBB ROAD CUPERTINO, CALIFORNIA 95014 (408) 725-3250 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: EDWIN N. LOWE, ESQ. JAMES N. STRAWBRIDGE, ESQ. JOHN W. KASTELIC, ESQ. BETSEY SUE, ESQ. ROBERT A. FREEDMAN, ESQ. WILSON SONSINI GOODRICH & ROSATI FENWICK & WEST LLP PROFESSIONAL CORPORATION TWO PALO ALTO SQUARE 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94304 (415) 494-0600 (415) 493-9300 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the Merger described herein. ------------------------------ If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please 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(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. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(3) OFFERING PRICE(3) FEE(4) Common Stock, $0.001 par value.................... 2,417,794(1) $1.763177508 $4,263,000 $1,258 Warrants to purchase Common Stock, $0.001 par value........................................... Included above(2) Included above Included above Included above
(1) Represents the maximum number of shares of the Common Stock of the Registrant that may be issued pursuant to the merger described herein (the "Merger"), consisting of (i) 2,016,055 shares of the Registrant's Common Stock, (ii) 281,558 shares of the Registrant's Common Stock subject to options and (iii) 120,181 shares of the Registrant's Common Stock subject to warrants. (2) The maximum number of shares of Common Stock of the Registrant that may be issued upon the exercise of warrants that will, pursuant to the Merger, be assumed by the Registrant and converted from warrants to purchase shares of Common Stock, no par value, of Pacific Monolithics, Inc. ("Pacific"), is included above (see subpart (iii) in note (1) above). (3) Inasmuch as there is no market for the securities of Pacific to be received by the Registrant or cancelled in the Merger, the maximum offering price per unit and the maximum aggregate offering price are calculated, pursuant to Rule 457(f)(2), using the book value of such securities computed as of the latest practicable date: $4,263,000 which was the book value of Pacific as of March 31, 1998. (4) The amount of the registration fee includes $1,151.00 previously paid pursuant to Section 14(g) of the Securities Exchange Act of 1934, as amended, in connection with the filing by the Registrant of a Preliminary Joint Proxy Statement/Prospectus related to the proposed Merger. ------------------------------ 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO] HYBRID NETWORKS, INC. 10161 Bubb Road Cupertino, CA 95014 May [ ], 1998 Dear Hybrid Stockholder: On behalf of the Board of Directors, I cordially invite you to attend the 1998 Annual Meeting of Stockholders (the "ANNUAL MEETING") of Hybrid Networks, Inc. ("HYBRID") to be held at Hybrid's headquarters located at 10161 Bubb Road, Cupertino, California 95014 on May 28, 1998 at 10:00 A.M. Each of the matters expected to be acted upon at the Annual Meeting is described in detail in the following Notice of Annual Meeting of Stockholders and Joint Proxy Statement/Prospectus. At the Annual Meeting, Hybrid stockholders will be asked to approve the acquisition by Hybrid of Pacific Monolithics, Inc. ("PACIFIC") pursuant to an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT") dated as of March 19, 1998 whereby a wholly-owned subsidiary of Hybrid ("MERGER SUB") will merge (the "MERGER") with and into Pacific. Upon completion of the Merger: - Pacific, as the surviving corporation in the Merger, will thereby become a wholly-owned subsidiary of Hybrid; - Each outstanding share of Pacific Common Stock and each outstanding share of Pacific Preferred Stock will be converted into between 0.0688078 and 0.1117959 of a share of Hybrid Common Stock (the exact number will be determined at the time of closing of the Merger and will be derived from the "Closing Price" of Hybrid Common Stock as defined in the Reorganization Agreement (the "EXCHANGE RATIO")); - Ten percent of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders pursuant to the Merger will be deposited in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement; and - Each outstanding option or warrant to purchase Pacific Common Stock will be assumed by Hybrid and adjusted according to the Exchange Ratio. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION" in the accompanying Joint Proxy Statement/Prospectus. A detailed description of the Reorganization Agreement and the proposed Merger is set forth in the accompanying Joint Proxy Statement/Prospectus, which you should read carefully. AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF HYBRID HAS DETERMINED THAT THE TRANSACTIONS CONTEMPLATED BY THE REORGANIZATION AGREEMENT ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS OF HYBRID. ACCORDINGLY, THE HYBRID BOARD OF DIRECTORS HAS APPROVED THE REORGANIZATION AGREEMENT AND THE MERGER AND RECOMMENDS THAT ALL HYBRID STOCKHOLDERS VOTE FOR THE ADOPTION AND APPROVAL OF THE REORGANIZATION AGREEMENT AND THE APPROVAL OF THE MERGER. At the Annual Meeting, you also will be asked to (i) elect two Class I directors of Hybrid, to serve from the time of their election and qualification until the earlier of (A) their resignation, which will occur upon the consummation of the Merger (whereupon the Hybrid Board will appoint two directors of Pacific to replace such directors as Class I directors on the Hybrid Board of Directors), or (B) the third annual meeting of stockholders following election and until their respective successors have been elected and duly qualified or until their respective earlier resignations or removals, (ii) approve an amendment to Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, (iii) approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares and (iv) ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. The effectiveness of any of the proposals to be voted upon at the Annual Meeting is not conditioned upon the approval of any of the other proposals by the Hybrid stockholders. Your vote on the business to be considered at the Annual Meeting is important, regardless of the number of shares you own. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE ANNUAL MEETING SO THAT YOUR SHARES MAY BE REPRESENTED AT THE ANNUAL MEETING. Returning the proxy does not deprive you of your right to attend the Annual Meeting and to vote your shares in person. We look forward to seeing you at the Annual Meeting. Sincerely, /s/ Carl S. Ledbetter Carl S. Ledbetter CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER HYBRID NETWORKS, INC. 10161 BUBB ROAD CUPERTINO, CA 95014 ------------------------ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To the Stockholders of Hybrid Networks, Inc.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "ANNUAL MEETING") of Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"), will be held at the Company's headquarters located at 10161 Bubb Road, Cupertino, California 95014 on May 28, 1998 at 10:00 A.M., local time, for the following purposes: 1. To consider and vote upon the approval and adoption of (i) an Agreement and Plan of Reorganization, dated as of March 19, 1998 (the "REORGANIZATION AGREEMENT"), by and among the Company, HN Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company ("MERGER SUB"), and Pacific Monolithics, Inc., a California corporation ("PACIFIC"), and (ii) an Agreement of Merger between Merger Sub and Pacific (the "AGREEMENT OF MERGER"). The Reorganization Agreement contemplates, among other things, that (a) Merger Sub will merge (the "MERGER") with and into Pacific with the result that Pacific will become a wholly-owned subsidiary of the Company, (b) each outstanding share of Pacific Common Stock, no par value ("PACIFIC COMMON STOCK"), and each outstanding share of Pacific Preferred Stock, no par value ("PACIFIC PREFERRED STOCK"), will be converted into between 0.0688078 and 0.1117959 of a share of Hybrid Common Stock, par value $0.001 per share ("HYBRID COMMON STOCK") (the exact number will be determined at the time of closing of the Merger and will be derived from the "Closing Price" of Hybrid Common Stock as defined in the Reorganization Agreement (the "EXCHANGE RATIO")), (c) ten percent of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders will be deposited in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement and (d) each outstanding option or warrant to purchase shares of Pacific Common Stock will be assumed by Hybrid and adjusted according to the Exchange Ratio; 2. To elect two Class I directors of the Company, to serve from the time of their election and qualification until the earlier of (i) their resignation, which will occur upon the consummation of the Merger (whereupon the Board of Directors will appoint two directors of Pacific to replace such directors as Class I directors on the Board of Directors), or (ii) the third annual meeting of stockholders following election and until their respective successors have been elected and duly qualified or until their respective earlier resignations or removals; 3. To approve an amendment to the Company's 1997 Equity Incentive Plan to increase the number of shares of Hybrid Common Stock reserved for issuance thereunder by 500,000 shares; 4. To approve an amendment to the Company's 1997 Employee Stock Purchase Plan to increase the number of shares of Hybrid Common Stock reserved for issuance thereunder by 100,000 shares; 5. To ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for the Company for the fiscal year ending December 31, 1998; and 6. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof. The foregoing items of business are more fully described in the Joint Proxy Statement/Prospectus accompanying this Notice. To ensure that your vote will be counted, please complete, date and sign the enclosed proxy card and return it promptly in the enclosed postage-paid envelope, whether or not you plan to attend the Annual Meeting. You may revoke your proxy in the manner described in the accompanying Joint Proxy Statement/Prospectus at any time before it is voted at the Annual Meeting. In the event that there are not sufficient votes to approve and adopt the Reorganization Agreement and to approve the Merger, it is expected that the Annual Meeting will be postponed or adjourned in order to permit further solicitation of proxies by Hybrid. Only stockholders of record at the close of business on April 30, 1998 are entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. By Order of the Board of Directors, /s/ Carl S. Ledbetter Carl S. Ledbetter CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Cupertino, California May [ ], 1998 WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE ANNUAL MEETING SO THAT YOUR SHARES MAY BE REPRESENTED AT THE ANNUAL MEETING. PACIFIC MONOLITHICS, INC. 1308 Moffett Park Drive Sunnyvale, CA 94089 May [ ], 1998 Dear Pacific Shareholder: On behalf of the Board of Directors, I cordially invite you to attend a Special Meeting of Shareholders (the "SPECIAL MEETING") of Pacific Monolithics, Inc. ("PACIFIC") to be held at Pacific's headquarters located at 1308 Moffett Park Drive, Sunnyvale, California 94089 on May 28, 1998 at 10:00 A.M. At the Special Meeting, Pacific shareholders will be asked to approve the acquisition by Hybrid Networks, Inc. ("HYBRID") of Pacific pursuant to an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT") dated as of March 19, 1998 whereby a wholly-owned subsidiary of Hybrid ("MERGER SUB") will merge (the "MERGER") with and into Pacific. Upon completion of the Merger: - Pacific will become a wholly-owned subsidiary of Hybrid; - Each outstanding share of Pacific Common Stock and each outstanding share of Pacific Preferred Stock will be converted into between 0.0688078 and 0.1117959 of a share of Hybrid Common Stock (the exact number will be determined at the time of the closing of the Merger and will be derived from the "Closing Price" of Hybrid Common Stock as defined in the Reorganization Agreement (the "EXCHANGE RATIO")); - Ten percent of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders pursuant to the Merger will be deposited in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement; and - Each outstanding option or warrant to purchase Pacific Common Stock will be assumed by Hybrid and adjusted according to the Exchange Ratio. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION" in the accompanying Joint Proxy Statement/Prospectus. It is a condition to Hybrid's obligation to complete the Merger that the holders of no more than 5% of the outstanding shares of Pacific capital stock be eligible to exercise dissenters' rights. A detailed description of the Reorganization Agreement and the proposed Merger is set forth in the accompanying Joint Proxy Statement/Prospectus, which you should read carefully. If the Merger is approved and consummated, you will receive detailed information on how to transmit your Pacific share certificates to obtain your shares of Hybrid Common Stock. AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF PACIFIC HAS DETERMINED THAT THE TRANSACTIONS CONTEMPLATED BY THE REORGANIZATION AGREEMENT ARE FAIR AND IN THE BEST INTERESTS OF THE SHAREHOLDERS OF PACIFIC. ACCORDINGLY, THE BOARD OF DIRECTORS OF PACIFIC HAS APPROVED THE REORGANIZATION AGREEMENT AND RECOMMENDS THAT ALL PACIFIC SHAREHOLDERS VOTE FOR THE ADOPTION AND APPROVAL OF THE REORGANIZATION AGREEMENT AND THE APPROVAL OF THE MERGER. Your vote on the business to be considered at the Special Meeting is important, regardless of the number of shares you own. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE SPECIAL MEETING, SO THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING. Returning the proxy does not deprive you of your right to attend the Special Meeting and to vote your shares in person. We look forward to seeing you at the Special Meeting. Sincerely, /s/ Matthew D. Miller Matthew D. Miller CHAIRMAN OF THE BOARD OF DIRECTORS PACIFIC MONOLITHICS, INC. 1308 Moffett Park Drive Sunnyvale, CA 94089 ------------------------ NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To the Shareholders of Pacific Monolithics, Inc.: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "SPECIAL MEETING") of Pacific Monolithics, Inc., a California corporation ("PACIFIC"), will be held at Pacific's headquarters located at 1308 Moffett Park Drive, Sunnyvale, California 94089 on May 28, 1998 at 10:00 A.M. for the following purposes: 1. To consider and vote upon a proposal to approve and adopt (i) an Agreement and Plan of Reorganization, dated as of March 19, 1998 (the "REORGANIZATION AGREEMENT"), by and among Pacific, Hybrid Networks, Inc., a Delaware corporation ("HYBRID") and HN Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Hybrid ("MERGER SUB"), and (ii) an Agreement of Merger between Merger Sub and Pacific. The Reorganization Agreement contemplates, among other things, that (a) Merger Sub will be merged with and into Pacific with the result that Pacific will become a wholly-owned subsidiary of Hybrid, (b) each outstanding share of Pacific Common Stock, no par value ("PACIFIC COMMON STOCK"), and each outstanding share of Pacific Preferred Stock, no par value per share ("PACIFIC PREFERRED STOCK"), will be converted into between 0.0688078 and 0.1117959 of a share of Hybrid Common Stock, par value $0.001 per share ("HYBRID COMMON STOCK") (the exact number will be determined at the time of the closing of the Merger and will be derived from the "Closing Price" of Hybrid Common Stock as defined in the Reorganization Agreement (the "EXCHANGE RATIO")), (c) ten percent of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders will be deposited in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement and (d) each outstanding option or warrant to purchase shares of Pacific Common Stock will be assumed by Hybrid and adjusted according to the Exchange Ratio; and 2. To transact such other business as may properly come before the Special Meeting or any adjournment or postponement thereof. Only shareholders of record at the close of business on April 30, 1998 are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof. The affirmative vote of holders of a majority of the outstanding shares of Pacific Common Stock and at least 60% of the outstanding shares of Pacific Preferred Stock is required to approve and adopt the Reorganization Agreement and to approve the Merger. The foregoing items of business are more fully described in the Joint Proxy Statement/Prospectus accompanying this Notice. To ensure that your vote will be counted, please complete, date and sign the enclosed proxy and return it promptly in the enclosed postage-paid envelope, whether or not you plan to attend the Special Meeting. You may revoke your proxy in the manner described in the accompanying Joint Proxy Statement/Prospectus at any time before it is voted at the Special Meeting. A summary of the provisions of Sections 1300-1312 of the California Corporations Code (the "CALIFORNIA CODE") pertaining to the rights of shareholders to demand appraisal of the fair value of their shares of Pacific Common Stock or Pacific Preferred Stock if the Merger is approved and consummated, including a summary of the requirements with which shareholders demanding such appraisal must comply, is contained in the Joint Proxy Statement/Prospectus under the heading "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--APPRAISAL AND DISSENTERS' RIGHTS." The entire text of Sections 1300-1312 of the California Code is included as Appendix C to the accompanying Joint Proxy Statement/Prospectus. By Order of the Board of Directors, /s/ Matthew D. Miller Matthew D. Miller CHAIRMAN OF THE BOARD OF DIRECTORS Sunnyvale, California May [ ], 1998 WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PRIOR TO THE SPECIAL MEETING SO THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY HYBRID NETWORKS, INC. PACIFIC MONOLITHICS, INC. JOINT PROXY STATEMENT/PROSPECTUS FOR THE ANNUAL MEETING OF THE STOCKHOLDERS OF HYBRID NETWORKS, INC., A DELAWARE CORPORATION AND A SPECIAL MEETING OF THE SHAREHOLDERS OF PACIFIC MONOLITHICS, INC., A CALIFORNIA CORPORATION TO BE HELD ON MAY 28, 1998. ------------------------ HYBRID NETWORKS, INC., A DELAWARE CORPORATION PROSPECTUS This Joint Proxy Statement/Prospectus is being furnished to the stockholders of Hybrid Networks, Inc., a Delaware corporation ("HYBRID"), in connection with the solicitation of proxies by the Hybrid Board of Directors (the "HYBRID BOARD") for use at the Annual Meeting of Hybrid Stockholders (the "HYBRID ANNUAL MEETING") to be held at 10:00 A.M., local time, on May 28, 1998, at Hybrid's corporate headquarters, 10161 Bubb Road, Cupertino, California 95014, and at any adjournments or postponements of the Hybrid Annual Meeting. This Joint Proxy Statement/Prospectus is also being furnished to the shareholders of Pacific Monolithics, Inc., a California corporation ("PACIFIC"), in connection with the solicitation of proxies by the Pacific Board of Directors for use at the Special Meeting of Pacific Shareholders (the "PACIFIC SPECIAL MEETING" and, together with the Hybrid Annual Meeting, the "MEETINGS") to be held at 10:00 A.M., local time, on May 28, 1998, at Pacific's corporate headquarters, 1308 Moffett Park Drive, Sunnyvale, California 94089, and at any adjournments or postponements of the Pacific Special Meeting. The Hybrid Annual Meeting has been called to (i) approve and adopt the Agreement and Plan of Reorganization, dated as of March 19, 1998 (the "REORGANIZATION AGREEMENT"), by and among Hybrid, HN Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Hybrid ("MERGER SUB"), and Pacific and the accompanying Agreement of Merger between Pacific and Merger Sub (the "AGREEMENT OF MERGER") whereby Merger Sub will merge with and into Pacific (the "MERGER") and to approve the Merger, (ii) to elect two Class I directors of the Company, to serve from the time of their election and qualification until the earlier of (A) their resignation, which will occur upon the consummation of the Merger (whereupon the Hybrid Board of Directors will appoint two directors of Pacific to replace such directors as Class I directors on the Hybrid Board of Directors), or (B) the third annual meeting of stockholders following election and until their respective successors have been elected and duly qualified or until their respective earlier resignations or removals, (iii) approve an amendment to the Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, (iv) approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares and (v) ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS AND SHAREHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "PROPOSAL NO. 1: THE MERGER--RISK FACTORS" COMMENCING ON PAGE 32. ------------------------ THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/ PROSPECTUS 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 JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Joint Proxy Statement/Prospectus is May [ ], 1998. The Pacific Special Meeting has been called to consider and vote upon a proposal to approve and adopt the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and to approve the Merger. This Joint Proxy Statement/Prospectus constitutes the Prospectus of Hybrid for use in connection with the offer and issuance of shares of Common Stock of Hybrid, par value $0.001 per share ("HYBRID COMMON STOCK"), to be issued upon consummation of the Merger. Each outstanding share of Pacific Common Stock, no par value (the "PACIFIC COMMON STOCK"), Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, no par value (the Pacific Series A, B and C Preferred Stock are hereafter collectively referred to as the "PACIFIC PREFERRED STOCK" and, together with the Pacific Common Stock, the "PACIFIC CAPITAL STOCK"), outstanding will be converted into an amount of Hybrid Common Stock equal to a fraction, the numerator of which is obtained by dividing $12,500,000 by the Closing Price and the denominator of which is the total number of shares of Pacific Common Stock and Pacific Preferred Stock outstanding plus the total number of shares of Pacific Common Stock issuable upon exercise of outstanding Pacific options (the "PACIFIC OPTIONS") and Pacific warrants (the "PACIFIC WARRANTS") (the "EXCHANGE RATIO"). The "CLOSING PRICE" shall equal the average of the closing sale prices of one share of Hybrid Common Stock reported in THE WALL STREET JOURNAL, on the basis of information provided by the Nasdaq Stock Market for each of the ten trading days ending two trading days preceding the closing date of the Merger; provided, however, that in no event shall the Closing Price be greater than $8.40 (resulting in an Exchange Ratio of 0.0688078, assuming the number of Pacific shares as of April 30, 1998 as indicated below (the "LOW EXCHANGE RATIO")) or less than $5.17 (resulting in an Exchange Ratio of 0.1117959, assuming the number of Pacific shares as of April 30, 1998 as indicated below (the "HIGH EXCHANGE RATIO")). As of March 19, 1998, based on Hybrid's ten day average trading price of $6.46 and assuming the number of shares of Pacific Common Stock, shares of Pacific Preferred Stock and shares subject to Pacific Options and Pacific Warrants outstanding on April 30, 1998, the Exchange Ratio would be 0.0894714 of a share of Hybrid Common Stock for each outstanding share of Pacific Capital Stock (the "ASSUMED EXCHANGE RATIO"). Ten percent of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders pursuant to the Merger will be deposited into escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement. Each outstanding Pacific Option and Pacific Warrant will be assumed and converted into an option or warrant, respectively, to purchase a number of shares of Hybrid Common Stock equal to the Exchange Ratio multiplied by the number of shares purchasable under each Pacific Option or Pacific Warrant, respectively, rounded down to the nearest whole share, at an exercise price equal to the exercise price of such Pacific Option or Pacific Warrant, as applicable, divided by the Exchange Ratio, rounded up to the nearest cent. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION." Affiliates of Pacific, including certain directors and executive officers of Pacific, beneficially owning 3,357,515 shares of Pacific Common Stock and 7,509,644 shares of Pacific Preferred Stock, or approximately 58.8% and 61.0% of the outstanding shares of Pacific Common Stock and Pacific Preferred Stock, respectively, have executed Voting Agreements pursuant to which they have agreed to vote such shares in favor of the adoption and approval of the Reorganization Agreement and the Agreement of Merger and approval of the Merger. The vote by these affiliates in accordance with their Voting Agreements will be sufficient to approve the Merger. However, it is a condition to Hybrid's obligation to complete the Merger that the holders of no more than 5% of the outstanding shares of Pacific Capital Stock be eligible to exercise dissenters' rights. Holders of Pacific Capital Stock may, by complying with Sections 1300 through 1312 of the California Corporations Code (the "CALIFORNIA CODE"), be entitled to dissenters' rights with respect to the Merger. Under the Delaware General Corporation Law, holders of Hybrid Common Stock are not entitled to dissenters' rights or appraisal rights with respect to the Merger. It is a condition to Hybrid's obligation to close the Merger that holders of no more than 5% of the outstanding shares of Pacific Capital Stock shall be eligible to exercise dissenters' rights. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER-- APPRAISAL AND DISSENTERS' RIGHTS." On May 1, 1998, the closing sale price on the Nasdaq Stock Market of Hybrid Common Stock was $6.13. This Joint Proxy Statement/Prospectus and the accompanying form(s) of proxy are first being mailed to stockholders of Hybrid and shareholders of Pacific on or about May , 1998. An annual report for Hybrid for the year ended December 31, 1997 is enclosed with this Joint Proxy Statement/Prospectus being delivered to the stockholders of Hybrid. TABLE OF CONTENTS
PAGE ----- AVAILABLE INFORMATION...................................................................................... 2 TRADEMARKS................................................................................................. 3 FORWARD-LOOKING STATEMENTS................................................................................. 3 SUMMARY.................................................................................................... 4 STOCKHOLDER MEETINGS..................................................................................... 4 Hybrid Annual Meeting.................................................................................. 4 Date, Time, Place and Purpose........................................................................ 4 Record Date and Vote Required........................................................................ 4 Recommendation of the Hybrid Board of Directors...................................................... 5 Pacific Special Meeting................................................................................ 5 Date, Time, Place and Purpose........................................................................ 5 Record Date and Vote Required........................................................................ 6 Recommendation of the Pacific Board of Directors..................................................... 6 PROPOSAL NO. 1: THE MERGER............................................................................... 7 The Companies.......................................................................................... 7 Risk Factors........................................................................................... 8 The Merger............................................................................................. 9 Financial Advisors..................................................................................... 11 Reasons for the Merger................................................................................. 11 Terms of the Merger.................................................................................... 12 Certain Federal Income Tax Considerations.............................................................. 14 Accounting Treatment................................................................................... 15 Appraisal and Dissenters' Rights....................................................................... 15 Regulatory Matters..................................................................................... 15 Escrow Agreement....................................................................................... 15 Certain Related Agreements............................................................................. 16 Market Price and Dividend Data......................................................................... 16 Unaudited Pro Forma Condensed Combined Financial Statements............................................ 18 ADDITIONAL MATTERS FOR CONSIDERATION OF HYBRID STOCKHOLDERS.............................................. 27 INTRODUCTION............................................................................................... 28 THE HYBRID ANNUAL MEETING.................................................................................. 28 Date, Time, Place and Purpose of Hybrid Annual Meeting................................................... 28 Record Date and Outstanding Shares....................................................................... 28 Voting of Proxies........................................................................................ 28 Vote Required............................................................................................ 29 Quorum; Abstentions; Broker Non-Votes.................................................................... 29 Solicitation of Proxies and Expenses..................................................................... 29 Appraisal Rights......................................................................................... 30 THE PACIFIC SPECIAL MEETING................................................................................ 30 Date, Time, Place and Purpose of Pacific Special Meeting................................................. 30 Record Date and Outstanding Shares....................................................................... 30 Voting of Proxies........................................................................................ 30 Vote Required............................................................................................ 31 Quorum; Abstentions...................................................................................... 31 Solicitation of Proxies and Expenses..................................................................... 31
i
PAGE ----- Dissenters' Rights....................................................................................... 31 PROPOSAL NO. 1: THE MERGER................................................................................. 32 RISK FACTORS............................................................................................. 32 Risks Relating to the Merger........................................................................... 32 Risk Relating to Hybrid, Pacific and the Combined Company.............................................. 35 APPROVAL OF THE MERGER................................................................................... 52 General................................................................................................ 52 Hybrid's Reasons for the Merger........................................................................ 52 Pacific's Reasons for the Merger....................................................................... 54 Board Recommendations.................................................................................. 56 Background of the Merger............................................................................... 57 Financial Advisors..................................................................................... 60 Certain Federal Income Tax Considerations.............................................................. 64 Accounting Treatment................................................................................... 65 Governmental and Regulatory Approvals.................................................................. 65 Appraisal and Dissenters' Rights....................................................................... 65 Interests of Certain Persons in the Merger............................................................. 66 TERMS OF THE MERGER...................................................................................... 67 General................................................................................................ 67 Effective Time; Closing Date........................................................................... 68 Conduct of Combined Company Following the Merger....................................................... 68 Merger Consideration................................................................................... 68 Conversion of Shares; Procedures for Exchange of Certificates.......................................... 69 Representations and Warranties......................................................................... 69 No Other Negotiations.................................................................................. 70 Additional Covenants................................................................................... 70 Indemnification Agreements............................................................................. 72 Conditions to the Merger............................................................................... 72 Termination; Termination Fee........................................................................... 73 Expenses............................................................................................... 74 Amendment.............................................................................................. 74 Escrow Agreement....................................................................................... 74 Voting Agreements...................................................................................... 74 Affiliates Agreements.................................................................................. 75 Employment/Non-Competition Arrangements................................................................ 76 Investor Rights Agreement.............................................................................. 76 SELECTED HISTORICAL FINANCIAL DATA OF HYBRID............................................................... 77 HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 78 SELECTED HISTORICAL FINANCIAL DATA OF PACIFIC.............................................................. 86 PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 88 BUSINESS OF HYBRID......................................................................................... 96 BUSINESS OF PACIFIC........................................................................................ 107 MANAGEMENT OF THE COMBINED COMPANY......................................................................... 112 SELECTED INFORMATION WITH RESPECT TO HYBRID................................................................ 114
ii
PAGE ----- Executive Compensation................................................................................... 114 Certain Relationships and Related Transactions........................................................... 117 Compensation Committee Report............................................................................ 117 Hybrid Stock Price Performance........................................................................... 120 SELECTED INFORMATION WITH RESPECT TO PACIFIC............................................................... 121 Executive Officers and Directors......................................................................... 121 Executive Compensation................................................................................... 122 Certain Relationships and Certain Transactions........................................................... 125 SECURITY OWNERSHIP OF THE COMBINED COMPANY................................................................. 126 SECURITY OWNERSHIP OF HYBRID............................................................................... 128 SECURITY OWNERSHIP OF PACIFIC.............................................................................. 130 COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION................................................ 132 DESCRIPTION OF HYBRID CAPITAL STOCK........................................................................ 133 COMPARATIVE RIGHTS OF HYBRID STOCKHOLDERS AND PACIFIC SHAREHOLDERS......................................... 135 ADDITIONAL MATTERS FOR CONSIDERATION OF HYBRID STOCKHOLDERS: PROPOSAL NO. 2 FOR HYBRID STOCKHOLDERS: ELECTION OF HYBRID DIRECTORS....................................... 140 PROPOSAL NO. 3 FOR HYBRID STOCKHOLDERS: AMENDMENT OF HYBRID'S 1997 EQUITY INCENTIVE PLAN................... 141 PROPOSAL NO. 4 FOR HYBRID STOCKHOLDERS: AMENDMENT OF HYBRID'S 1997 EMPLOYEE STOCK PURCHASE PLAN............ 145 PROPOSAL NO. 5 FOR HYBRID STOCKHOLDERS: RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS............... 149 STOCKHOLDER PROPOSALS...................................................................................... 150 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................................................... 150 OTHER BUSINESS............................................................................................. 150 EXPERTS.................................................................................................... 150 LEGAL MATTERS.............................................................................................. 150 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1 APPENDICES A-1 Agreement and Plan of Reorganization A-2 Form of Agreement of Merger between Pacific and Merger Sub B Opinion of NationsBanc Montgomery Securities LLC C Sections 1300-1312 of California Corporations Code
iii NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF. ------------------------ AVAILABLE INFORMATION Hybrid is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "COMMISSION"). These materials can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of these materials can also be obtained from the Commission at prescribed rates by writing to the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the World Wide Web site is http://www.sec.gov. Under the rules and regulations of the Commission, the solicitation of proxies from stockholders of Hybrid and shareholders of Pacific to approve and adopt the Reorganization Agreement, the Agreement of Merger and the Merger constitutes an offering of Hybrid Common Stock to be issued in connection with the Merger. Accordingly, Hybrid has filed with the Commission a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect to such offering (together with any amendment thereto, the "REGISTRATION STATEMENT"). This Joint Proxy Statement/Prospectus constitutes the prospectus of Hybrid that is filed as part of the Registration Statement. Other parts of the Registration Statement are omitted from this Joint Proxy Statement/Prospectus in accordance with the rules and regulations of the Commission. Copies of the Registration Statement, including the exhibits to the Registration Statement and other material that is not included herein, may be inspected, without charge, at the regional offices of the Commission referred to above, obtained at the Commission's World Wide Web site set forth above or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. Statements made in this Joint Proxy Statement/Prospectus concerning the contents of any contract or other document are not necessarily complete. With respect to each contract or other document filed as an exhibit to the Registration Statement, reference is hereby made to that exhibit for a more complete description of the matter involved, and each such statement is hereby qualified in its entirety by such reference. All information contained in this Joint Proxy Statement/Prospectus relating to Hybrid has been supplied by Hybrid, and all information relating to Pacific has been supplied by Pacific. 2 TRADEMARKS This Joint Proxy Statement/Prospectus contains trademarks of Hybrid and Pacific, and may contain trademarks of others, in the U.S. and other countries. CyberManager-Registered Trademark- and CyberMaster-Registered Trademark- are registered trademarks of Hybrid. Hybrid Networks-TM- and CyberCommuter-TM- are trademarks of Hybrid. Pacific Monolithics-Registered Trademark-, DigiSite-Registered Trademark-, Fil-Tenna-Registered Trademark-, CypherPoint-Registered Trademark- and Vagi-Registered Trademark- are registered trademarks of Pacific. FORWARD-LOOKING STATEMENTS This Joint Proxy Statement/Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify those forward looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors, including those described in the risk factors set forth under "PROPOSAL NO. 1: THE MERGER--RISK FACTORS" and reference is made to the particular discussions set forth under "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER-- HYBRID'S REASONS FOR THE MERGER" and "--PACIFIC'S REASONS FOR THE MERGER,"; "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"; "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"; "BUSINESS OF HYBRID"; and "BUSINESS OF PACIFIC." Readers are cautioned not to place undue reliance on forward-looking statements contained herein, which reflect the analysis of the management of Hybrid and Pacific, as appropriate, only as of the date hereof. Neither Hybrid nor Pacific undertakes any obligation to release publicly the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 3 SUMMARY THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. THE SUMMARY DOES NOT CONTAIN A COMPLETE DESCRIPTION OF THE TERMS OF THE MERGER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. STOCKHOLDERS OF HYBRID AND SHAREHOLDERS OF PACIFIC ARE URGED TO READ THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. STOCKHOLDER MEETINGS HYBRID ANNUAL MEETING DATE, TIME, PLACE AND PURPOSE The Hybrid Annual Meeting will be held on May 28, 1998 at 10:00 A.M., local time, at Hybrid's headquarters located at 10161 Bubb Road, Cupertino, California 95014. See "THE HYBRID ANNUAL MEETING." At the Hybrid Annual Meeting, stockholders of record of Hybrid on the Hybrid Record Date (as defined below) will be asked to: (i) approve and adopt the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and to approve the Merger, (ii) elect two Class I directors of Hybrid, to serve from the time of their election and qualification until the earlier of (A) their resignation, which will occur upon the consummation of the Merger (whereupon the Hybrid Board will appoint two directors of Pacific to replace such directors as Class I directors on the Hybrid Board) or (B) the third annual meeting of stockholders following election and until their respective successors have been elected and duly qualified or until their respective earlier resignations or removals, (iii) approve an amendment to Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, (iv) approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares and (v) ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. The Reorganization Agreement and the Agreement of Merger are attached hereto as Appendices A-1 and A-2, respectively. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER." RECORD DATE AND VOTE REQUIRED Only Hybrid stockholders of record at the close of business on April 30, 1998 (the "HYBRID RECORD DATE") have the right to receive notice of and to vote at the Hybrid Annual Meeting. As of the Hybrid Record Date there were 10,410,050 shares of Hybrid Common Stock outstanding and entitled to vote. The affirmative vote of the holders of a majority of the outstanding shares of Hybrid Common Stock is required to approve and adopt the Reorganization Agreement and the Agreement of Merger and to approve the Merger as set forth in Proposal No. 1. Under Proposal No. 2, directors will be elected by a plurality of the votes of the shares of Hybrid Common Stock present in person or represented by proxy at the Hybrid Annual Meeting and entitled to vote on the election of the two Class I directors. The affirmative vote of a majority of the shares of Hybrid Common Stock represented in person or by proxy and entitled to vote at the Hybrid Annual Meeting is required to approve each of Proposal No. 3--the amendment of Hybrid's 1997 Equity Incentive Plan, Proposal No. 4--the amendment of Hybrid's 1997 Employee Stock Purchase Plan and Proposal No. 5-- ratification of the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ended December 31, 1998. As of April 30, 1998, directors and executive officers of Hybrid, and their affiliated entities, as a group beneficially owned 1,395,709 shares of Hybrid Common Stock, or approximately 13.4% of the shares of Hybrid Common Stock outstanding as of such date. Affiliates of Hybrid, including certain of such directors 4 and executive officers of Hybrid, beneficially owning 1,384,512 shares of Hybrid Common Stock, or approximately 13.3% of the outstanding shares of Hybrid Common Stock, have executed Voting Agreements pursuant to which they have agreed to vote such shares in favor of the adoption and approval of the Reorganization Agreement and the Agreement of Merger and approval of the Merger. The effectiveness of any of the proposals to be voted upon at the Hybrid Annual Meeting is not conditioned upon the approval of any of the other proposals by the Hybrid stockholders. RECOMMENDATIONS OF THE HYBRID BOARD OF DIRECTORS Proposal No. 1: The Merger. Hybrid's Board of Directors (the "HYBRID BOARD") has adopted and approved the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and approved the Merger and has determined that the Merger is fair, from a financial point of view to, and in the best interests of Hybrid. After careful consideration, the Hybrid Board recommends a vote FOR the adoption and approval of the Reorganization Agreement and the Agreement of Merger and the approval of the Merger. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--HYBRID'S REASONS FOR THE MERGER" AND "-- BACKGROUND OF THE MERGER." Proposal No. 2: Election of Hybrid Directors. The Hybrid Board recommends a vote FOR the election of each of the nominated directors. See "PROPOSAL NO. 2 FOR HYBRID STOCKHOLDERS: ELECTION OF HYBRID DIRECTORS." Proposal No. 3: Amendment of Hybrid's 1997 Equity Incentive Plan. The Hybrid Board recommends a vote FOR approval of the amendment of Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Hybrid Common Stock reserved for issuance thereunder by 500,000 shares. See "PROPOSAL NO. 3 FOR HYBRID STOCKHOLDERS: AMENDMENT OF THE 1997 EQUITY INCENTIVE PLAN." Proposal No. 4: Amendment of Hybrid's 1997 Employee Stock Purchase Plan. The Hybrid Board recommends a vote FOR approval of the amendment of Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares. See "PROPOSAL NO. 4 FOR HYBRID STOCKHOLDERS: AMENDMENT OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN." Proposal No. 5: Ratification of Selection of Independent Accountants. The Hybrid Board recommends a vote FOR ratification of the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. See "PROPOSAL NO. 5 FOR HYBRID STOCKHOLDERS: RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS." PACIFIC SPECIAL MEETING DATE, TIME, PLACE AND PURPOSE The Pacific Special Meeting will be held on May 28, 1998 at 10:00 A.M., local time, at Pacific's headquarters located at 1308 Moffett Park Drive, Sunnyvale, California 94089. See "THE PACIFIC SPECIAL MEETING." At the Pacific Special Meeting, shareholders of Pacific on the Pacific Record Date (as defined below) will be asked to consider and vote upon a proposal to approve and adopt the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and to approve the Merger. The Reorganization Agreement and the Agreement of Merger are attached hereto as Appendices A-1 and A-2, respectively. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER." 5 RECORD DATE AND VOTE REQUIRED Pacific shareholders of record at the close of business on April 30, 1998 (the "PACIFIC RECORD DATE") have the right to receive notice of and to vote at the Pacific Special Meeting. At the close of business on the Pacific Record Date, there were 5,712,668 shares of Pacific Common Stock and 12,320,681 shares of Pacific Preferred Stock outstanding, each of which is entitled to one vote on each matter to be acted upon. The affirmative vote of the holders of a majority of the outstanding shares of Pacific Common Stock and 60% of the outstanding shares of Pacific Preferred Stock is required to approve and adopt the Reorganization Agreement and the Agreement of Merger and to approve the Merger set forth in Proposal No. 1. As of April 30, 1998, directors and executive officers of Pacific, and their affiliated entities, as a group beneficially owned 3,446,092 shares of Pacific Common Stock and 2,632,965 shares of Pacific Preferred Stock, or approximately 60.3% of the shares of Pacific Common Stock and 21.4% of the shares of Pacific Preferred Stock, respectively, outstanding as of such date. Affiliates of Pacific, including certain directors and executive officers of Pacific, beneficially owning 3,357,515 shares of Pacific Common Stock and 7,509,644 shares of Pacific Preferred Stock, or approximately 58.8% and 61.0% of the outstanding shares of Pacific Common Stock and Pacific Preferred Stock, respectively, have executed Voting Agreements pursuant to which they have agreed to vote such shares in favor of the adoption and approval of the Reorganization Agreement and the Agreement of Merger and approval of the Merger. The vote by these affiliates in accordance with their Voting Agreements will be sufficient to approve the Merger. However, it is a condition to Hybrid's obligation to complete the Merger that the holders of no more than 5% of the outstanding shares of Pacific Capital Stock be eligible to exercise dissenters' rights. RECOMMENDATION OF THE PACIFIC BOARD OF DIRECTORS Pacific's Board of Directors (the "PACIFIC BOARD") has adopted and approved the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and approved the Merger and has determined that the Merger is fair, from a financial point of view to, and in the best interests of Pacific and its shareholders. After careful consideration, the Pacific Board recommends a vote FOR the adoption and approval of the Reorganization Agreement and the Agreement of Merger and the approval of the Merger. See "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--PACIFIC'S REASONS FOR THE MERGER" and "--BACKGROUND OF THE MERGER." 6 PROPOSAL NO. 1: THE MERGER THE COMPANIES HYBRID NETWORKS, INC. Hybrid is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. Hybrid'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 is currently generating 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, wireless or cable 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 wireless or cable 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. Hybrid's objective is to be a leader in providing cost-effective, high speed Internet and intranet access solutions to broadband wireless system operators, cable systems operators, Intranet service providers ("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 wireless and cable 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 systems 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. Hybrid's principal executive offices are located at 10161 Bubb Road, Cupertino, California 95014; its telephone number is (408) 725-3250. See "BUSINESS OF HYBRID." PACIFIC MONOLITHICS, INC. Pacific designs, develops, manufactures and markets radio frequency devices and systems for providers of wireless communication services. Since its inception in 1984, Pacific has been involved in the development of radio frequency integrated circuits ("RFIC") employing gallium arsenide for use in a variety of commercial and military applications. In 1991, Pacific began applying its RFIC design expertise and radio frequency system engineering skills to the development of system solutions for the broadband wireless video market. Since 1991, Pacific has produced and sold over one million broadband wireless antenna/downconverters. Additionally, since the introduction of Pacific's CypherPoint video encoding system in 1996, Pacific has produced and sold over 50 encoding systems and 100,000 decoders. Pacific's strategy is to leverage its position in broadband wireless video communications to address more extensive "wireless last mile" voice, data and video applications. It has recently begun field trials of a radio frequency Transverter which, when used in combination with a two-way cable modem, can provide high-speed wireless Internet access using the radio frequency spectrum. Pacific was incorporated in California in March 1984. Pacific's principal executive offices are located at 1308 Moffett Park Drive, Sunnyvale, California 94089; its telephone number is (408) 745-2700. See "BUSINESS OF PACIFIC." 7 MERGER SUB Merger Sub, a Delaware corporation, which was incorporated in March 1998, is a corporation recently organized by Hybrid for the sole purpose of effecting the Merger. It has no material assets and has not engaged in any activities except in connection with the proposed Merger. Merger Sub's principal executive offices are located at 10161 Bubb Road, Cupertino, California 95014; its telephone number is (408) 725-3250. RISK FACTORS The following risk factors, among others set forth under "RISK FACTORS" below and elsewhere in this Joint Proxy Statement/Prospectus, should be considered by Hybrid stockholders and Pacific shareholders in evaluating the matters to be voted on at the Hybrid Annual Meeting and the Pacific Special Meeting and the acquisition of the securities offered hereby. Risks related to the Merger include the following: (i) the expected long-term strategic benefits of the Merger are dependent upon the successful integration of operations and retention of key personnel, and there can be no assurance that these objectives will be achieved; (ii) disruption of Hybrid's and Pacific's sales and marketing activities may result from the Merger and might not be smoothly or effectively resolved, and such disruption could materially and adversely affect the combined company's financial results; (iii) the integration of Hybrid's and Pacific's products, technologies and engineering teams after the Merger might not be timely accomplished or technically feasible, which could in turn reduce the expected technological benefits of the Merger and have an adverse impact upon the combined company's product development; (iv) Hybrid's stock price may be significantly and adversely affected if the beneficial synergies that the Merger is intended to generate are not achieved or do not occur as rapidly or to the extent anticipated by securities analysts and investors; (v) negative reaction to the Merger on the part of Hybrid's and/or Pacific's suppliers, resellers and customers could result in reduced revenues and earnings, which could in turn have a negative effect on the price of Hybrid's stock; (vi) the Merger is expected to result in substantial direct transaction costs and operating charges relating to the integration of Pacific's operations into Hybrid's operations, and the integration of the two companies may involve substantial additional unexpected costs; (vii) in the past, each of Hybrid and Pacific has required substantial amounts of capital to design, develop, market and manufacture its products and has not been able to generate sufficient cash from operations to meet its cash flow needs; Pacific will need additional near-term financing; and the combined company may need to raise additional funds through public or private equity or debt financing or from other sources; (viii) the Merger will dilute Hybrid stockholders' and Pacific shareholders' ownership interests, compared to their ownership interests in their respective companies prior to the Merger; and (ix) if certain restrictions on the transfer of shares of Hybrid Common Stock and, prior to the Merger, Pacific Common Stock and Pacific Preferred Stock, are not observed by each company's respective affiliates, the Merger may fail to qualify as a pooling of interests for financial reporting purposes. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO THE MERGER." Risks relating to Hybrid, Pacific and the combined company include the following: (i) Pacific is currently in need of immediate additional capital in an approximate amount of $1.0 million to finance its operations and meet its short term liquidity needs, which proceeds, if not obtained, will require Pacific to scale back sales and marketing and research and development efforts (ii) Hybrid has a limited operating history, having shipped its first product line in 1994, and Hybrid and Pacific each has a history of losses; (iii) each of Hybrid and Pacific has experienced, and the combined company expects to continue to experience, significant fluctuations in its results of operations on a quarterly and on an annual basis attributable to absence of any significant backlog and a decline in average selling prices for each of Hybrid's and Pacific's products; (iv) the sales cycle associated with each of Hybrid's and Pacific's products is typically lengthy and orders are therefore subject to a number of significant risks; (v) substantially all of Hybrid's current sales are dependent upon recently introduced products, and the businesses of each of Hybrid and Pacific are subject to rapid technological change; (vi) the market for high speed Internet access 8 products is characterized by competing technologies, evolving industry standards and frequent new product introductions; (vii) the inexperience of each of Hybrid and Pacific in an emerging market may adversely affect the combined company's competitiveness vis-a-vis more established and larger competitors; (viii) the market for the combined company's products will be dependent upon cable operator installations; (ix) the combined company will be dependent on broadband wireless system operators to purchase the combined company's wireless video and modem products and sell its wireless modems to end-users; (x) the combined company will also be dependent on cable system operators to purchase and sell its cable modems to end users; (xi) a small number of customers account for a substantial portion of each of Hybrid's and Pacific's net sales; (xii) the market for high speed network connectivity products and services is intensely competitive and many of Hybrid's and Pacific's competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources; (xiii) the cost of Hybrid's and Pacific's products are relatively expensive for the consumer electronics market; (xiv) the combined company will be dependent on out-sourcing its manufacturing; (xv) each of Hybrid and Pacific are dependent on key outside suppliers for component availability; (xvi) the commercial market for products designed for the Internet and the TCP/IP networking protocol has only recently begun to develop, and the combined company's success will depend in large part on the increased use of the Internet; (xvii) the "asymmetric" architecture of Hybrid's products is not widely used and is relatively unproven in computer networking; (xviii) products as complex as those offered by Hybrid and Pacific frequently contain undetected errors, defects or failures that could result in product returns and other losses to the combined company or its customers; (xix) the combined company's success will depend in significant part upon the continued services of its key technical, sales and senior management personnel, competition for such personnel is intense and there can be no assurance that the combined company will be able to attract and/ or retain key personnel; (xx) Hybrid, Pacific and their customers are subject to varying degrees of federal, state and local regulation that affect their businesses; (xxi) each of Hybrid and Pacific rely on a combination of patent, trade secret, copyright and trademark laws to establish and protect proprietary rights in their products and such claims may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the combined company; (xxii) Hybrid's push to increase its international sales will expose the combined company to the greater risks inherent in international sales such as longer payment cycles, unexpected changes in regulatory requirements, etc.; (xxiii) concentration of ownership by the combined company's executive officers and directors; (xxiv) Hybrid is subject to certain restrictive debt covenants which could adversely affect the combined company's operations; (xxv) sales of substantial amounts of Hybrid Common Stock in the public market following the acquisition of Pacific by Hybrid could adversely affect the market price of the combined company's Common Stock prevailing from time to time and could impair Hybrid's ability to raise capital through the sale of equity or debt securities; and (xxvi) the market price for shares of Hybrid's Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a wide variety of factors. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY." THE MERGER EFFECTS OF THE MERGER The Reorganization Agreement provides, among other things, for the Merger of Merger Sub with and into Pacific pursuant to the Reorganization Agreement and the Agreement of Merger, which will result in Pacific, as the surviving corporation of the Merger, becoming a wholly-owned subsidiary of Hybrid. CONVERSION OF PACIFIC SECURITIES Upon consummation of the Merger, each outstanding share of Pacific Capital Stock will be converted into an amount of Hybrid Common Stock equal to a fraction, the numerator of which is obtained by dividing $12,500,000 by the Closing Price and the denominator of which is the total number of shares of Pacific Capital Stock outstanding plus the total number of shares of Pacific Common Stock issuable upon 9 exercise of outstanding Pacific Options and Pacific Warrants. The Closing Price will be equal to the average of the closing sale prices of one share of Hybrid Common Stock reported in THE WALL STREET JOURNAL, on the basis of information provided by the Nasdaq Stock Market for each of the ten trading days ending two (2) trading days preceding the Closing Date; provided, however, that in no event shall the Closing Price be greater than $8.40 or less than $5.17 (resulting in the Low Exchange Ratio of 0.0688078 and the High Exchange Ratio of 0.1117959, respectively, assuming the number of Pacific shares as of April 30, 1998 as indicated below). As of March 19, 1998, based on Hybrid's ten day average trading price of $6.46 and the number of shares of Pacific Common Stock, shares of Pacific Preferred Stock and shares subject to Pacific Options and Pacific Warrants outstanding on April 30, 1998, the Exchange Ratio would be approximately 0.0895193 of a share of Hybrid Common Stock for each outstanding share of Pacific Capital Stock (the Assumed Exchange Ratio). Each outstanding Pacific Option and Pacific Warrant will be assumed and converted into an option or warrant, respectively, to purchase a number of shares of Hybrid Common Stock equal to the Exchange Ratio multiplied by the number of shares of Pacific Common Stock purchasable under each Pacific Option or Pacific Warrant, as applicable, rounded down to the nearest whole share, at an exercise price equal to the exercise price of such Pacific Option or Pacific Warrant, respectively, divided by the Exchange Ratio, rounded up to the nearest cent. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION." For a summary of the principal differences between the rights of holders of Hybrid Common Stock and Pacific Capital Stock, see "COMPARATIVE RIGHTS OF HYBRID STOCKHOLDERS AND PACIFIC SHAREHOLDERS." Pursuant to the Reorganization Agreement, Pacific and Hybrid will enter into an Escrow Agreement (the "ESCROW AGREEMENT") whereby 10% of the shares of Common Stock issuable to each of the Pacific shareholders will be deposited in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--ESCROW AGREEMENT." HOLDERS OF PACIFIC COMMON STOCK OR PACIFIC PREFERRED STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING PACIFIC COMMON STOCK OR PACIFIC PREFERRED STOCK WITH THE ENCLOSED PROXY. IF THE MERGER IS APPROVED, A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING PACIFIC COMMON STOCK OR PACIFIC PREFERRED STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. CERTIFICATES REPRESENTING PACIFIC COMMON STOCK OR PACIFIC PREFERRED STOCK SHOULD BE SENT TO THE EXCHANGE AGENT (AS DEFINED BELOW) ONLY AFTER RECEIPT OF, AND IN ACCORDANCE WITH, THE INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL. OWNERSHIP OF HYBRID Based on the Assumed Exchange Ratio and the number of shares of Pacific Common Stock outstanding or subject to Pacific Options or Warrants as of April 30, 1998, immediately following the Merger, the former shareholders of Pacific will collectively hold approximately 13.4% of the outstanding shares of Hybrid Common Stock (15.7% including former optionholders and warrantholders of Pacific). Based on the High Exchange Ratio, the former shareholders of Pacific would hold approximately 16.2% of the outstanding shares of Hybrid Common Stock (18.8% including former optionholders and warrant holders of Pacific); and, based on the Low Exchange Ratio, the former shareholders of Pacific would hold approximately 10.7% of the outstanding shares of Hybrid Common Stock (12.5% including former optionholders and warrant holders of Pacific). In addition, affiliates of Pacific who currently own approximately 60% of Pacific's outstanding capital stock, after the consummation of the Merger will own only 8.5% of the outstanding Hybrid Common Stock based on the Assumed Exchange Ratio, 10.4% based on 10 the High Exchange Ratio and 6.7% based on the Low Exchange Ratio. See "SECURITY OWNERSHIP OF THE COMBINED COMPANY." RESALE OF SECURITIES RECEIVED BY PACIFIC SHAREHOLDERS Shares of Hybrid Common Stock received by holders of Pacific Capital Stock who are not also affiliates of Pacific will be freely salable following the Merger. With respect to shares of Hybrid Common Stock issuable upon the exercise of assumed Pacific Options, Hybrid has agreed that as soon as practicable following the closing of the Merger that it will file a registration statement on Form S-8 registering such shares. Upon such registration, shares of Hybrid Common Stock issued upon the exercise of the assumed Pacific Options will be freely salable as well. Shares of Hybrid Common Stock issuable upon the exercise of assumed Pacific Warrants are not being registered in connection with the Merger. Shares of Hybrid Common Stock received upon the exercise of the assumed Pacific Warrants must either be registered for resale or otherwise qualify for an exemption from registration under applicable federal and state securities laws as, for example, by the holder of such shares complying with the provisions of Rule 144 under the Securities Act. See "--MARKET AND DIVIDEND DATA" BELOW AND "COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION." FINANCIAL ADVISORS NationsBanc Montgomery Securities LLC ("NATIONSBANC MONTGOMERY") has delivered its written opinion dated March 19, 1998 stating that the consideration to be paid by Hybrid in the Merger was fair to Hybrid from a financial point of view, as of the date of such opinion. The full text of the opinion of NationsBanc Montgomery, which sets forth the assumptions made, matters considered and limitations on the review undertaken by NationsBanc Montgomery is attached as Appendix B to this Joint Proxy Statement/Prospectus. Hybrid stockholders are urged to read the opinion in its entirety. In connection with the Merger, UBS Securities LLC ("UBS") acted as financial advisor to Pacific. UBS orally informed the Pacific Board of Directors on March 19, 1998, that, based upon it's review of the businesses of Hybrid and Pacific and its experience in the investment banking industry, it concurred with the Board's views as to the advantages of a business combination with Hybrid. UBS did not render a formal "fairness opinion" on the Merger. No financial or other advice was rendered by UBS to Hybrid in connection with the Merger. UBS acted as one of the two managing underwriters in Hybrid's initial public offering and currently acts as a market maker for Hybrid's stock. REASONS FOR THE MERGER The Hybrid Board authorized the execution and delivery of the Reorganization Agreement with the expectation that the Merger will produce substantial benefits, including (i) combining Hybrid's wireless network products and expertise with Pacific's wireless transmission products and expertise to provide an opportunity for the combined company (a) to offer a broader and more complete suite of products and (b) to accelerate development of integrated, end-to-end system solutions for high speed wireless Internet access; (ii) combining each company's market presence, customer base and relationships in the broadband marketplace to provide additional marketing opportunities; (iii) adding Pacific's international sales and distribution capability to give Hybrid the opportunity to expand the international distribution of its products; (iv) increasing the management breadth, engineering, sales and marketing and other personnel capacity of the combined company; (v) providing the opportunity to achieve operational efficiencies; and helping the combined company to achieve critical mass in revenues and resources to meet the increasing challenges in the markets in which it will participate. See "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--HYBRID'S REASONS FOR THE MERGER." 11 The Pacific Board authorized the execution and delivery of the Reorganization Agreement with the expectation that the Merger will produce substantially the same benefits as those envisioned by the Hybrid Board. In addition, the Pacific Board believes that Hybrid's current reserves of cash and cash equivalents may enable Pacific to have greater flexibility in managing its business. Moreover, the Merger will provide a means by which Pacific's shareholders and optionholders will be able to gain liquidity for their equity interests. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--PACIFIC'S REASONS FOR THE MERGER." TERMS OF THE MERGER EFFECTIVE TIME It is anticipated that the Merger will become effective (the "EFFECTIVE TIME") as promptly as practicable after the requisite shareholder and stockholder approvals have been obtained and all other conditions to the Merger, as specified in the Reorganization Agreement, have been satisfied or waived. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--CONDITIONS TO THE MERGER." CONDITIONS TO THE MERGER In addition to the requirement that the Merger be approved by the Hybrid stockholders and by the Pacific shareholders, the obligations of Hybrid and Pacific to consummate the Merger are subject to the satisfaction of a number of other conditions, including, without limitation, effectiveness of and the absence of any proceedings or stop order commenced or threatened by the Commission with respect to this Joint Proxy Statement/Prospectus; the absence of any order, decree or ruling by any court or governmental agency or threat thereof, or any other fact or circumstance, that would prohibit or render illegal the transactions contemplated by the Reorganization Agreement; and the receipt of all permits or authorizations that may be required by regulatory authorities. Each party's obligations under the Reorganization Agreement are also conditioned upon the accuracy of the representations and warranties made therein by the other party; the obtaining of certain third-party consents; the performance in all material respects by the other party of its covenants contained therein; the absence of any material adverse effect with respect to Hybrid or Pacific; and the receipt of certain legal opinions. Hybrid's obligations to consummate the Merger will be further conditioned upon the absence of certain legal proceedings concerning the transactions provided for in the Reorganization Agreement by Pacific; the execution by the Pacific parties and delivery to Hybrid of the Escrow Agreement, certain employment arrangements and noncompetition agreements with Richard B. Gold, Michael D. Morganstern and Allen F. Podell, who are currently officers of Pacific (the "EMPLOYMENT AND NONCOMPETITION ARRANGEMENTS"), and certain Pacific affiliates agreements; that the holders of no more than 5% of the aggregate outstanding shares of Pacific Capital Stock be eligible to exercise dissenters' rights under the California Code; and the receipt of opinions from Coopers & Lybrand L.L.P. and Deloitte & Touche LLP to the effect that the Merger will be treated as a pooling of interests for accounting purposes (the "POOLING OPINIONS"). Pacific's obligations to consummate the Merger will be further conditioned upon the execution by Hybrid and delivery to Pacific of an investor rights agreement (providing for registration rights) with certain Pacific shareholders and the Employment and Noncompetition Arrangements; the appointment of Richard B. Gold and Matthew D. Miller to the Hybrid Board of Directors, effective upon the effectiveness of the Merger, and the execution and delivery of indemnity agreements with such new directors; and Hybrid's authorization for listing on the Nasdaq Stock Market of the Hybrid Common Stock to be issued in the Merger, upon notice of issuance. At any time on or prior to the Merger, to the extent legally allowed, Hybrid or Pacific, without approval of the stockholders or shareholders of such company, as the case may be, may waive compliance with any of the agreements or conditions contained in the Reorganization Agreement for the benefit of that company. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--CONDITIONS TO THE MERGER." 12 SURRENDER OF CERTIFICATES If the Merger becomes effective, Boston Equiserve (the "EXCHANGE AGENT") will give specific written instructions to all holders of record of Pacific Common Stock and Pacific Preferred Stock as of the Effective Time as to the procedure for surrendering their Pacific stock certificates. Upon the Exchange Agent's receipt of such certificates, each Pacific shareholder will receive a certificate representing Hybrid Common Stock and a cash payment in lieu of fractional shares. CERTIFICATES REPRESENTING SHARES OF PACIFIC COMMON STOCK OR PREFERRED STOCK SHOULD NOT BE SURRENDERED UNTIL THE EXCHANGE AGENT'S WRITTEN INSTRUCTIONS ARE RECEIVED. TERMINATION The Reorganization Agreement may be terminated by mutual agreement of both parties or by either party: (i) as a result of a breach by the other party of a representation, warranty or covenant set forth in the Reorganization Agreement which breach has or can reasonably be expected to result in a material adverse effect on such party and which the other party fails to cure within thirty days after written notice thereof (except that no cure period will be provided for a breach which by its nature cannot be cured), (ii) if all the conditions for closing the Merger are not satisfied or waived on or before the Final Date (as defined below) other than as a result of the breach of the Reorganization Agreement by the terminating party or the breach of certain affiliates agreements by such party's affiliates, (iii) if the required approval of the stockholders or shareholders of Hybrid or Pacific, as applicable, are not obtained by reason of the failure to obtain the required vote, or (iv) if a permanent injunction or other order by a federal or state court which would make illegal or otherwise restrain or prohibit consummation of the Merger is issued and has become final and nonappealable. The term "FINAL DATE" is defined in the Reorganization Agreement as July 31, 1998 except that if a temporary, preliminary or permanent injunction or other order by any federal or state court which would prohibit or otherwise restrain consummation of the Merger is issued and in effect on July 31, 1998, and such injunction has not become final and nonappealable, either Hybrid or Pacific may, upon written notice to the other party on or before July 31, 1998, extend the time for consummation of the Merger up to and including the earlier of the date such injunction becomes final and nonappealable or 45 days after July 31, 1998. If the Reorganization Agreement is terminated by Hybrid because more than 5% of Pacific Capital Stock are eligible for the exercise of dissenters' rights under the California Code, or if Coopers & Lybrand L.L.P. does not issue its Pooling Opinion because of actions taken by Pacific after the date of the Reorganization Agreement, Pacific would be required to pay Hybrid a termination payment in the amount of $375,000. If the Reorganization Agreement is terminated by Pacific because Coopers & Lybrand L.L.P. does not issue a Pooling Opinion as a result of actions taken by Hybrid after the date of the Reorganization Agreement, Hybrid would be required to pay Pacific a termination payment in the amount of $375,000. MERGER EXPENSES AND FEES AND OTHER COSTS If the Merger is consummated, Hybrid will bear all costs and expenses in connection with the Reorganization Agreement and the transactions provided for therein. Expenses incurred by Pacific for accounting, attorneys and other professionals' fees and expenses (other than those of its financial advisors, UBS) in excess of $175,000, if paid by Hybrid, will enable Hybrid to make a claim under the Escrow. If the Merger is not consummated, each of Pacific and Hybrid will bear its own costs and expenses with respect to the Reorganization Agreement and the transactions contemplated thereby. 13 Hybrid expects to incur a charge of approximately $3.0 million to $3.5 million in the quarter in which the Merger occurs in connection with the write-off of certain assets, personnel severance costs, the cancellation and continuation of contractual obligations and transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS" below in this section. NASDAQ STOCK MARKET LISTING The shares of Hybrid Common Stock to be issued in the Merger will be traded on the Nasdaq Stock Market under the symbol "HYBR". AMENDMENT The Reorganization Agreement may be amended by Hybrid and Pacific at any time before or after approval by the Hybrid stockholders or the Pacific shareholders, except that, after such approval, no amendment may be made which by law requires the further approval of the Hybrid stockholders or the Pacific shareholders unless such approval is obtained. INTERESTS OF CERTAIN PERSONS IN THE MERGER Certain management personnel of Pacific have entered into or are expected to enter into employment agreements or arrangements and noncompetition agreements with Hybrid that will become effective upon consummation of the Merger, as described below. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER-- EMPLOYMENT/NONCOMPETITION ARRANGEMENTS." Under the employment arrangements, upon the consummation of the Merger, Richard B. Gold (the Chief Executive Officer, President and a director of Pacific) will become the President and Chief Operating Officer of Hybrid, and Michael D. Morganstern (the Vice President, Engineering of Pacific) and Allen F. Podell (the Chief Technical Officer of Pacific) will become employees of Hybrid. Pursuant to the terms of the Reorganization Agreement, it is anticipated that, following the Merger, Mr. Gold and Matthew D. Miller (the Chairman of the Board of Pacific), will be appointed directors of Hybrid. Pursuant to the Reorganization Agreement, Hybrid has agreed to indemnify Messrs. Gold and Miller in their capacity as Hybrid directors. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--INDEMNIFICATION AGREEMENTS." In addition, Mr. Miller has been a consultant to Hybrid since October 1994 and has received options to purchase 18,519 shares of Hybrid Common Stock. A consulting firm of which Mr. Miller is the President acts as a consultant to Pacific as well. See "SELECTED INFORMATION WITH RESPECT TO PACIFIC--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." As a result of the foregoing, the officers and directors of Pacific referred to above may have personal interests in the Merger which are not identical to the interests of other Pacific shareholders. In addition, certain 5% or greater shareholders of Pacific, in May 1996 and September 1997, loaned Pacific an aggregate of $1.0 million and $750,000, respectively, in connection with bridge loan financings, and such shareholders received promissory notes and warrants to purchase Pacific Common Stock. In connection with the Merger, the promissory notes are expected to be repaid in full, together with accrued interest. James R. Flach, a director of Hybrid, is an executive partner of Accel Partners. Accel Partners and entities associated with Accel Partners constitute principal stockholders of Hybrid, principal shareholders of Pacific and holders of certain of the Pacific promissory notes that are expected to be repaid following the Merger. See "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--INTERESTS OF CERTAIN PERSONS IN THE MERGER" and "SELECTED INFORMATION WITH RESPECT TO PACIFIC--CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS." William H. Fry, Hybrid's Vice President and Chief Technical Officer, holds options to purchase 113,010 shares of Hybrid Common Stock, 55,262 of which were vested as of April 30, 1998. In January 1998, Hybrid's Board of Directors approved the 12-month accelerated vesting for options held by Mr. Fry if the Company hires certain senior management and his employment is terminated, voluntarily or involuntarily, within 12 months after such hiring. Mr. Gold is expected to be appointed the Chief Operating Officer of Hybrid following the consummation of the Merger, in which event Mr. Fry would 14 have the right to receive accelerated vesting of options for up to 26,991 shares of Hybrid Common Stock, should he leave the Company within 12 months thereafter. This may give Mr. Fry a personal interest in the Merger which is not identical to the interest of other Hybrid stockholders. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--INTERESTS OF CERTAIN PERSONS IN THE MERGER." CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The Merger is expected to be a tax-free reorganization for federal income tax purposes, so that no gain or loss will be recognized by Hybrid, Pacific, Hybrid stockholders or Pacific shareholders on the exchange of Pacific Common Stock or Pacific Preferred Stock, as the case may be, for Hybrid Common Stock, except to the extent that Pacific shareholders receive cash in lieu of fractional shares or upon exercise of dissenters' or appraisal rights. The Reorganization Agreement does not require the parties to obtain a ruling from the Internal Revenue Service as to the tax consequences of the Merger. As a condition to Hybrid's and Pacific's obligations to consummate the Merger, Hybrid and Pacific are to receive opinions at the Effective Time from their respective legal counsel to the effect that the Merger will be treated as a tax-free reorganization for federal income tax purposes. Hybrid Stockholders and Pacific Shareholders are urged to consult their own tax advisors regarding such tax consequences. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--CERTAIN FEDERAL INCOME TAX CONSIDERATIONS." ACCOUNTING TREATMENT The Merger is intended to be treated as a pooling of interests for accounting purposes. As a condition to Hybrid's obligations to consummate the Merger, Hybrid is to receive the Pooling Opinions from Coopers & Lybrand L.L.P., independent accountants for Hybrid, and Deloitte & Touche LLP, independent auditors for Pacific, to the effect that the Merger will be treated as a pooling of interests for accounting purposes. See "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--ACCOUNTING TREATMENT." APPRAISAL AND DISSENTERS' RIGHTS If the Merger is approved by the required vote of Pacific's shareholders, each holder of shares of Pacific Capital Stock who does not vote in favor of the Merger and who follows the procedures set forth in Sections 1300 through 1312 of the California Code will be entitled to have shares of Pacific Capital Stock purchased by Pacific for cash at their fair market value. The fair market value of shares of Pacific Capital Stock will be determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation in consequence of the proposed Merger and therefore valuing the shares of Pacific Capital Stock as if the Merger had not occurred. The failure of a dissenting Pacific shareholder to timely and properly comply with the procedures set forth in Sections 1300 through 1312 of the California Code will result in the termination or waiver of such rights. Under the Delaware General Corporation Law, Hybrid stockholders are not entitled to dissenters' rights or appraisal rights with respect to the proposed Merger. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--APPRAISAL AND DISSENTERS' RIGHTS." REGULATORY MATTERS The Merger is not subject to notification and review under the Hart Scott Rodino Antitrust Improvements Act of 1976 (the "HSR ACT") or the rules promulgated thereunder by the Federal Trade Commission ("FTC"). ESCROW AGREEMENT In connection with the Merger, Hybrid, State Street Bank and Trust Co., as Escrow Agent, and Alan F. Dishlip, as representative of the Pacific shareholders, will enter into the Escrow Agreement. Pursuant to 15 the Escrow Agreement, upon consummation of the Merger, Hybrid will deposit into escrow stock certificates representing 10% of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders pursuant to the Merger. The Escrow Shares will be held in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement. Pursuant to such indemnification obligations, the Pacific shareholders will indemnify and hold harmless Hybrid and its officers, directors, agents, employees and affiliates from and against all damages arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties and covenants given or made by Pacific in the Reorganization Agreement or any certificate, document or instrument delivered by or on behalf of Pacific pursuant thereto. Indemnification obligations will not apply unless and until the "Damages" (as defined) exceed $100,000, in which event such indemnification obligations will include all Damages. The indemnification obligations of the Pacific Shareholders with respect to the Pacific financial statements expire when Hybrid issues its press release regarding its audited financial results for its fiscal year ending December 31, 1998. The indemnification obligations of the Pacific Shareholders with respect to all other Pacific representations and warranties expire on the first anniversary of the Closing Date. CERTAIN RELATED AGREEMENTS AFFILIATES AGREEMENTS To help ensure that the Merger will be accounted for as a "pooling of interests," affiliates of Hybrid ("HYBRID AFFILIATES") and Pacific ("PACIFIC AFFILIATES") have executed agreements which prohibit such persons from disposing of their shares (i) during the 30-day period prior to the closing date of the Merger and (ii) until Hybrid publicly releases its first report including the combined financial results of Hybrid and Pacific for a period of at least 30 days of "combined operations," as defined by the Commission. Pursuant to such agreements, the Pacific Affiliates have also acknowledged the resale restrictions imposed by Rule 145 promulgated under the Securities Act on shares received by them in the Merger and have made certain representations pertaining to the "continuity of interest" requirements for a tax-free reorganization. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--AFFILIATES AGREEMENTS." VOTING AGREEMENTS Certain affiliates of Hybrid who beneficially own approximately 13.4% of the outstanding shares of Hybrid Common Stock, and certain affiliates of Pacific who beneficially own approximately 58.8% and 61.0% of the outstanding shares of Pacific Common Stock and Pacific Preferred Stock, respectively, have entered into Voting Agreements pursuant to which such affiliates have agreed to vote their shares of Hybrid Common Stock or Pacific Capital Stock, as applicable, in favor of the Merger and against any action or agreement that would be in breach of any representation, warranty, covenant or obligation of Hybrid or Pacific, as applicable, in the Reorganization Agreement. See "PROPOSAL NO. 1: THE MERGER-- TERMS OF THE MERGER--VOTING AGREEMENTS." INVESTOR RIGHTS AGREEMENT Hybrid and certain Pacific shareholders will enter into an Investor Rights Agreement (the "INVESTOR RIGHTS AGREEMENT") which grants such shareholders the right to have "piggyback" registration rights with respect to the shares of Hybrid Common Stock to be received by it in exchange for their Pacific Capital Stock pursuant to the Merger. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--INVESTOR RIGHTS AGREEMENT." 16 MARKET PRICE AND DIVIDEND DATA Hybrid Common Stock is traded on the Nasdaq National Market under the symbol "HYBR." The following table sets forth the range of high and low sale prices reported on the Nasdaq National Market for Hybrid Common Stock for the periods indicated:
HIGH LOW --------- --------- FISCAL YEAR ENDING DECEMBER 31, 1998 Second Quarter (through May 1, 1998).......................................................... $ 7.38 $ 6.00 First Quarter................................................................................. $ 13.00 $ 3.88 FISCAL YEAR ENDED DECEMBER 31, 1997 Fourth Quarter (beginning November 12, 1997).................................................. $ 24.25 $ 9.25
The Pacific Common Stock and Pacific Preferred Stock are not listed on any exchange and do not trade publicly. The following table sets forth the closing sales prices per share of Hybrid Common Stock on the Nasdaq National Market on March 19, 1998, the last trading day before the announcement of the proposed Merger, and on May 1, and the equivalent per share price for Pacific Capital Stock. The "equivalent per share price" for Pacific Common Stock and Pacific Preferred Stock as of such dates equal the closing sale price per share of Hybrid Common Stock on such dates multiplied by the Assumed Exchange Ratio of 0.0894714. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION."
HYBRID COMMON PACIFIC STOCK EQUIVALENT --------------- ----------- March 19, 1998.................................................... $ 7.81 $ 0.70 May 1, 1998....................................................... $ 6.13 $ 0.55
At March 31, 1998, the closing price per share of Hybrid Common Stock, book value per share of Pacific Capital Stock, pro forma combined book value per share and book value per share of Pacific Capital Stock based on the application of the Assumed Exchange Ratio to the closing price per share of Hybrid Common Stock were as follows:
HYBRID COMMON PACIFIC CAPITAL PRO FORMA PACIFIC STOCK STOCK COMBINED EQUIVALENT --------------- --------------- ----------- ----------- March 31, 1998........................ $ 7.13 $ 0.24 $ 2.68 $ 0.24
Pacific shareholders are advised to obtain current market quotations for Hybrid Common Stock. No assurance can be given as to the market prices of Hybrid Common Stock at any time before the Effective Time or as to the market price of Hybrid Common Stock at any time thereafter. In the event the market price of Hybrid Common Stock decreases or increases prior to the Effective Time, the value at the Effective Time of the Hybrid Common Stock to be received in the Merger in exchange for the Pacific Capital Stock would correspondingly increase or decrease, subject to the range described on the cover page of this Joint Proxy Statement/Prospectus. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER-- MERGER CONSIDERATION." Hybrid and Pacific have never paid cash dividends on their respective shares of Common Stock or Preferred Stock. Pursuant to the Reorganization Agreement, each of Hybrid and Pacific have agreed not to pay cash dividends pending the consummation of the Merger without the written consent of the other. Subject to the completion of the Merger, the Hybrid Board intends to continue a policy of retaining all earnings to finance the expansion of its business. The terms of an outstanding $5.5 million debenture (the "$5.5 MILLION DEBENTURE") prevent Hybrid from paying any cash dividends for so long as the $5.5 Million Debenture remains outstanding. In addition, in October 1997, Hybrid entered into a $4.0 million bank credit facility (the "$4.0 MILLION CREDIT FACILITY"), the terms of which prohibit the declaration of dividends. The Pacific Board currently intends to retain all earnings for use in the business of the combined company and has no present intention to pay cash dividends. 17 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS: The following unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of Hybrid and Pacific, including the notes thereto, which are included herein. See "SELECTED HISTORICAL FINANCIAL DATA OF HYBRID" and "SELECTED HISTORICAL FINANCIAL DATA OF PACIFIC." The unaudited pro forma condensed combined financial statements assume a business combination between Hybrid and Pacific accounted for on a pooling-of-interests basis and are based on each company's respective historical financial statements and notes thereto, which are included herein. The unaudited pro forma condensed combined balance sheets combine Hybrid's balance sheet as of March 31, 1998 with Pacific's balance sheet as of March 31, 1998, giving effect to the Merger as if it had occurred on March 31, 1998. The unaudited pro forma condensed combined statements of operations combine Hybrid's historical results for the three years ended December 31, 1997 and the three months ended March 31, 1998 with Pacific's historical results for the three years ended September 30, 1997 and the three months ended March 31, 1998, giving effect to the Merger as if it had occurred at January 1, 1995, the earliest period presented. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated at the beginning of the earliest period presented, nor is it necessarily indicative of future operating results or financial position. 18 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
HYBRID AT PACIFIC AT MARCH 31, MARCH 31, PRO FORMA FOOTNOTE PRO FORMA 1998 1998 ADJUSTMENTS REFERENCE # COMBINED ------------ ------------- ----------- --------------- ----------- (AMOUNTS IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents................... $ 7,248 $ 162 $ 7,410 Short-term investments...................... 12,753 -- 12,753 Accounts receivable, net.................... 9,846 7,119 16,965 Inventories................................. 5,582 6,498 12,080 Prepaid expenses and other current assets... 369 347 716 -- ------------ ------------- ----------- ----------- Total current assets...................... 35,798 14,126 49,924 Property and equipment, net................... 1,768 2,583 4,351 Intangibles and other assets.................. 1,628 110 1,738 -- ------------ ------------- ----------- ----------- Total assets................................ $ 39,194 $ 16,819 $ 56,013 -- -- ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to bank....................... $ -- $ 4,298 $ 4,298 Notes payable to shareholders............... -- 1,750 1,750 Accounts payable............................ 2,080 4,407 6,487 Accrued liabilities......................... 1,278 1,063 1,500 C2 3,841 Current portion of capital lease obligations............................... 455 465 920 Deferred revenue............................ -- 24 24 -- ------------ ------------- ----------- ----------- Total current liabilities................. 3,813 12,007 1,500 17,320 Convertible debenture......................... 5,500 -- 5,500 Capital lease obligations, less current portion..................................... 587 458 1,045 Other liabilities............................. -- 90 90 -- ------------ ------------- ----------- ----------- Total liabilities......................... 9,900 12,555 1,500 23,955 -- ------------ ------------- ----------- ----------- Stockholders' equity: Convertible preferred stock................. -- 14,068 $ (14,068) C1 -- Common stock................................ 10 15,591 (15,589) C1 12 Notes receivable............................ -- (150) (150) Additional paid-in capital.................. 63,916 -- 29,657 C1 93,573 Accumulated deficit......................... (34,632) (25,245) (1,500) C2 (61,377) -- ------------ ------------- ----------- ----------- Total stockholders' equity................ 29,294 4,264 (1,500) 32,058 -- ------------ ------------- ----------- ----------- Total liabilities and stockholders' equity.................................... $ 39,194 $ 16,819 -- $ 56,013 -- -- ------------ ------------- ----------- ----------- ------------ ------------- ----------- -----------
See notes to unaudited pro forma condensed combined financial statements. 19 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
HYBRID PACIFIC FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED PRO FORMA PRO FORMA MARCH 31, 1998 MARCH 31, 1998 ADJUSTMENT COMBINED -------------- -------------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales.............................................. $ 3,528 $ 5,018 $ 8,546 Cost of goods sold..................................... 2,897 4,140 7,037 ------- ------- ----------- ----------- Gross profit......................................... 631 878 1,509 Costs and expenses: Research and development............................. 2,042 1,059 3,101 Sales and marketing.................................. 977 633 1,610 General and administrative........................... 1,390 453 1,843 ------- ------- ----------- ----------- Total operating expenses........................... 4,409 2,145 6,554 ------- ------- ----------- ----------- Loss from operations................................... (3,778) (1,267) (5,045) Interest income and other expenses, net................ 78 (229) (151) ------- ------- ----------- ----------- Net loss............................................... $ (3,700) $ (1,496) $ (5,196) ------- ------- ----------- ----------- ------- ------- ----------- ----------- Basic and diluted loss per share....................... $ (0.36) $ (0.28) $ (0.48) ------- ------- ----------- ------- ------- ----------- Shares used in basic and diluted per share calculation.......................................... 10,353 5,285 (4,812) 10,826 ------- ------- ----------- ----------- ------- ------- ----------- -----------
See notes to unaudited pro forma condensed combined financial statements. 20 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
HYBRID PACIFIC FOR THE YEAR FOR THE YEAR ENDED DEC. ENDED SEPT. PRO FORMA PRO FORMA 31, 1997 30, 1997 ADJUSTMENT COMBINED ------------ ------------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................. $ 14,270 $ 35,369 $ 49,639 Cost of goods sold........................................ 12,258 26,014 38,272 ------------ ------------- ----------- ----------- Gross profit............................................ 2,012 9,355 11,367 Costs and expenses: Research and development................................ 7,108 4,824 11,932 Sales and marketing..................................... 4,319 3,690 8,009 General and administrative.............................. 3,606 1,649 5,255 ------------ ------------- ----------- ----------- Total operating expenses.............................. 15,033 10,163 25,196 ------------ ------------- ----------- ----------- Loss from operations.................................. (13,021) (808) (13,829) Interest income and other expenses, net................... (569) (599) (1,168) ------------ ------------- ----------- ----------- Net loss.............................................. $ (13,590) $ (1,407) $ (14,997) ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- Basic and diluted loss per share.......................... $ (3.84) $ (0.29) $ (3.77) ------------ ------------- ----------- ------------ ------------- ----------- Shares used in basic and diluted per share calculation.... 3,541 4,866 (4,431) 3,976 ------------ ------------- ----------- ----------- ------------ ------------- ----------- -----------
See notes to unaudited pro forma condensed combined financial statements. 21 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
HYBRID PACIFIC FOR THE YEAR FOR THE YEAR ENDED DEC. ENDED SEPT. PRO FORMA PRO FORMA 31, 1996 30, 1996 ADJUSTMENT COMBINED ------------ ------------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................. $ 2,962 $ 29,141 $ 32,103 Cost of goods sold........................................ 3,130 23,246 26,376 ------------ ------------- ----------- ----------- Gross profit (loss)....................................... (168) 5,895 5,727 Costs and expenses: Research and development................................ 5,076 5,421 10,497 Sales and marketing..................................... 1,786 3,104 4,890 General and administrative.............................. 1,714 2,839 4,553 ------------ ------------- ----------- ----------- Total operating expenses.............................. 8,576 11,364 19,940 ------------ ------------- ----------- ----------- Loss from operations.................................. (8,744) (5,469) (14,213) Interest income and other expenses, net................... 229 (474) (245) ------------ ------------- ----------- ----------- Net loss.............................................. $ (8,515) $ (5,943) $ (14,458) ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- Basic and diluted loss per share.......................... $ (3.36) $ (1.42) $ (4.97) ------------ ------------- ----------- ------------ ------------- ----------- Shares used in basic and diluted per share calculation.... 2,535 4,184 (3,810) 2,909 ------------ ------------- ----------- ----------- ------------ ------------- ----------- -----------
See notes to unaudited pro forma condensed combined financial statements. 22 HYBRID AND PACIFIC UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
HYBRID PACIFIC FOR THE YEAR FOR THE YEAR ENDED DEC. ENDED SEPT. PRO FORMA PRO FORMA 31, 1995 30, 1995 ADJUSTMENT COMBINED ------------ ------------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................. $ 630 $ 24,925 $ 25,555 Cost of goods sold........................................ 761 15,964 16,725 ------------ ------------- ----------- ----------- Gross profit (loss)....................................... (131) 8,961 8,830 Costs and expenses: Research and development................................ 3,862 3,169 7,031 Sales and marketing..................................... 390 2,514 2,904 General and administrative.............................. 748 2,434 3,182 ------------ ------------- ----------- ----------- Total operating expenses.............................. 5,000 8,117 13,117 ------------ ------------- ----------- ----------- Income (loss) from operations......................... (5,131) 844 (4,287) Interest income and other expenses, net................... (138) (300) (438) ------------ ------------- ----------- ----------- Income (loss) before income taxes......................... (5,269) 544 (4,725) Provision for income taxes................................ 3 3 ------------ ------------- ----------- ----------- Net income (loss)..................................... $ (5,269) $ 541 $ (4,728) ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- Basic income (loss) per share............................. $ (2.37) $ 0.15 $ (1.85) ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- Shares used in basic per share calculation................ 2,223 3,701 (3,370) 2,554 ------------ ------------- ----------- ----------- ------------ ------------- ----------- ----------- Diluted income (loss) per share........................... $ (2.37) $ 0.03 $ (1.85) ------------ ------------- ----------- ------------ ------------- ----------- Shares used in diluted per share calculation.............. 2,223 15,553 (15,222) 2,554 ------------ ------------- ----------- ----------- ------------ ------------- ----------- -----------
See notes to unaudited pro forma condensed combined financial statements. 23 HYBRID AND PACIFIC NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS NOTE A: The Hybrid condensed combined statements of operations for the three years ended December 31, 1997 have been combined with Pacific condensed combined statements of operations for the three years ended September 30, 1997. Additionally, the Hybrid statement of operations for the three months ended March 31, 1998 has been combined with Pacific's statement of operations for the three months ended March 31, 1998. This method of combining the two companies is for the presentation of unaudited pro forma condensed combined financial statements only. The unaudited pro forma condensed combined financial statements, including the notes thereto, should be read in conjunction with the historical financial statements of Hybrid and Pacific which are included elsewhere in this document. The selected historical unaudited financial data for Pacific as of and for the three months and six months ended March 31, 1998 reflect, in the opinion of the management of Pacific, all adjustments consisting only of normal recurring accruals, necessary for the fair presentation of the results of operations for such period. These interim operating results of Pacific are not necessarily indicative of the results that may be expected for their fiscal year ending September 30, 1998. NOTE B: The unaudited pro forma combined statements of operations for Hybrid and Pacific have been prepared as if the Merger was completed at the beginning of the earliest period presented. Intercompany transactions between Hybrid and Pacific have not been significant. The initiation date for the transaction was February 12, 1998 and the expected consummation date is May 29, 1998. The unaudited pro forma combined basic and diluted net loss per share is based on the combined weighted average number of common shares of Hybrid Common Stock and Pacific Common Stock for each period, based upon the Assumed Exchange Ratio of 0.0894714 shares of Hybrid Common Stock for each share of Pacific Common Stock. The unaudited pro forma condensed combined financial statements assume that all Pacific Preferred Stock and Pacific Common Stock will convert into shares of Hybrid Common Stock based on the Exchange Ratio. Potentially dilutive shares from Pacific Options, Pacific Warrants and Pacific Preferred Stock are excluded from the computation of combined diluted loss per share because their effect is antidilutive. NOTE C: 1. PRO FORMA BASIS OF PRESENTATION These unaudited pro forma combined financial statements reflect the issuance of 1,611,680 shares of Hybrid Common Stock in exchange for an aggregate of 12,320,681 shares of Pacific Preferred Stock and 5,692,668 shares of Pacific Common Stock (outstanding as of March 31, 1998) in connection with the Merger based on the Assumed Exchange Ratio of 0.0894714 share of Hybrid Common Stock for every 1.0 share of Pacific Common Stock and Pacific Preferred Stock. The following table details the pro forma share issuances in connection with the Merger:
NUMBER OF PREFERRED COMMON SHARES OF SHARES SHARES EXCHANGE HYBRID COMMON OUTSTANDING OUTSTANDING RATIO STOCK ------------ ------------ ------------ -------------- Number of Shares of Pacific Common and Preferred Stock Outstanding at March 31, 1998........ 12,320,681 5,692,668 0.0894714 1,611,680 Number of Shares of Hybrid Common Stock Outstanding at March 31, 1998....................................... 10,364,000 -------------- Total Number of Shares of Hybrid Common Stock Outstanding After Completion of Merger......... 11,975,680 -------------- --------------
24 HYBRID AND PACIFIC NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED) The actual number of shares of Hybrid Common Stock to be issued will be determined at the Effective Time of the Merger based on the number of shares of Pacific Common Stock and Pacific Preferred Stock outstanding at such time. 2. TRANSACTION COSTS Hybrid and Pacific estimated they will incur direct transaction costs of approximately $1.5 million associated with the Merger consisting of transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. At March 31, 1998, none of the transaction related costs had been incurred. These nonrecurring transaction costs will be charged to operations through the quarter ending June 30, 1998. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to estimated direct transaction costs and merger related expenses to be incurred for the Merger. Estimated costs and expenses are not reflected in the Unaudited Pro Forma Condensed Combined Statements of Operations. NOTE D: As the companies have historically adopted similar accounting policies, no adjustments have been made to conform the accounting policies of the combined companies. NOTE E: If more than 5% of Pacific capital stock is eligible for the exercise of dissenters' rights the planned transaction does not have to be consummated by Hybrid. Hybrid and Pacific anticipate dissenters' rights to be less than 5%. NOTE F: Pacific's net revenue, and net income were $13,150,000 and $332,000 respectively for the three months ended December 31, 1996 as compared to net sales of $6,963,000 and net loss of $819,000 for the three months ended December 31, 1997. The decreases in net sales and net income are due primarily to reductions in shipments to a major customer due to declined demand. The Pro Forma Condensed Combined Statements of Operations of Hybrid and Pacific for the year ended December 31, 1997, exclude Pacific's operations for the three months ended December 31, 1997. Had they been included, the Pro Forma Combined Net loss for the year ended December 31, 1997 would have been increased by $1,151,000 to a combined total net loss of $16,149,000 or $4.06 diluted net loss per share. COMPARATIVE PER SHARE DATA The following tables set forth certain historical per share data of Hybrid and Pacific and combined per share data on an unaudited pro forma basis after giving effect to the Merger on a pooling-of-interests basis assuming that 0.0894714 of a share of Hybrid Common Stock is issued in exchange for each share of Pacific Common Stock and Pacific Preferred Stock in the Merger. This data should be read in conjunction with the Selected Historical Financial Data, the Unaudited Pro Forma Combined Financial Statements and the separate historical financial statements of Hybrid and Pacific and the notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of future periods or the results that actually would have been realized had the entities been a single entity during the periods presented. 25 HYBRID AND PACIFIC NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Historical--Hybrid Basic and diluted loss per share........................... $ (3.84) $ (3.36) $ (2.37) $ (0.36) $ (1.67) Book value per share(1).................................... 3.21 2.83
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 1995 --------- --------- --------- AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Historical--Pacific Basic net income (loss) per share......................... $ (0.29) $ (1.42) $ 0.15 $ (0.28) $ (0.04) Diluted net income (loss) per share....................... (0.29) (1.42) 0.03 (0.28) (0.04) Book value per share (1).................................. 0.37 0.24
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Unaudited Pro forma combined per share data (2): Pro forma basic and diluted loss per Hybrid share........ $ (3.77) $ (4.97) $ (1.85) $ (0.48) $ (1.50) Pro forma book value per Hybrid share.................... 3.20 2.68 Unaudited Equivalent pro forma combined per share data (3): Equivalent pro forma basic and diluted loss per Pacific share: - at Low Ratio of .0688078............................ $ (0.26) $ (0.35) $ (0.13) $ (0.03) $ (0.11) - at High Ratio of .1117959........................... (0.41) (0.54) (0.20) (0.05) (0.16) - at Assumed Ratio of .0894714........................ (0.34) (0.44) (0.17) (0.04) (0.13) Equivalent pro forma book value per Pacific share: - at Low Ratio of .0688078............................ 0.23 0.19 - at High Ratio of .1117959........................... 0.35 0.31 - at Assumed Ratio of .0894714........................ 0.29 0.24
(1) The historical book value per share for Hybrid is computed by dividing stockholders' equity by the number of shares of common stock outstanding at the end of the period. The historical book value per share for Pacific is computed by dividing shareholders' equity by the number of shares of common stock and preferred stock outstanding at the end of each period. (2) For purposes of this presentation, pro forma combined net loss per share data reflects Hybrid's per share data for the three years ended December 31, 1997 and three months ended March 31, 1998 and Pacific's per share data for the three years ended September 30, 1997 and three months ended March 31, 1998. The pro forma combined basic and diluted net loss per share data is based on the combined weighted average number of shares outstanding of Hybrid and Pacific for each period based on the Assumed Exchange Ratio of 0.0894714 shares of Hybrid Common Stock for each share of Pacific Common Stock. 26 HYBRID AND PACIFIC NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED) (3) The Pacific equivalent pro forma basic and diluted per share amounts are calculated by multiplying the combined pro forma per share data amounts by the Assumed Exchange Ratio of 0.0894714 shares of Hybrid Common Stock for each share of Pacific Capital Stock as well as the low and high range of 0.0688078 and 0.1117959, respectively. ADDITIONAL MATTERS FOR CONSIDERATION OF HYBRID STOCKHOLDERS At the Hybrid Annual Meeting, the stockholders of Hybrid will also be asked to (i) elect two Class I directors of Hybrid, each to serve from the time of their election and qualification until the earlier of (A) their resignation, which will occur upon the consummation of the Merger (whereupon the Hybrid Board will appoint two directors of Pacific to replace such directors as Class I directors on the Hybrid Board) or (B) the third annual meeting of stockholders following election and until their successors have been elected and duly qualified or until their respective earlier resignations or removal, (iii) approve an amendment to Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, (iv) approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares and (v) ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. 27 INTRODUCTION This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation of proxies to be used at the Hybrid Annual Meeting and the Pacific Special Meeting. This Joint Proxy Statement/ Prospectus is also furnished by Hybrid to Pacific shareholders in connection with the issuance of shares of Hybrid Common Stock in connection with the Merger described herein. The information set forth herein concerning Hybrid and Merger Sub has been furnished by Hybrid and the information set forth herein concerning Pacific has been furnished by Pacific. THE HYBRID ANNUAL MEETING DATE, TIME, PLACE AND PURPOSE OF HYBRID ANNUAL MEETING The Hybrid Annual Meeting will be held at Hybrid's headquarters located at 10161 Bubb Road, Cupertino, California 95014 on May 28, 1998 at 10:00 A.M., local time. At the Hybrid Annual Meeting, stockholders of Hybrid will be asked to: (i) approve and adopt the Reorganization Agreement and the Agreement of Merger, attached hereto as Appendices A-1 and A-2, respectively, and the transactions contemplated thereby and to approve the Merger, (ii) elect two Class I directors of Hybrid, to serve from the time of their election and qualification until the earlier of (A) their resignation, which will occur upon the consummation of the Merger (whereupon the Hybrid Board will appoint two directors of Pacific to replace such directors as Class I directors on the Hybrid Board of Directors), or (B) the third annual meeting of stockholders following election and until their respective successors have been elected and duly qualified or until their respective earlier resignations or removals, (iii) approve an amendment to Hybrid's 1997 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, (iv) approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares and (v) ratify the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ending December 31, 1998. RECORD DATE AND OUTSTANDING SHARES Only holders of record of Hybrid Common Stock at the close of business on the Hybrid Record Date are entitled to notice of and to vote at the Hybrid Annual Meeting. As of the close of business on the Hybrid Record Date, there were 10,410,050 shares of Hybrid Common Stock outstanding and entitled to vote, held of record by 192 stockholders (although Hybrid has been informed that there are in excess of 2,000 beneficial holders). Each Hybrid stockholder is entitled to one vote for each share of Hybrid Common Stock held as of the Hybrid Record Date. VOTING OF PROXIES The Hybrid proxy accompanying this Joint Proxy Statement/Prospectus is solicited on behalf of the Board of Directors of Hybrid for use at the Hybrid Annual Meeting. Hybrid stockholders are requested to complete, date and sign the accompanying proxy and promptly return it in the enclosed envelope or otherwise mail it to Hybrid. All properly executed proxies received by Hybrid prior to the vote at the Hybrid Annual Meeting that are not revoked will be voted at the Hybrid Annual Meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve and adopt the proposals discussed above. A Hybrid stockholder who has given a proxy may revoke it at any time before it is exercised at the Hybrid Annual Meeting, by (i) delivering to the Secretary of Hybrid (by any means, including facsimile) a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked, (ii) signing and so delivering a proxy relating to the same shares and bearing a date later than the proxy previously delivered, or (iii) attending the Hybrid Annual Meeting and voting in person (although attendance at the Hybrid Annual Meeting will not, by itself, revoke a proxy). Please note, 28 however, that if a stockholder's shares are held of record by a broker, bank or other nominee and that stockholder wishes to vote at the Hybrid Annual Meeting, the stockholder must bring to the Hybrid Annual Meeting a letter from the broker, bank or other nominee confirming that stockholder's beneficial ownership of the shares. It is not anticipated that any matter not referred to herein will be presented for action at the Hybrid Annual Meeting. If any other matters are properly brought before the Hybrid Annual Meeting, the persons named in the proxies will have discretion to vote on such matters in accordance with their best judgment. VOTE REQUIRED The affirmative vote of the holders of a majority of the outstanding shares of Hybrid Common Stock is required to approve and adopt the Reorganization Agreement and the Agreement of Merger and to approve the Merger set forth in Proposal No. 1. For Proposal No. 2, directors will be elected by a plurality of the votes of the shares of Hybrid Common Stock present in person or represented by proxy at the Hybrid Annual Meeting and entitled to vote on the election of the two Class I directors. The affirmative vote of a majority of the shares of Hybrid Common Stock represented in person or by proxy and entitled to vote at the Hybrid Annual Meeting is required to approve each of Proposal No. 3--the amendment of Hybrid's 1997 Equity Incentive Plan, Proposal No. 4--the amendment of Hybrid's 1997 Employee Stock Purchase Plan, and Proposal No. 5-- ratification of the selection of Coopers & Lybrand L.L.P. as independent accountants for Hybrid for the fiscal year ended December 31, 1998. The effectiveness of any of the proposals to be voted upon at the Hybrid Annual Meeting is not conditioned upon the approval of any of the other proposals by the Hybrid stockholders. On the Hybrid Record Date, directors and executive officers of Hybrid, and their affiliated entities, as a group beneficially owned 1,395,709 shares of Hybrid Common Stock or approximately 13.4% of the outstanding shares of Hybrid Common Stock on such date. Affiliates of Hybrid, including certain of such directors and executive officers of Hybrid, beneficially owning 1,384,512 shares or 13.3% of the outstanding Hybrid Common Stock, have executed Voting Agreements, pursuant to which they have agreed to vote such shares in favor of the Merger and have executed irrevocable proxies with respect thereto. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--VOTING AGREEMENTS." In addition, under the Reorganization Agreement, it is a condition to Hybrid's obligation to complete the Merger that the holders of no more than 5% of the outstanding shares of Pacific Capital Stock be eligible to exercise dissenters' rights under the California Code. QUORUM; ABSTENTIONS; BROKER NON-VOTES The required quorum for the transaction of business at the Hybrid Annual Meeting is a majority of the shares of Hybrid Common Stock outstanding on the Hybrid Record Date. Abstentions will be included in determining the number of shares present and voting at the Hybrid Annual Meeting and will have the same effect as votes against the proposals. With respect to Proposal No. 1, broker non-votes will have the same effect as votes against the proposal. With respect to Proposal Nos. 2, 3, 4 and 5 broker non-votes will not be counted for any purpose in determining whether a proposal has been approved. SOLICITATION OF PROXIES AND EXPENSES Hybrid will bear the cost of the solicitation of proxies in the enclosed form from its stockholders. In addition to solicitation by mail, the directors, officers and employees of Hybrid may solicit proxies from stockholders by telephone, telegram, letter or in person. Following the original mailing of the proxies and other soliciting materials, Hybrid will request brokers, custodians, nominees and other record holders to 29 forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Hybrid Common Stock and to request authority for the exercise of proxies. In such cases, Hybrid, upon the request of the record holders, will reimburse such holders for their reasonable expenses. APPRAISAL RIGHTS Under the Delaware General Corporation Law, Hybrid stockholders are not entitled to dissenters' rights or appraisal rights with respect to the proposed Merger. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--APPRAISAL AND DISSENTERS' RIGHTS." THE PACIFIC SPECIAL MEETING DATE, TIME, PLACE AND PURPOSE OF PACIFIC SPECIAL MEETING The Pacific Special Meeting will be held at 10:00 A.M., local time, on May 28, 1998 at Pacific's headquarters located at 1308 Moffett Park Drive, Sunnyvale, California 94089. At the Pacific Special Meeting, shareholders of Pacific on the Pacific Record Date will be asked to consider and vote upon a proposal to approve and adopt the Reorganization Agreement, the Agreement of Merger and the Merger. The Reorganization Agreement and the Agreement of Merger are attached hereto as Appendices A-1 and A-2, respectively. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER." RECORD DATE AND OUTSTANDING SHARES Only holders of record of Pacific Common Stock and Pacific Preferred Stock at the close of business on the Pacific Record Date are entitled to notice of and to vote at the Pacific Special Meeting. As of the close of business on the Pacific Record Date, there were 5,712,668 shares of Pacific Common Stock outstanding and entitled to vote, held of record by 255 shareholders and 12,320,681 shares of Pacific Preferred Stock outstanding and entitled to vote, held of record by 35 shareholders. Each Pacific shareholder is entitled to one vote for each share of Pacific Common Stock and one vote for each share of Pacific Preferred Stock held as of the Pacific Record Date. VOTING OF PROXIES The Pacific proxy accompanying this Joint Proxy Statement/Prospectus is solicited on behalf of the Board of Directors of Pacific for use at the Pacific Special Meeting. Pacific shareholders are requested to complete, date and sign the accompanying proxy and promptly return it in the enclosed envelope or otherwise mail it to Pacific. All properly executed proxies received by Pacific prior to the vote at the Pacific Special Meeting that are not revoked will be voted at the Pacific Special Meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve and adopt the Reorganization Agreement, the Agreement of Merger and the Merger. A Pacific shareholder who has given a proxy may revoke it at any time before it is exercised at the Pacific Special Meeting, by (i) delivering to the Secretary of Pacific (by any means, including facsimile) a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked, (ii) signing and so delivering a proxy relating to the same shares and bearing a date later than the proxy previously delivered, or (iii) attending the Pacific Special Meeting and voting in person (although attendance at the Pacific Special Meeting will not, by itself, revoke a proxy). It is not anticipated that any matter not referred to herein will be presented for action at the Pacific Special Meeting. If any other matters are properly brought before the Pacific Special Meeting, the persons named in the proxies will have discretion to vote on such matters in accordance with their best judgment. 30 VOTE REQUIRED Pursuant to the California Code and Pacific's Articles of Incorporation, approval of the Merger requires the affirmative vote of at least a majority of the outstanding shares of the Pacific Common Stock entitled to vote at the Pacific Special Meeting, voting as a class, and at least 60% of the shares of the Pacific Preferred Stock entitled to vote at the Special Meeting, voting as a separate class. Since the required vote of the Pacific shareholders is based upon the number of outstanding shares of Pacific Common Stock and Pacific Preferred Stock rather than upon the shares actually voted in person or by proxy at the Pacific Special Meeting, the failure by the holder of any such shares to submit a proxy or to vote in person at the Pacific Special Meeting (including abstentions) will have the same effect as a vote against approval and adoption of the Reorganization Agreement, the Agreement of Merger and the Merger. Shareholders of Pacific beneficially owning 3,357,515 shares or 58.8% of the outstanding Pacific Common Stock and 7,509,644 shares or 61.0% of the outstanding Pacific Preferred Stock have executed Voting Agreements, pursuant to which they have agreed to vote all such shares in favor of adoption and approval of the Reorganization Agreement, the Agreement of Merger and for the Merger. Accordingly, approval of the Reorganization Agreement, the Agreement of Merger and the Merger at the Pacific Special Meeting is assured. However, it is a condition to Hybrid's obligation to complete the Merger that the holders of no more than 5% of the outstanding shares of Pacific Capital Stock be eligible to exercise dissenters' rights. QUORUM; ABSTENTIONS The required quorum for the transaction of business at the Pacific Special Meeting is a majority of the shares of Pacific Common Stock and Pacific Preferred Stock outstanding on the Pacific Record Date, either present in person or represented by proxy. Abstentions will be included in determining the number of shares present and voting at the Pacific Special Meeting and will have the same effect as votes against the proposal. If an executed Pacific proxy is returned and the shareholder has specifically abstained from voting on any matter, the shares represented by such proxy will be considered present at the Pacific Special Meeting for purposes of determining a quorum. Since the required vote of the Pacific shareholders is based upon the number of outstanding shares of Pacific Capital Stock, any abstentions will have the same effect as a vote against approval and adoption of the Reorganization Agreement and the Agreement of Merger and approval of the Merger. SOLICITATION OF PROXIES AND EXPENSES Pacific will bear the cost of the solicitation of proxies in the enclosed form from its shareholders. In addition to solicitation by mail, the directors, officers and employees of Pacific may solicit proxies from shareholders by telephone, telegram, letter or in person. Following the original mailing of the proxies and other soliciting materials, Pacific will request custodians, nominees and other record holders to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Pacific Common Stock and/or Pacific Preferred Stock and to request authority for the exercise of proxies. In such cases, Pacific, upon the request of the record holders, will reimburse such holders for their reasonable expenses. DISSENTERS' RIGHTS If the Merger is approved by the required vote of Pacific shareholders and is not abandoned or terminated, each holder of Pacific Capital Stock who does not vote in favor of the Merger and also follows the procedures set forth in Sections 1300 through 1312 of the California Code, attached hereto as Appendix C, will be entitled to have shares of Pacific Capital Stock purchased by Pacific at their fair market value, determined as of the day before the first announcement of the terms of the Merger and excluding any appreciation or depreciation in consequence of the Merger and therefore valuing the shares 31 as if the Merger had not occurred. The failure of a dissenting Pacific shareholder to timely and properly comply with such procedures will result in the termination or waiver of such rights. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--APPRAISAL AND DISSENTERS' RIGHTS." PROPOSAL NO. 1: THE MERGER RISK FACTORS THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE MATTERS TO BE VOTED ON AT THE HYBRID ANNUAL MEETING AND THE PACIFIC SPECIAL MEETING AND THE ACQUISITION OF THE SECURITIES OFFERED HEREBY. THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WORDS SUCH AS "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "SEEKS", VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS REFLECT THE BEST JUDGMENT OF THE MANAGEMENT OF HYBRID AND PACIFIC BASED ON FACTORS CURRENTLY KNOWN AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. RISKS RELATING TO THE MERGER GENERAL RISKS ASSOCIATED WITH INTEGRATION OF OPERATIONS. Hybrid and Pacific have entered into the Reorganization Agreement with the expectation that the proposed Merger will result in long-term strategic benefits. These anticipated benefits will depend in part on whether the companies' operations can be integrated in an efficient and effective manner. There can be no assurance that this will occur. The successful integration of Pacific with Hybrid will require, among other things, integration of the companies' respective product offerings and coordination of the companies' management, sales and marketing and research and development efforts. It is possible that this integration will not be accomplished smoothly or successfully, and that efforts to achieve integration may require more time, expense and management attention than anticipated. The diversion of the attention of management from day-to-day operations and any difficulties encountered in the transition process could have an adverse impact on the combined company's business, operating results or financial condition. Disruption of the combined company's business might result from employee uncertainty or lack of focus, as well as from customer or supplier confusion, following announcement of the Merger. The process of combining the operations of the two organizations could cause the interruption of, or a loss of momentum in, the activities of either or both of the companies' businesses, which could have an adverse effect on their combined operations. In addition, during the pre-Merger and integration phase, competitors may try to recruit key employees of Hybrid or Pacific and to gain a competitive advantage with Hybrid's or Pacific's prospective and existing customers. Despite the efforts of the combined company, it might not be able to retain key management, technical and sales personnel. EXECUTION BY COMBINED SALES AND MARKETING FORCES. The combined company may experience disruption in sales and marketing as a result of attempting to integrate Hybrid's and Pacific's sales force with its own, and may be unable to effectively correct such disruption, or to successfully execute on its sales and marketing objectives, even after the companies' respective sales and marketing forces have been combined. In addition, sales models for the various products that will make up the combined company's new product line may vary significantly from product to product. Sales personnel not accustomed to the different approaches required for products newly added to their portfolio may experience delays and difficulties in selling these newly added products. Furthermore, it may be difficult to retain key sales personnel during the period prior to and after the effectiveness of the Merger. As a result, the combined company may be unable to take full advantage of the combined sales forces' efforts, and the sales approach and distribution channels of one company may be ineffective in promoting the products of the other. Hybrid and Pacific also use a number of distribution channels in the various geographic locations in which their respective products are sold, and channel conflicts may develop following the Merger. 32 INTEGRATION OF PRODUCTS AND ENGINEERING TEAMS; DELAY IN DEVELOPMENT OF INTEGRATED PRODUCTS. After the Merger, the combined company plans to combine its product offerings and to develop products to work together in integrated suites. It is possible that such integration and development efforts will not be accomplished in a timely manner or prove to be technologically infeasible. There can be no assurance that either company will retain its key technical personnel, that the engineering teams of the two companies will successfully cooperate and realize any technological benefits, or that the focus on product integration and extension efforts will not have an adverse effect on the development, introduction or delivery of new or enhanced Hybrid or Pacific products. Any delays that occur in the development and introduction of the integrated, end-to-end, system solutions for high speed Internet access that Hybrid plans to pursue following the Merger could have a materially adverse effect upon the combined company's business, operating results or financial condition. FINANCIAL IMPACT OF FAILURE TO ACHIEVE SYNERGIES. If the integration of Hybrid's and Pacific's operations is not successful, or the combined company does not achieve the operational efficiencies and other business synergies that are anticipated or if such synergies are not achieved as quickly as may be expected by financial analysts or at the level expected by financial analysts, or if the effect of the Merger on earnings per share is not in line with the expectation of financial analysts, the market price of Hybrid's Common Stock will be significantly and adversely affected. See "RISKS RELATED TO HYBRID, PACIFIC AND THE COMBINED COMPANY--POSSIBLE VOLATILITY OF STOCK PRICE." RISKS ASSOCIATED WITH EFFECT OF MERGER ON SUPPLIERS, RESELLERS AND CUSTOMERS; UNCERTAINTIES OF THE WIRELESS MARKET. The announcement and consummation of the Merger could cause suppliers, resellers and present and potential customers of either company to delay or cancel orders for products as a result of concerns and uncertainty over evolution, integration and support of Hybrid's and Pacific's products following the Merger. The combined company's combination of products and creation of integrated suites could cause present and potential customers of Hybrid and Pacific to delay or cancel orders for products. Such delays or cancellations of orders could have a material adverse effect on the business, operating results or financial condition of Hybrid, Pacific or the combined company. In particular, such delays or cancellations could be expected to disrupt revenue and earnings, which in turn would have a negative effect on the market price of Hybrid Common Stock. In addition, Hybrid's focus on the broadband wireless market may increase following the Merger, and there are uncertainties regarding the general economic condition of that market. There is a risk that the financial condition of increasing numbers of customers for the combined company's wireless products will adversely affect such customers' ability or willingness to purchase or pay for those products, thereby adversely affecting the combined company's business, results of operation and financial condition. COSTS OF INTEGRATION; TRANSACTION EXPENSES. Hybrid expects to incur a charge of approximately $3.0 million to $3.5 million in the quarter in which the Merger occurs in connection with the write-off of certain assets, personnel severance costs, the cancellation and continuation of contractual obligations and direct transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. Actual costs may substantially exceed such estimates, unanticipated expenses associated with the integration of the two companies may arise, or Hybrid may incur additional material charges in subsequent quarters to reflect additional costs associated with the integration of the two companies. In addition, upon consummation of the Merger, the Company will pay Pacific's indebtedness of approximately $2.0 million in bridge loans (inclusive of accrued interest) made by principal shareholders of Pacific. Total costs associated with the Merger are anticipated to result in an operating loss and a net loss for Hybrid's quarter ending June 30, 1998 and for its fiscal year ending December 31, 1998, and could negatively affect financial results in future periods for the reasons discussed above. POSSIBLE NEED FOR ADDITIONAL FINANCING. In the past, each of Hybrid and Pacific has required substantial amounts of capital to design, develop, market, sell and manufacture its products and to finance customer purchases by providing extended payment terms and other accommodations and to fund continuing operations. It is anticipated that these costs will continue. The combined company's future 33 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 combined company's products, competitive pressure on the price of the combined company's products, the levels at which the combined 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 combined company invests in new technology and improvements on its existing technology, and the response of competitors to the combined company's products. While Hybrid believes that available bank borrowings, existing cash balances and funds generated from operations, if any, will provide the combined company with sufficient funds to pay the costs referred to in "--COSTS OF INTEGRATION; TRANSACTION EXPENSES" above and to finance its operations for at least the next 12 months, to the extent that existing resources are insufficient to fund the combined company's activities over the long-term, the combined 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 Hybrid's stockholders, and such securities may have rights, preferences or privileges senior to those of the Hybrid Common Stock. To the extent that the combined company relies upon debt financing, the combined 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 combined company or its stockholders. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES" and "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES." SHORT TERM DILUTION OF INTEREST. A number of shares and shares subject to options and warrants equal to approximately 15.7% of Hybrid's outstanding Common Stock (based on the Assumed Exchange Ratio of 0.0894714) will be issued or subject to issuance to the securityholders of Pacific upon consummation of the Merger and will cause a dilution of earnings per share which may negatively impact Hybrid's stock price in the near term. If the Closing Price is less than $6.46 (the assumed Closing Price used in computing the Assumed Exchange Ratio), then more shares of Hybrid Common Stock will be issued or issuable in the Merger; and if the Closing Price is more than $6.46, fewer shares of Hybrid Common Stock will be issued or issuable in the Merger. At the Low Exchange Ratio, approximately 14.3% of Hybrid's outstanding Common Stock would be issued or issuable in the Merger, and at the High Exchange Ratio, approximately 23.2% would be issued or issuable. Further, as a result of the antidilution provisions of the $5.5 Million Debenture, the number of shares of Hybrid Common Stock issuable upon conversion of the debenture (currently 513,433 shares) will be increased by virtue of the Merger, and the amount of the increase depend upon the per share market price of Hybrid Common Stock at the time of the Merger (the lower the market price, the greater number of shares will be issuable upon conversion of the debenture). For example, if the market price were $6.46 at the time of the Merger, the number of shares issuable upon conversion of the debenture would increase by approximately 338,000 shares; and if the market price were $5.00, the number of shares issuable upon conversion would increase by approximately 587,000 over the current amount. While Hybrid believes that the dilution resulting from the Merger will be temporary and that the Merger will ultimately be accretive to the combined company's earnings per share, there can be no assurance that this will be the case or that Hybrid's stock price will not continue to be negatively affected, or that actual results will be as expected. POOLING OF INTERESTS. In order to qualify the Merger as a pooling of interests for accounting and financial reporting purposes, affiliates of Hybrid and Pacific have agreed not to sell, or otherwise reduce their risk with respect to, any shares of stock, except for a de minimus number as defined by certain SEC rules and regulations, of either Hybrid or Pacific during the period beginning 30 days preceding the Effective Time and continuing until the day that Hybrid publicly announces financial results covering at least 30 days of combined operations of Hybrid and Pacific. If the Merger is completed and the Effective Time occurs after May 1998, it is not expected that such combined financial results would be published until mid to late October. If affiliates of Hybrid or Pacific sell their Hybrid Common Stock despite their 34 contractual obligation not to do so, the Merger may not qualify for accounting as a pooling of interests for financial reporting purposes in accordance with generally accepted accounting principles, which would in turn materially and adversely affect Hybrid's reported earnings and, potentially, its stock price. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--ACCOUNTING TREATMENT." RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY PACIFIC'S NEED FOR IMMEDIATE ADDITIONAL FINANCING. Pacific is currently in need of immediate additional capital to finance its operations and to meet its short term liquidity needs. While Pacific is seeking additional financing up to an approximate amount of $1.0 million, there can be no assurance that the additional required financing will be available through equity offerings, bank borrowings or otherwise, or that, if such financing is available, it will be available on terms favorable to Pacific or its shareholders. If Pacific is unable to secure financing prior to the consummation of the Merger, Pacific will have to scale back sales and marketing and research and development efforts and Pacific's business, financial condition and operating results will be materially adversely affected. LIMITED OPERATING HISTORY; HISTORY OF LOSSES. Hybrid was organized in 1990 and has experienced operating losses each year since that time. As of March 31, 1998, Hybrid had an accumulated deficit of approximately $34.6 million. Because Hybrid and the market for broadband access through wireless and cable modems are still in an emerging stage, there can be no assurance that the combined company will ever achieve profitability on a quarterly or an annual basis or will sustain profitability once achieved. Hybrid 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 Hybrid's business and the industry is unproven, and Hybrid's limited operating history makes the combined company's future operating results difficult to predict. Pacific also has a history of losses, and as of March 31, 1998, Pacific had an accumulated deficit of $25.2 million. The growth and future success of the combined company will be substantially dependent upon broadband wireless system operators, cable system operators and ISPs adopting its technologies, purchasing its products and selling its client modems to wireless, cable and ISP subscribers. Hybrid has had limited experience selling its products to broadband wireless system operators, cable 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 Hybrid'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 Hybrid and Pacific currently offer more price competitive products. In the event that Hybrid's or Pacific's current or future competitors release new products or technologies with more advanced features, better performance or lower prices than Hybrid's or Pacific's current or future products, demand for the combined company's products would decline. See "--COMPETITION." Failure of the combined company's products to achieve market acceptance could have a material adverse effect on the combined company's business, operating results or financial condition. Although Hybrid has experienced significant growth in net sales in the past year , Hybrid does not believe that its growth rate during the past year is sustainable or indicative of future operating results. For the three months ended March 31, 1998, Hybrid's net sales declined by 31% from its net sales for the three months ended December 31, 1997. In addition, Hybrid has had negative gross margins in past periods, and there can be no assurance that any growth in net sales will result in positive gross profits or operating profits. Pacific's revenue declined from the first quarter of fiscal 1997 to the first quarter of fiscal 1998 due to a decline in customer demand for its broadband wireless video downconverts and decoders. Future operating results of the combined company will depend on many factors, including the growth of the wireless and cable modem system markets, demands for the Series 2000 and future product lines, demand for Pacific's product lines, purchasing decisions by wireless and cable 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 combined company to develop and market new products and control costs, general economic conditions and other factors. The combined company believes that it will continue to 35 experience net losses for the foreseeable future. See "HYBRID 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. Each of Hybrid and Pacific has experienced, and the combined company expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. Historically, Hybrid's and Pacific's quarterly net sales have been unpredictable due to a number of factors. Factors that have influenced Hybrid and Pacific and that will continue to influence the combined company's results of operations in a particular period include: the size and timing of customers orders and subsequent shipments, particularly with respect to Hybrid's headend equipment and Pacific's downconverters and antennas; customer order deferrals in anticipation of new products or technologies; timing of product introductions or enhancements by the combined 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 combined company's operating expenses; personnel changes; quality control of products sold; regulatory changes; customers' capital spending; delays of orders by customers; customers' delay in or failure to pay accounts receivable; and general economic conditions. For example, for the three months ended March 31, 1998, Hybrid's net sales declined 31% from its net sales for the three months ended December 31, 1997, and Hybrid recorded a $800,000 sales return reserve. Further, Hybrid increased its reserves for doubtful accounts in the fourth quarter of 1997 and the first quarter of 1998 by $500,000 and $450,000, respectively. See "HYBRID'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." In addition, the inability to obtain components from suppliers or manufacturers has adversely affected Hybrid's and Pacific's operating results in the past and may materially adversely affect the combined company's operating results in the future. For example, in the second quarter and a portion of the third quarter of 1997, Hybrid did not receive the full shipment of modems anticipated from Sharp Corporation ("SHARP"), its primary modem manufacturer, because of technical delays in product integration. As a result, Hybrid 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 combined 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 wireless and cable companies typically require delivery of products within 30 days, thus a substantial majority of Hybrid's and Pacific's net sales are typically booked and shipped in the same quarter. Accordingly, net sales for Hybrid and Pacific for any future quarter are difficult to predict. Hybrid, at any given time, has a limited backlog of orders and currently has no backlog. Further, sales are generally made pursuant to purchase orders, which can be rescheduled, reduced or canceled with little or no penalty. Historically, a substantial majority of Hybrid's and Pacific'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 Hybrid's and Pacific's typical transaction, any delay in the closing of a transaction can have a significant impact on the combined company's operating results for a particular period. See "--LENGTHY SALES CYCLE." Historically, average selling prices ("ASPS") in the wireless and cable systems industry have decreased over the life of individual products and technologies. In the past, each of Hybrid and Pacific has experienced decreases in unit ASPs of each of its products. The combined 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. Hybrid's gross margins are also impacted by the sales mix of points of presence headend equipment ("POPS" or "HEADENDS") and modems. Hybrid's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than Hybrid's headends. Due to current customer demand, Hybrid 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 36 OF CLIENT MODEMS, DOWN CONVERTERS, ANTENNAS AND VIDEO DECODERS" below and "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." LENGTHY SALES CYCLE. The sale of Hybrid's and Pacific'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 Hybrid's and Pacific'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 control of Hybrid or Pacific, as the case may be. 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 payment or fails to pay, the combined 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" above, and "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "PACIFIC 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 Hybrid's product sales were attributable to its Series 1000 product line. In October 1996, Hybrid introduced its Series 2000 product line (which replaced the Series 1000 product line). Hybrid 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 Hybrid'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 Hybrid to make engineering changes to such products, and Hybrid continues to modify the designs of its products in an attempt to increase their reliability and performance. From time to time, Pacific has also been required to make engineering changes to its products and to modify the designs of its products in an attempt to increase their reliability and performance. There can be no assurance that engineering and product design efforts of the combined company will be successful. The combined 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, in the quarter ended March 31, 1998, Hybrid began offering products for two-way cable transmission using QPSK technology in response to customer requirements. In addition, Hybrid and Pacific are developing products for two-way broadband wireless transmission. There can be no assurance that the combined 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 combined company's business, operating results and financial condition. In addition, as the combined company introduces new products that cause existing products to become obsolete, the combined company could experience inventory writeoffs, which could have a material adverse effect on the combined company's business, operating results and financial condition. For example, to the extent that customers demand two-way products, demand for the combined company's wireless and cable systems that utilize telephone return could be adversely affected. See "BUSINESS OF HYBRID--PRODUCTS, TECHNOLOGY AND SERVICES" and "--RESEARCH AND DEVELOPMENT". 37 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 Digital Subscriber Line ("XDSL"), or wireless technologies, such as DBS, could decrease the demand for the combined 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 broadband wireless and cable 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 broadband wireless system operators, cable system operators or telephone companies ("TELCOS"), could require the combined company to redesign its products to meet such standards, resulting in delays in the introduction of such products. For instance, Hybrid's products are not in full compliance with the DAVIC specifications that are supported in Europe or the versions of the MCNS specifications or IEEE standards. Cable customers and competitors are giving increased emphasis to the value of compliance with MCNS specifications. If such standards do become widespread and Hybrid's products are not in compliance, Hybrid's customers and potential customers may refuse to purchase Hybrid's products, materially adversely affecting the combined company's business, operating results and financial condition. Further, Hybrid'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 Hybrid'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 combined company's products. Market acceptance of new technologies or the failure of the combined company to develop and introduce new products or enhancements directed at new industry standards could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID--COMPETITION." INEXPERIENCE IN EMERGING MARKET. Broadband wireless system operators, cable system operators, distributors and other customers may prefer to purchase products from larger, more established manufacturing companies, including certain of Hybrid's or Pacific's competitors, that can demonstrate the capability to supply large volumes of products on short notice. In addition, many broadband wireless system operators, cable system operators and other customers may be reluctant to adopt technologies that have not gained wide acceptance among their industry peers. Certain competitors of Hybrid and Pacific have already established relationships in the market, further limiting Hybrid's and Pacific's ability to sell products to such potential customers. While each of Hybrid and Pacific has sold products to certain broadband wireless system operators, cable system operators and other customers, most of these sales are not based on long-term contracts and such customers may terminate their relationships with Hybrid or Pacific, as the case may be, at any time. Further, Hybrid's and Pacific'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, each of Hybrid and Pacific has offered, and in the future the combined company may need to offer, extended payment, pricing, service, marketing or other promotional terms which could have a material adverse effect on the combined company's business, operating results or financial condition. For example, Hybrid increased its reserves for doubtful accounts in the fourth quarter of 1997 due to the assessment of the risk associated with the slow pay of several customers, which adversely affected operating results. If the combined 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 Hybrid or Pacific, as the case may be, the combined company's business, operating results or financial condition could be materially adversely affected. See "BUSINESS OF HYBRID--CUSTOMERS." 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 38 served by cable plants that support two-way data access. Further, a limited number of businesses, a major target market for Hybrid, 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 wire 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 this portion of spectrum is more susceptible to ingress noise and other impairments and, because it is small in comparison to the downstream portion, it can support only 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 Hybrid's products are designed. Consequently, Hybrid 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 combined company's business, operating results and financial condition. See "BUSINESS OF HYBRID--CUSTOMERS." DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS. Hybrid depends on broadband wireless system operators to purchase its wireless modem products and to sell its client wireless modems to end-users. Pacific also depends on broadband wireless system operators to purchase its downconverters, antennas and video encoding systems. Approximately 50.6% and 27.8% of Hybrid's net sales in 1997 and the first quarter of 1998, respectively, were attributable to customers in the broadband wireless industry. Many broadband wireless system companies are in the early stage of development or are in need of significant capital to upgrade and expand their services in order to compete effectively with cable system operators, satellite TV and telcos. Many of these broadband wireless system companies in need of such significant capital have had difficulties financing their businesses and are under-capitalized. Accordingly, to address the needs of and competitive factors facing these customers, each of Hybrid and Pacific on occasion has provided certain broadband wireless system operators and other customers extended payment, promotional pricing or other terms which could have, and in the case of Hybrid have had, a material adverse effect on the combined company's business, operating results and financial condition. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 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 or be able to obtain the financing necessary 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 39 system operators can attract customers, particularly in the business community, which have not traditionally subscribed to wireless cable services. Moreover, to the extent that broadband wireless systems operators shift their focus and spending from video delivery to high speed Internet access, sales of Pacific's current products could be materially adversely impacted. While broadband wireless system operators are currently utilizing telephone return for upstream data transmission, Hybrid believes that wireless operators will demand two-way wireless transmission as more of these entities obtain licenses for additional frequencies. Currently, Hybrid and Pacific are developing products to satisfy the two-way transmission needs of the broadband wireless system operators. There can be no assurance that the combined company will be successful in such development efforts, or if successful, that the product will be developed on a timely basis. The failure of the combined company's products to gain market acceptance could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID" and "BUSINESS OF PACIFIC." DEPENDENCE ON CABLE SYSTEM OPERATORS. Hybrid 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 Hybrid's products. Hybrid began selling in the first quarter of 1998 a two-way cable transmission solution utilizing the QPSK technology required by cable system operators, but there can be no assurance that Hybrid 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 telcos, satellite TV and broadband wireless system operators. Because of the substantial capital cost of upgrading cable systems for high 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, Hybrid is highly dependent on cable system operators to continue to maintain their cable infrastructure in such a manner that Hybrid will be able to provide consistently high performance and reliable service. Therefore, the success and future growth of the combined 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 OF HYBRID--INDUSTRY BACKGROUND" and "--CUSTOMERS." CUSTOMER CONCENTRATION. To date, a small number of customers has accounted for a substantial portion of each of Hybrid's and Pacific's net sales. Hybrid 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. Pacific also expects that sales to a small number of customers will continue to account for a substantial portion of its net sales. Each of Hybrid and Pacific expect 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 and regulatory considerations. In addition, the mix of Hybrid's customers, whether cable, wireless, ISPs or distributors, has changed from quarter to quarter. As a result, each of Hybrid and Pacific has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and annual basis. Because 40 limited numbers of cable system operators and broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, the combined company's future success will depend upon its ability to establish and maintain relationships with these companies. Further, during the latter part of 1997 and the first quarter of 1998 Hybrid has increased its sales through distributors and value added resellers. During the first quarter of 1998, Hybrid recorded an $800,000 sales return reserve for potential adjustments to inventory held by distributors and value added resellers. While these customers do not have the contractual right to require product returns or stock rotation, Hybrid considered it prudent to reserve for requested returns which it would consider accepting in light of current market weakness. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." In addition, as the market for high speed Internet and corporate intranet access over broadband wireless and cable systems continues to evolve, the composition of companies participating in this market will continue to change. For instance, in 1994, 1995 and 1996, Intel Corporation ("INTEL") accounted for 59.6%, 51.6% and 20.7%, respectively, of Hybrid's net sales. From 1994 to 1996, Intel manufactured certain products based on Hybrid's design and jointly marketed Hybrid's products with its own. However, in 1996 Intel stopped purchasing products from Hybrid as it scaled back its direct participation in the wireless and cable market, though it continues to be a significant stockholder of Hybrid and maintains certain licensing and manufacturing rights to certain of Hybrid's products. Should Intel decide to purchase or support designs or products from competitors of Hybrid it could have a material adverse effect on the combined company's business, operating results and financial condition. In the year ended September 30, 1996, two customers accounted for 35.7% and 12.4% of Pacific's net sales, respectively, and in the year ended September 30, 1997, two customers accounted for 30.4% and 21.5%, respectively, of Pacific's net sales. In the six months ended March 31, 1998, four customers accounted for 31.3%, 13.6%, 11.5% and 10.1%, respectively, of Pacific's net sales. The loss of any one of Hybrid's or Pacific's major customers could have a material adverse effect on the combined company's business, financial condition and results of operations. Further, Hybrid's and Pacific'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, each of Hybrid and Pacific on occasion has provided customers extended payment, promotional pricing or other terms. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms can have a material adverse effect on the combined company's business, operating results or financial condition. For example, Hybrid increased its reserves for doubtful accounts in the fourth quarter of 1997 and first quarter of 1998 by $500,000 and $450,000, respectively, due to the assessment of the risk associated with the slow pay of several customers which adversely affected operating results. Two of Hybrid's customers accounted for 16.7% and 13.2%, respectively, of Hybrid's accounts receivable for the three months ended March 31, 1998, and one of Pacific's customers accounted for 35.8% for the three months ended March 31, 1998. The combined company's future success will depend in significant part upon the decision of Hybrid's and Pacific's current and prospective customers to continue to purchase products from the combined company. There can be no assurance that Hybrid's or Pacific's current customers will continue to place orders with the combined company or that the combined company will be able to obtain orders from new customers. If orders from current customers of Hybrid or Pacific are canceled, decreased or delayed, or the combined company fails to obtain significant orders from new customers, or any significant customer delays payment or fails to pay, the combined company's business, operating results or financial condition could be materially adversely affected. Further, Hybrid's headend equipment does not operate with other companies' models and, accordingly, Hybrid is typically a sole source provider to its customers. As a result, the combined company's operating results could be materially and adversely affected if a major customer of Hybrid or Pacific were to implement other technologies that impact the future utilization of Hybrid's and Pacific's products. See "BUSINESS OF HYBRID--CUSTOMERS" and "BUSINESS OF PACIFIC--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 41 of operations, breadth of product line, sales and distribution capability, technical support and service, relationships with broadband wireless system operators, cable system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of Hybrid's and Pacific'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 Hybrid's or Pacific's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put the combined company at a disadvantage in relation to its competitors. Hybrid's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of Hybrid'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 Hybrid. In addition, many of Hybrid's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of Hybrid's competitors have established relationships with cable system operators and telcos and, based on these relationships, may have more direct access to the personnel of such cable system operators and telcos that are responsible for making purchasing decisions. In addition, Hybrid 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, could become competitors should they decide to enter Hybrid's market directly. Stanford Telecom, which manufacturers QPSK components and is the sole supplied for certain components used in Hybrid's products, has become a competitor for at least one of Hybrid's products in the broadband wireless market. There can be no assurance that Hybrid will be able to compete effectively in its target markets. The principal competitors in the wireless modem market are Bay Networks, Harmonic Lightwaves through its acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecom. 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. For example, Cisco Systems has announced intentions to develop solutions based on the Multimedia Cable Network System ("MCNS") standard with several cable modem vendors and in December 1997 announced an MCNS-compliant integrated router and cable modem to offer high-speed Internet access. Certain of Hybrid's competitors have already introduced or announced high speed connectivity products that are priced lower than Hybrid'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 Hybrid's products. Pacific's current competitors include other providers of downconverters, antennas and video encoding systems such as California Amplifier, Inc., Conifer Corporation, Trans-Systems, Inc. and TeleLynx, Inc. Pacific's potential competitors include providers of cable modems, such as Motorola, Inc., General Instrument, Scientific-Atlanta, Bay Networks and 3Com. Most of Pacific's future and potential competitors are substantially larger and have significantly greater financial, technical, marketing, distribution, customer support and other resources than Pacific, as well as greater name recognition and access to customers than Pacific. In addition, many of Pacific's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of Pacific's competitors have established relationships with current and potential customers of Pacific's products, and based on those relationships, may have more direct access to the personnel of such current and potential customers that are responsible for making purchasing decisions. There can be no assurance that current or potential competitors will not introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than Pacific's products. Accordingly, there can be no assurance that Pacific will be able to compete effectively in its target markets, even after the Merger. 42 To be successful, Hybrid's Series 2000 products must achieve market acceptance, and the combined company must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. The combined 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 combined 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 combined company will not materially and adversely affect the combined company's business, operating results or financial condition. Further, as a strategic response to changes in the competitive environment, the combined 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 combined company's business, operating results or financial condition. Broadband wireless and cable 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, xDSL technology enables high speed data to be transmitted through existing telephone lines to the home. Recently, several companies, including Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent, several RBOCs, MCI and others announced the formation of a group focused on accelerating the pace of ADSL service. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, the combined company's business, operating results and financial condition would be materially adversely affected. See "BUSINESS OF HYBRID--COMPETITION" and "BUSINESS OF PACIFIC--COMPETITION." NEED TO REDUCE COST OF CLIENT MODEMS, DOWNCONVERTERS, ANTENNAS AND VIDEO DECODERS. The list prices for the Series 2000 client modems currently range from approximately $440 to $795, depending upon features and volume purchased. Customers wishing to purchase client modems generally must also purchase an Ethernet adapter for their computer. These prices make Hybrid's products relatively expensive for the consumer electronics and the small office or home office markets. Market acceptance of Hybrid's products, and the combined company's future success, will depend in significant part on reductions in the unit cost of Hybrid's client modems. Certain of Hybrid's competitors currently offer products at prices lower than those for Hybrid's modems. While Hybrid has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will keep pace with competitive pricing pressures or lead to improved gross margins. If the combined company is unable to obtain cost reductions, its gross margins and profitability will be adversely affected. To address continuing competitive and pricing pressures, Hybrid expects that it will have to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning Hybrid's products to utilize more highly integrated components and more automated manufacturing techniques. Hybrid 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 combined 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 combined company to reduce the list price of Hybrid's client modems. Moreover, there can be no assurance that additional volume purchase or manufacturing agreements will be available to the combined company on terms that the combined company considers acceptable. To the extent that the combined 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 combined company's business, operating results or financial condition could be materially adversely affected. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS OF HYBRID--MANUFACTURING." 43 The list price for Pacific's downconverter, antenna and video decoder products also make those products relatively expensive for the consumer electronics markets. Market acceptance of Pacific's products, and the combined company's future success, will depend in significant part on reductions in the unit costs of Pacific's downconverters, antennas and video decoders. Certain of Pacific's competitors currently offer products at prices lower than those for Pacific's downconverters, antennas and video decoders. If the combined company is unable to obtain cost reductions with respect to Pacific's downconverters, antennas and video decoders, the combined company's gross margins and profitability will be adversely affected. To address continuing competitive and pricing pressures, Pacific expects that it will have to continue to significantly reduce the cost of manufacturing its products through design and engineering changes. There can be no assurance that the combined company will be successful in redesigning Pacific's downconverters, antennas and video decoders or that a redesign can be made on a timely basis and without introducing significant errors or product defects, or that the redesign will result in significant cost reductions to allow the combined company to reduce the list price of Pacific's products. Failure to accomplish any of the foregoing could have a material adverse effect on the combined company's business, operating results or financial condition. See "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "BUSINESS OF PACIFIC--MANUFACTURING." LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING. The combined 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. Hybrid 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. Hybrid entered into an agreement pursuant to which Sharp to date has been the exclusive OEM supplier through Itochu of certain of Hybrid'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, Hybrid 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 combined company will not experience similar supply problems in the future from Sharp or any other manufacturer. Hybrid is exploring the possibility of entering into supply arrangements with other manufacturers to provide additional or alternative sources of supply for certain of Hybrid'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 Hybrid's customers. Hybrid has had only limited experience manufacturing its products to date, and there can be no assurance that the combined company or Sharp or any other manufacturer of Hybrid's products will be successful in increasing the volume of its manufacturing efforts. The combined 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. Failure to do so could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID--MANUFACTURING" and "BUSINESS OF PACIFIC--MANUFACTURING." The list price for Pacific's downconverter, antenna and video decoder products also make those products relatively expensive for the consumer electronics markets. Market acceptance of Pacific's products, and the combined company's future success, will depend in significant part on reductions in the unit costs of Pacific's downconverters, antennas and video decoders. Certain of Pacific's competitors currently offer products at prices lower than those for Pacific's downconverters, antennas and video decoders. If the combined company is unable to obtain cost reductions with respect to Pacific's downconverters, antennas and video decoders, the combined company's gross margins and profitability will be adversely affected. To address continuing competitive and pricing pressures, Pacific expects that it will have to continue to significantly reduce the cost of manufacturing its products through design and engineering changes. There can be no assurance that the combined company will be successful in redesigning Pacific's downconverters, antennas and video decoders or that a redesign can be made on a timely basis and without introducing 44 significant errors or product defects, or that the redesign will result in significant cost reductions to allow the combined company to reduce the list price of Pacific's products. Failure to accomplish any of the foregoing could have a material adverse effect on the combined company's business, operating results or financial condition. See "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "BUSINESS OF PACIFIC--MANUFACTURING." LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING. The combined 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. Hybrid 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. Hybrid entered into an agreement pursuant to which Sharp to date has been the exclusive OEM supplier through Itochu of certain of Hybrid'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, Hybrid 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 combined company will not experience similar supply problems in the future from Sharp or any other manufacturer. Hybrid is exploring the possibility of entering into supply arrangements with other manufacturers to provide additional or alternative sources of supply for certain of Hybrid'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 Hybrid's customers. Hybrid has had only limited experience manufacturing its products to date, and there can be no assurance that the combined company or Sharp or any other manufacturer of Hybrid's products will be successful in increasing the volume of its manufacturing efforts. The combined 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. Failure to do so could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID--MANUFACTURING" and "BUSINESS OF PACIFIC--MANUFACTURING." DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS. Hybrid is dependent upon certain key suppliers for a number of the components for its products. For example, Hybrid currently only has one vendor, Broadcom Corporation, for the 64 QAM demodulator semiconductors that are used in Hybrid'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 Hybrid's competitors high-speed cable data modems and equipment based on Broadcom's MCNS compliant semiconductors. As a result of such program, certain of Broadcom's technological and product enhancements may be made available to certain of Hybrid's competitors before making them available to Hybrid. This could have the effect of putting Hybrid at a competitive disadvantage with regard to time to market or cause Hybrid to have to redesign its products if competitors influence changes in Broadcom's products. Hitachi is the sole supplier of components used in the processors used in certain of Hybrid's modems. In addition, certain other components for products that Hybrid has under development are currently only available from a single source. For example, Stanford Telecom, which is a competitor for at least one of Hybrid's broadband wireless products, is currently the sole supplier for certain components used in Hybrid's products, although Hybrid is in the process of developing one or more alternative sources. Pacific is also dependent on certain key suppliers for a number of components in its products and is dependent on Sun Denki (HK) Limited for most of its manufacturing needs. Specifically, Pacific is dependent upon Triquint Semiconductor for gallium arsenide semiconductors, Microchip Corp. for micro controller integrated circuit semiconductors, General Electric Corp. for printed circuit board material and Murata Inc. for RF filters. There can be no assurance that delays in key components or product deliveries will not occur in the future for Hybrid or Pacific 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 45 demand for such components. Any significant interruption or delay in the supply of components for Hybrid's or Pacific's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on the combined company's ability to manufacture its products and, therefore, could have a material adverse effect on its business, operating results or financial condition. See "BUSINESS OF HYBRID--MANUFACTURING" and "BUSINESS OF PACIFIC--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 combined 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 combined 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, Hybrid is and the combined company will be dependent on the growth of the use of the Internet by business, 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 combined 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 combined company's products. Potentially increased performance provided by the products of the combined 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 combined company's products are dependent on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. DEPENDENCE ON ACCEPTANCE OF ASYMMETRIC NETWORKING. Hybrid'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 Hybrid has spent considerable engineering resources to enable its products to work with such protocols. There can be no assurance that Hybrid's current products or the combined company's future products will be compatible with symmetric standards or that errors will not occur in connecting the symmetric protocols with Hybrid'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 Hybrid'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 Hybrid'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 combined company's business, operating results or financial condition. RISK OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY. Products as complex as those offered by Hybrid and Pacific 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 Hybrid's and Pacific's products, and there can be no assurance that errors will not be found in Hybrid's or Pacific's 46 current products or the combined company's future products. The occurrence of such errors, defects or failures could result in product returns and other losses to the combined company or its customers. Such occurrence could also result in the loss of or delay in market acceptance of the combined company's products, which could have a material adverse effect on the combined company's business, operating results or financial condition. Hybrid's products generally carry a one year warranty which includes factory and on-site repair services as needed for replacement of parts. In addition, Hybrid's third party manufacturer provides a 15 month warranty period on all cable modems manufactured by it. The warranty period begins on the date the modems are completely assembled. Pacific typically provides a two-year warranty on its broadband wireless downconverters and decoders. Due to the relatively recent introduction of the Series 2000 products, Hybrid has limited experience with the problems that could arise with this generation of products. In addition, each of Hybrid's and Pacific's purchase agreements with its customers typically contain provisions designed to limit exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although neither Hybrid nor Pacific has experienced any product liability claims to date, the sale and support of Hybrid's and Pacific's products entails the risk of such claims. A successful product liability claim brought against the combined company could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID--MANUFACTURING" and "BUSINESS OF PACIFIC--MANUFACTURING." DEPENDENCE ON KEY PERSONNEL. The combined company's success will depend in significant part upon the continued services of its key technical sales and senior management personnel, including the combined company's Chairman and Chief Executive Officer, Carl S. Ledbetter, and the combined company's President and Chief Operating Officer, Richard B. Gold. Hybrid carries a $1.5 million "key man" life insurance policy on Mr. Ledbetter as required under the terms of the $5.5 Million Debenture but does not have an employement agreement with Mr. Ledbetter. Mr. Gold will be party to an employment agreement with the combined company. See "SELECTED INFORMATION WITH RESPECT TO HYBRID--EXECUTIVE COMPENSATION-- EMPLOYMENT AGREEMENTS." Any officer or employee of the combined company will be able to terminate his or her relationship with the combined company at any time. The combined 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 combined company will be able to attract and retain key personnel. The loss of the services of one or more of the combined company's executive officers or key employees or the combined company's failure to attract additional qualified personnel could have a material adverse effect on the combined company's business, operating results or financial condition. See "BUSINESS OF HYBRID--EMPLOYEES" and "--MANAGEMENT." REGULATION OF THE COMMUNICATIONS INDUSTRY. Hybrid, Pacific and their customers are subject to varying degrees of federal, state and local regulation. For instance, the jurisdiction of the FCC extends to high speed Internet access products such as those of Hybrid. The FCC has promulgated regulations that, among other things, set installation and equipment standards for communications systems. Further regulation of the combined company's customers may adversely impact its business, operating results and financial condition. For example, FCC regulatory policies affecting the availability of cable, wireless and telco services, and other terms on which cable, wireless and telco companies conduct their business, may impede the combined company's penetration of certain markets. Changes in current or future laws or regulations which negatively impact the combined company's products and technologies, in the United States or elsewhere, could materially and adversely affect the combined company's business, operating results and financial condition. In March 1997, the FCC was petitioned to grant broadband wireless operators the right to use their spectrum for two-way access. Two-way access would enable voice, video and data over that spectrum. Failure to obtain FCC clearance of two-way authorization for such spectrum would materially adversely 47 affect sales of Hybrid's and Pacific's products and would materially adversely affect the combined company's business, operating results and financial condition. In addition, international regulatory authorities for broadband wireless communications are currently conducting spectrum auctions. Failure to complete these auctions in a timely manner would have a material adverse effect on sales of Pacific's downconverter, antenna and video encoding products and would materially adversely affect the combined company's business, operating results and financial condition. PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS. Each of Hybrid and Pacific relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. Hybrid 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. Pacific currently has 23 patents issued in the United States, as well as pending patent applications in the United States, Mexico, Europe and Japan that relate to the design features for its broadband wireless products. In the future, the combined company will likely 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 Hybrid's or Pacific'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 combined company's products can be sold, to provide meaningful protection or any commercial advantage to the combined company. Moreover, any patents that have been or may be issued might be challenged, as is the case with the patent litigation recently initiated by Hybrid discussed below. Any such challenge could result in time consuming and costly litigation and result in the combined 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. Each of Hybrid and Pacific 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 Hybrid and Pacific to protect its intellectual property will prove sufficient to prevent misappropriation of its technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect Hybrid's, Pacific's or the combined company's products or intellectual property rights to the same extent as do the laws of the United States. In the past, each of Hybrid and Pacific has received, and in the future may receive, notices from third parties claiming that its products or proprietary rights infringe the proprietary rights of third parties. Hybrid expects that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in the combined 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 combined company to enter into royalty or licensing agreements. Such royalty or licensing agreements may not be available on terms acceptable to the combined company or at all, which could have a material adverse effect upon the combined company's business, operating results and financial condition. Each of Hybrid and Pacific has and in the future may license its patents or proprietary rights for commercial or other reasons, to parties who are competitors of Hybrid or Pacific, or who may become competitors of the combined company. Further the combined company may also elect to initiate claims or litigation against third parties for infringement of Hybrid's, Pacific's or the combined company's patents or proprietary rights or to establish the validity of Hybrid's, Pacific's or the combined company's patents or proprietary rights. Hybrid recently initiated patent infringement litigation against two companies, and in response one company is seeking a declaration of invalidity, unenforceability and non-infringement of Hybrid's patents and attorneys fees, and the other company is seeking to be dismissed from the litigation. Hybrid has not yet determined if it will initiate litigation against other parties as well. In addition, Hybrid 48 has sent notices to certain third parties offering to license its patents for products that may be infringing its patent rights. There can be no assurance that such notifications will not lead to potential litigation initiated by the combined company or related countersuits by third parties seeking to challenge Hybrid's, Pacific's or the combined company patents or asserting infringement by the combined company. Such litigation could be time consuming and costly and have a material adverse effect on the combined company's business, operating results and financial condition. See "BUSINESS OF HYBRID--INTELLECTUAL PROPERTY" and "BUSINESS OF PACIFIC--INTELLECTUAL PROPERTY." RISKS OF INTERNATIONAL SALES. To date, sales of Hybrid's products outside of the United States have represented an insignificant portion of net sales. While Hybrid 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, Hybrid's products will have to be designed to meet industry standards of foreign countries, such as the DAVIC specifications that are supported in Europe. Hybrid has committed and continues to commit resources to developing international sales and support channels. Sales to customers of Pacific outside the United States have accounted for a significant portion of net sales. Pacific's international sales accounted for 30.4%, 28.5% and 36.7% of net sales in the years ended September 30, 1997, 1996 and 1995, respectively, and 53.8% of net sales for the six months ended March 31, 1998. International sales are subject to a number of risks, including longer payment cycles, export and import restrictions and tariffs, including existing United States restrictions on the export of certain high technology products that could limit the combined company's sales abroad, unexpected changes in regulatory requirements, 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. Sales to international customers are typically made in U.S. dollars to minimize the risks associated with fluctuating foreign currency exchange rates. To date, substantially all of Pacific's international sales have been denominated in U.S. currency, however, Pacific expects that, in the future, more international sales may be denominated in local currencies. Pacific has not engaged in foreign currency hedging activities. Fluctuations in currency exchange rates could cause Pacific's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. To the extent that international revenues increase as a percentage of total revenues in the future, foreign currency fluctuation exposure may also increase. In addition, Pacific has in the past experienced a decline in sales to Mexico due to the devaluation of the Mexico peso. There can be no assurance that future economic or political instability in countries where Pacific sells its products will not have a material adverse effect on Pacific's sales in such countries, and consequently, on the business financial condition or results of operations of Pacific. Additionally, the protection of intellectual property may be more difficult to enforce outside of the United States. In the event the combined company is successful in expanding its international operations, particularly sales of Hybrid's products, the imposition of exchange or price controls or other restrictions on foreign currencies could materially adversely affect the combined company's business, operating results and financial condition. If the combined 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. CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS. Upon completion of the Merger at the Assumed Exchange Ratio, the combined company's executive officers, directors and greater than 5% stockholders (and their affiliates) will, in the aggregate, beneficially own approximately 37.1% of Hybrid's outstanding Common Stock. As a result, such persons, acting together, will have the ability to significantly influence all matters submitted to stockholders of Hybrid for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of Hybrid's assets) and to significantly influence the management and affairs of Hybrid. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of Hybrid, impede a merger, consolidation, takeover or other business combination involving Hybrid or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of 49 Hybrid, which in turn could have an adverse effect on the market price of Hybrid's Common Stock. See "SECURITY OWNERSHIP OF THE COMBINED COMPANY." RESTRICTIVE DEBT COVENANTS. Under the terms of the outstanding $5.5 Million Debenture, Hybrid is subject to certain restrictive covenants which could adversely affect the combined company's operations, including limitations on the amount of capital expenditures it may incur in any 12-month period and prohibitions against declaring dividends, retiring any subordinated debt other than in accordance with its terms or distributing assets to any stockholder, as long as the $5.5 Million Debenture remains outstanding. In October 1997, Hybrid entered into the $4.0 Million Credit Facility, which contains a number of restrictive covenants, including covenants prohibiting the declaration of dividends. The $5.5 Million Debenture and the Credit Facility are collateralized by substantially all of Hybrid's assets. In addition, the $5.5 Million Debenture contains "full ratchet" antidilution provisions under which the number of shares of Hybrid's Common Stock into which the $5.5 Million Debenture is convertible, at the option of the holder, may be increased if Hybrid issues any shares (with certain exceptions for employee stock options and the like) prior to October 1998 for consideration less that $10.71 per share. Commencing with October 1998, any such issuance would be subject to certain "weighted average" antidilution provisions. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "DESCRIPTION OF HYBRID CAPITAL STOCK--CONVERTIBLE $5.5 MILLION DEBENTURE" and Notes 6 and 7 of Notes to Financial Statements. Pacific has an $8 million bank line of credit with Coast Business Credit ("COAST"). Coast may terminate the line of credit at any time upon the occurrence of certain events of default, including Pacific's failure to pay any amounts under the line of credit when due. In the event of any such termination, an amount equal to $240,000 will be payable by Pacific to Coast as an early termination fee. As of April 30, 1998, the amount outstanding under the line of credit was $3,733,000. See "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES." SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Hybrid'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 could adversely affect the market price of Hybrid Common Stock prevailing from time to time and could impair the combined company's ability to raise capital through the sale of equity or debt securities. There are approximately 7,180,307 shares of Common Stock outstanding that are restricted shares ("RESTRICTED SHARES") under the Securities Act. Currently, no Restricted Shares are eligible for sale in the public market. The 7,180,307 Restricted Shares became available for sale in the public market on May 12, 1998, although approximately 2,601,792 of such shares are held by affiliates of Hybrid and are subject to a pooling lock-up associated with the Merger that prevents them from selling such shares before July 1998. In addition, upon consummation of the Merger, the $5.5 Million Debenture could be converted at any time at the option of the holder into 851,393 shares of Common Stock, assuming that Hybrid Common Stock is valued at the closing of the Merger at $6.46 per share, the ten day average price before the execution of the Reorganization Agreement (the number of shares into which the debenture could be convertible would be greater if the closing price is lower than $6.46) (see "RESTRICTIVE DEBT COVENANTS" above). Furthermore, the holders of warrants for 1,340,656 shares of Hybrid Common Stock can exercise such warrants at any time, but only 158,137 of such shares could not be sold until the expiration of the 180-day lock-up period on May 12, 1998 and the remaining 1,179,865 cannot be sold until July 1998 due to the pooling lock-up and the holding period restrictions imposed by Rule 144 of the Securities Act. NationsBanc Montgomery, the underwriter for Hybrid's initial public offering, 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. Shares of Hybrid Common Stock issued in the Merger will be freely tradeable following the closing of the Merger, but shares held by affiliates may not be sold until the expiration of the pooling lock-up. See "DESCRIPTION OF HYBRID CAPITAL STOCK--WARRANTS" and "--CONVERTIBLE $5.5 MILLION DEBENTURES." If such holders sell in the public market, such sales could have a material adverse effect on the market price of Hybrid's Common Stock. 50 POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the shares of Hybrid's 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 combined company's results of operations, announcements of technological innovations, new products introduced by the combined 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. 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 Hybrid'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 Hybrid's Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such company. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the combined company's business, operating results and financial condition. 51 APPROVAL OF THE MERGER GENERAL THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED TRANSACTIONS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL PROVISIONS OF THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS. DETAILED TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE REORGANIZATION AGREEMENT AND AGREEMENT OF MERGER OF WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDICES A-1 AND A-2, RESPECTIVELY. REFERENCE IS ALSO MADE TO THE OTHER APPENDICES HERETO. STATEMENTS MADE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS WITH RESPECT TO THE TERMS OF THE MERGER ARE QUALIFIED IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH IN THE AGREEMENT AND THE ANNEXES HERETO. THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS REFLECT THE BEST JUDGMENT OF THE MANAGEMENT OF HYBRID AND PACIFIC BASED ON FACTORS CORRECTLY KNOWN AND RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THE JOINT PROXY STATEMENT/ PROSPECTUS. The Reorganization Agreement provides, among other things, for the Merger of Merger Sub (a wholly-owned subsidiary of Hybrid) with and into Pacific, whereby Pacific, as the surviving corporation of the Merger, will become a wholly-owned subsidiary of Hybrid. Pursuant to the Reorganization Agreement, Hybrid has agreed that, upon consummation of the Merger, Richard B. Gold, the President and Chief Executive Officer of Pacific, and Matthew D. Miller, the Chairman of the Board of Pacific, will be appointed to Hybrid's Board of Directors and that Stephen E. Halprin and Douglas M. Leone, two of Hybrid's current directors (who are nominated for re-election at the Hybrid Annual Meeting pursuant to Proposal No. 2 below) will resign as directors (assuming they are re-elected at the meeting). Accordingly, upon the Merger, Hybrid's Board of Directors will consist of Messrs. Gold and Miller and Hybrid's three continuing directors, James R. Flach, Gary M. Lauder and Carl S. Ledbetter. The executive officers of Hybrid will remain in their current positions, except that Mr. Gold will become Hybrid's President and Chief Operating Officer. See "MANAGEMENT OF THE COMBINED COMPANY." The shareholders of Pacific will become stockholders of Hybrid (as described in "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION"), and their rights will be governed by Hybrid's Certificate of Incorporation and Bylaws, as well as the Delaware General Corporation Law. HYBRID'S REASONS FOR THE MERGER Hybrid believes that the combination of Hybrid's wireless network products, technology and expertise with Pacific's wireless transmission products, technology and expertise will provide an opportunity for the combined company to offer a more complete suite of products and to accelerate development of integrated, end-to-end system solutions for high speed wireless Internet access. In addition, combining Hybrid's current products and network capabilities with Pacific's wireless transmission product capability will allow the combined company to offer broader high speed Internet access solutions, including products that provide two-way wireless access, two-way cable access, wireless downstream and phone-up access and cable downstream and phone-up access. The ability to provide a more complete and broader product offering may give the combined company increased leverage with customers who enter into volume purchase arrangements. Pacific's market presence, customer base and relationships in the broadband wireless marketplace should provide additional marketing opportunities for the products the of the combined company. In addition, Pacific's international sales and distribution capability will give Hybrid the opportunity to expand the international distribution of its products. 52 The Merger will increase the management breadth and organization infrastructure of the combined company by adding Pacific's key executives. Hybrid's engineering capacity and expertise will be strengthened and expanded by the addition of Pacific's engineering team and its technical expertise in RF (radio frequency)/analog product design and engineering. Pacific's engineers are expected to help Hybrid satisfy a need it had previously identified for hiring a substantial number of technical personnel in this important area, a difficult goal to achieve in the current labor market. The Merger will enable Hybrid to combine its technology with Pacific's technology and should increase the research and development capacity of the combined company to improve product offerings. Integrating the sales and marketing staffs and manufacturing and support functions of the two companies should significantly expand the combined company's capabilities and provide for greater efficiencies in there areas. Hybrid anticipates that the combined company may be able to achieve significant operational efficiencies in the future. Hybrid will gain access to Pacific's low cost, off-shore volume manufacturing relationships. The combined company may achieve cost savings by consolidating existing facilities, and by consolidating or realigning internal and outside administration and operational functions. The Merger may help the combined company achieve critical mass in revenues and resources to meet increasing challenges from larger companies already in or expected to enter the markets in which the combined company will participate. The increased size of the combined company may enable it to pursue new technological and market opportunities by way of internal development and, possibly, through future acquisitions of new products and technologies. In the course of its deliberations, the Hybrid Board reviewed with Hybrid's management and financial advisors a number of factors relevant to the Merger in addition to the benefits outlined above. The Hybrid Board considered, among other things, (i) the terms of the Merger; (ii) the likelihood of realizing superior benefits through alternative business strategies; (iii) information concerning Hybrid's and Pacific's respective businesses, prospects, financial positions, results of operations, operations, products, product development and technologies, based in the case of Pacific on information provided by Pacific and on Hybrid management's due diligence investigation; (iv) information regarding comparable companies in the wireless Internet access industry, including market prices of the companies' stock, market capitalizations, earnings per share, price earnings ratios, revenues and other results of operations, based on reported historical information and analysts' reports and earnings estimates; (v) information regarding reported acquisitions of over the last three years of other companies in the wireless Internet access industry and other comparable acquisitions; (vi) an analysis of the relative value that Pacific might contribute to the future business and prospects of the combined company; (vii) current financial market conditions and historical market prices, volatility and trading information with respect to Hybrid Common Stock; (viii) the number of shares of Hybrid that might be issued by Hybrid under the terms of the Reorganization Agreement, based on varying assumptions as to the Closing Price of Hybrid Common Stock as determined in accordance with those terms; (ix) estimates made by Hybrid's management (based in part upon estimates provided by Pacific as to its prospective operating results) as to the potential effect of the Merger upon Hybrid's prospective operating results for 1998 and 1999 before giving effect to potential cost reduction synergies that might be achieved as a result of the Merger, indicating that the Merger might have a dilutive effect on earnings per share (increasing losses) for 1998 and 1999 (recognizing that the estimates were subject to substantial uncertainties and that actual operating results would likely be materially different than those estimated); (x) estimates as to the potential effect of cost reduction synergies that might possibly be achieved from the Merger, indicating that such synergies, if achieved to the maximum extent postulated (see "--OPINION OF FINANCIAL ADVISORS--PRO FORMA ANALYSIS" below), would improve slightly the combined company's estimated results of operations for 1998, so that the Merger might not have a significant effect on earnings per share for that year, and would improve to a greater extent the combined company's estimated results of operations for 1999, so that the Merger might be accretive for that year (recognizing that achievement of such synergies was subject to substantial uncertainty and that the actual cost reductions, if any, might be materially less than the maximum amount postulated); 53 (xi) advice and detailed financial analysis of NationsBanc Montgomery, including its oral opinion on March 19, 1998, subsequently confirmed in writing, that as of such date the consideration to be paid by Hybrid in the Merger was fair to Hybrid from a financial point of view, as of the date of such opinion; (xii) the compatibility of the businesses products, technologies, management and the administrative, sales and marketing and technical organizations of Hybrid and Pacific; (xiii) the expectation that the Merger will qualify for pooling of interests treatment for financial reporting purposes; (xiv) the expectation that the Merger will be a tax-free reorganization for federal income tax purposes; and (xv) reports from management and legal advisors on the results of Hybrid's due diligence analysis of Pacific. For a discussion of many of the foregoing factors, see "--OPINION OF FINANCIAL ADVISORS" below. The Hybrid Board also considered a variety of potentially negative factors concerning the Merger, including: (i) the risk that, despite the intentions and efforts of the parties, the benefits sought to be achieved in the Merger might not be achieved, or that integration of the technologies, products, organizations or other operations of the two companies might not be accomplished smoothly and might require more time, expense and management attention than anticipated; (ii) the potential disruption of the combined company's business that might result from employee uncertainty or lack of focus, as well as customer and supplier confusion, following announcement of the Merger; (iii) the uncertainty of the market's acceptance of Hybrid's combined product offerings following the Merger; (iv) the risk that delays may occur in the development and introduction of the integrated, end-to-end, system solutions for high speed wireless Internet access that Hybrid expects to develop following the Merger; (v) uncertainties regarding the economic condition of the broadened wireless market and the risk that the financial condition of many actual and potential customers for the combined company's wireless products will be such that their ability to purchase or pay for those products is limited, thereby adversely affecting the combined company's results of operations; (vi) the risk that the combination of Hybrid and Pacific, each of which have a history of operating losses, may result in increased operating losses that Hybrid's current capital resources may diminish at an accelerated rate resulting in the need to raise additional capital on terms that might be unfavorable to Hybrid and its stockholders, (vii) the estimated charges of $3.0 million to $3.5 million to be incurred due to the Merger in the quarter in which it closes, (viii) the risk that, during the period prior to consummation of the Merger, Pacific will be unable to obtain additional funds for its continuing operations and its short term liquidity needs, during such interim (and the risk that, if the Merger is not consummated, Pacific will not be able to repay the loan); (ix) the possibility that the operational efficiencies and other benefits anticipated from the Merger might not achieved or might not occur as rapidly or to the extent currently anticipated, so that the initially dilutive effect of the Merger on Hybrid stock may be greater or continue longer than expected; (x) the risk that, despite the efforts of the combined company, key technical, management and sales personnel of Pacific and Hybrid might not be retained by the combined company; (xi) the risk that the combined company's ability to increase or maintain revenues might be diminished by intensified competition among suppliers of similar or related products; (xii) the risk that the public market price of Hybrid stock might be adversely affected by announcement of the Merger; and (xiii) the other risks described above in "PROPOSAL NO. 1: THE MERGER-- RISK FACTORS." The Hybrid Board believed that these risks were outweighed by the potential benefits of the Merger. In view of the wide variety of factors, both positive and negative, considered by the Hybrid Board, the Board did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered. After taking into consideration all of the factors set forth above, the Hybrid Board determined that the Merger was in the best interests of Hybrid and its stockholders, and the Board continues to recommend approval and adoption of the Merger by the Hybrid stockholders. PACIFIC'S REASONS FOR THE MERGER Pacific believes that the combined company has the opportunity to be a worldwide leader in broadband access equipment. 54 As the wireless data business has become increasingly important, many of Pacific's customers have expressed interest in integrated, end-to-end system solutions, and the combination of Pacific's product line with Hybrid's product line allows the combined company to offer such an end-to-end solution. In particular, the combination of Hybrid's wireless network equipment with Pacific's wireless transmission equipment will enable the combined company to offer an integrated product offering for wireless high speed Internet access. The combined company's broader, more complete product offering should provide increased leverage with customers who enter into volume purchase orders. The combination of Hybrid and Pacific will create a combined company with significantly greater resources than those of Pacific alone, and may enable Pacific to compete more effectively in the market. In particular, Hybrid's significant cash and cash equivalents will enable Pacific to have greater flexibility in managing its business. Moreover, Hybrid's market presence, customer base and relationships with existing broadband access providers offer expanded sales and marketing opportunities for Pacific's products. Additionally, Hybrid has relationships with global telecommunications companies which are synergistic with Pacific's business. There is the potential for significant operating synergies during 1998 and 1999. Hybrid's technical strength in digital hardware and software design complements Pacific's technical strength in RF/analog product design. Hybrid's operational strength in system design and integration complements Pacific's operational strength in product engineering, manufacturing and customer support. Additionally, Pacific's management team will be bolstered by the addition of key executive personnel of Hybrid. Finally, the Merger will be a means by which Pacific's shareholders and optionholders will be able to obtain liquidity for their equity interests. In addition, the Merger is expected to be accomplished as a tax-free exchange under Section 368 of the Code. In the course of its deliberations, the Pacific Board reviewed with Pacific's management and financial advisors a number of factors relevant to the Merger in addition to the benefits outlined above. The Pacific Board considered, among other things, (i) the terms of the Merger; (ii) Pacific management's view as to the prospects of Pacific as an independent company; (iii) historical information concerning Pacific's and Hybrid's respective businesses, financial performances and condition, results of operations, operations, products, product development and technologies, management and competitive position, based in the case of Hybrid on information provided by Hybrid and on Pacific management's due diligence investigation; (iv) Pacific management's view as to the historical financial condition, results of operations and businesses of Pacific and Hybrid before and after giving effect to the Merger based on management due diligence and publicly available financial information; (v) estimates made by Pacific's management as to Pacific's prospective operating results for calendar years 1998 and 1999 as a stand alone entity, indicating potential operating losses for both years (recognizing that the estimates were subject to substantial uncertainties and that actual operating results would likely be materially different than those estimated); (vi) estimates (based in part on publicly available analysts' estimates and on information provided by Hybrid), as to the combined company's prospective operating results for calendar years 1998 and 1999 before giving effect to potential cost reduction synergies that might be achieved as a result of the Merger, indicating that the Merger might have a dilutive effect on earnings per share (increasing losses) for 1998 and an accretive effect for 1999 (recognizing that the estimates were subject to substantial uncertainties and that actual operating results would likely be materially different than those estimated); (vii) estimates as to the potential effect of cost reduction synergies that might possibly be achieved from the Merger, indicating that such synergies, if achieved to the maximum extent postulated (see "--OPINION OF FINANCIAL ADVISORS-- PRO FORMA ANALYSIS" below), would improve the combined company's estimated results of operations slightly for 1998 and to a greater extent for 1999 (recognizing that achievement of such synergies was subject to substantial uncertainty and that the actual cost reductions, if any, might be materially less than the maximum amount postulated); (viii) Pacific management's view as to the potential for other third parties to enter into strategic relationships with or to acquire Hybrid or Pacific; (ix) current financial market conditions and historical market prices, volatility and trading information with respect to Hybrid 55 Common Stock; (x) the impact of the Merger on Pacific's customers and employees; (xi) the number of shares of Hybrid that might be issued by Hybrid under the terms of the Reorganization Agreement, based on varying assumptions as to the Closing Price of Hybrid Common Stock as determined in accordance with those terms; (xii) the compatibility of the businesses products, technologies, management and the administrative, sales and marketing and technical organizations of Pacific and Hybrid; (xiii) reports from management on the results of Pacific's due diligence analysis of Hybrid; and (xiv) advice of UBS, Pacific's financial advisor with respect to the Merger (UBS was not asked to render a fairness opinion with respect to the Merger). The Pacific Board also considered the possible effects of the provisions regarding the termination fees. In addition, the Pacific Board also took into account that Pacific would be represented on the Board of Directors of the combined company following the Merger. The Pacific Board also considered a variety of potentially negative factors concerning the Merger, including: (i) the risk that, despite the intentions and efforts of the parties, the benefits sought to be achieved in the Merger might not be achieved, or that integration of the technologies, products, organizations or other operations of the two companies might not be accomplished smoothly and might require more time, expense and management attention than anticipated; (ii) the potential disruption of the combined company's business that might result from employee uncertainty or lack of focus, as well as customer and supplier confusion, following announcement of the Merger; (iii) the uncertainty of the market's acceptance of the combined product offerings following the Merger; (iv) the risk that the combination of Pacific and Hybrid, each of which have a history of operating losses, may result in increased operating losses; (v) that Pacific's and Hybrid's combined capital resources may diminish at an accelerated rate resulting in the need to raise additional capital on terms that might be unfavorable to the combined company and its shareholders; (vi) the substantial charges to be incurred, primarily in the quarter in which the Merger is consummated, in connection with the Merger; (vii) the possibility that the operational efficiencies and other benefits anticipated from the Merger might not be achieved and that, as a result, the Merger would have a dilutive effect on Hybrid stock; (viii) the risk that, despite the efforts of the combined company, key technical management and sales personnel of Pacific and Hybrid might not be retained by the combined company; (ix) the risk that the combined company's ability to increase or maintain revenues might be diminished by intensified competition among suppliers of similar or related products; (x) the risk that the public market price of Hybrid stock might be adversely affected by announcement of the Merger; and (xi) the other risks described in "PROPOSAL NO. 1: THE MERGER--RISK FACTORS" herein. The Pacific Board believed that these risks were outweighed by the potential benefits of the Merger. In view of the wide variety of factors, both positive and negative, considered by the Pacific Board, the Board did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered. After taking into consideration all of the factors set forth above, the Pacific Board determined that the Merger was fair and in the best interests of Pacific and its shareholders, and the Board continues to recommend approval and adoption of the Merger by the Pacific shareholders. BOARD RECOMMENDATIONS Hybrid's Board has adopted and approved the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and approved the Merger and has determined that the Merger is fair, from a financial point of view to, and in the best interests of Hybrid. James R. Flach, a member of the Hybrid Board and an executive partner of Accel Partners, a venture capital firm and an affiliate of Hybrid, abstained from the vote on the Reorganization Agreement and the transactions contemplated thereby. Gary M. Lauder, a member of the Hybrid Board and the General Partner of Lauder Partners, a venture capital partnership, did not attend the meeting of the Hybrid Board at which the adoption and approval of the Reorganization Agreement was voted upon but subsequently voted in favor of the Merger. 56 AFTER CAREFUL CONSIDERATION, THE HYBRID BOARD RECOMMENDS A VOTE FOR THE ADOPTION AND APPROVAL OF THE REORGANIZATION AGREEMENT AND THE AGREEMENT OF MERGER AND THE APPROVAL OF THE MERGER. Pacific's Board has adopted and approved the Reorganization Agreement and the Agreement of Merger and the transactions contemplated thereby and approved the Merger by the vote of all but one of the members of the Pacific Board and has determined that the Merger is fair, from a financial point of view to, and in the best interests of Pacific and its shareholders. Alan F. Dishlip, a member of the Pacific Board and a general partner of Utah Venture Partners, could not be present at the meeting of the Pacific Board at which the adoption and approval of the Reorganization Agreement was voted upon, but subsequent thereto informed Pacific that he supports the approval and adoption of the Reorganization Agreement and approval of the Merger. AFTER CAREFUL CONSIDERATION, THE PACIFIC BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION AND APPROVAL OF THE REORGANIZATION AGREEMENT AND THE AGREEMENT OF MERGER AND THE APPROVAL OF THE MERGER. BACKGROUND OF THE MERGER Pacific and Hybrid have been working together informally in the wireless broadband access equipment market since 1995 when the companies began occasionally referring customers to one another. On June 23, 1997, at the request of Matthew D. Miller, a director of Pacific, Mr. Miller and Carl S. Ledbetter, Hybrid's President and Chief Executive Officer, met preliminarily to explore a more structured business relationship between the two companies. A follow up meeting was held on July 17, 1997 between Richard B. Gold, Pacific's President and Chief Executive Officer, and Mr. Ledbetter. To facilitate this meeting, Hybrid entered into a non-disclosure agreement with respect to the confidential information of Pacific, and Pacific provided Hybrid with certain information regarding its business. Mr. Ledbetter indicated that he was not then prepared to propose or actively consider such a combination as such discussions would be premature, but Hybrid and Pacific agreed to keep the channels of communication open. Mr. Ledbetter had further meetings with Mr. Miller on August 13, 1997, with Mr. Gold on September 16, 1997 and November 14, 1997 and with Mr. Miller on November 20, 1997 to apprise each other of developments in their respective businesses, although no substantive discussions were held. On December 11, 1997, Mr. Ledbetter met with Mr. Gold and indicated that he was prepared to commence discussions on a more active basis. On December 12, 1997, Hybrid executed a new non-disclosure agreement, and Pacific delivered preliminary financial information to Hybrid. Subsequently, Pacific retained UBS to advise the Pacific Board of Directors, and Hybrid retained NationsBanc Montgomery to advise the Hybrid Board of Directors, in connection with a possible business combination between Hybrid and Pacific. On December 30, 1997, a meeting was held at the offices of Fenwick & West, legal counsel to Hybrid, among Mr. Gold and Andrew Hartland of Pacific, Mr. Ledbetter and Dan E. Steimle of Hybrid, Tor Braham and Steven J. Lalli of UBS, and Michael Richter and David Locala of NationsBanc Montgomery. During the meeting, the parties engaged in preliminary discussions with respect to a business combination of the two companies. On January 15, 1998, at a regular meeting of Hybrid's Board of Directors and in discussions with Hybrid's directors before and after the meeting, Mr. Ledbetter discussed his interest in pursuing a business combination with Pacific and the basic terms that Hybrid might propose. On January 22, 1998, Mr. Ledbetter called Mr. Miller and presented a preliminary proposal, in the form of a summary term sheet, for a business combination between the two companies. Mr. Ledbetter and Mr. Gold met on January 27, 1998 and discussed the proposed combination in general terms. 57 On January 29, 1998, at a regular meeting of Pacific's Board of Directors, Mr. Gold and Mr. Braham of UBS presented to the Board the potential business combination with Hybrid. Mr. Braham reviewed with the Board a detailed package prepared by UBS relating to Hybrid and the potential business combination. Mr. Braham also discussed other alternatives and potential business combinations with companies other than Hybrid. Messrs. Gold and Braham then reviewed the proposed term sheet in detail with the Board, and the Board discussed the proposed valuation of Pacific and the preliminary areas of concern with the term sheet. Mr. Gold then reviewed Hybrid's business and the advantages and disadvantages of a proposed business combination with Hybrid. After an extended discussion, the Board authorized Pacific's management, in consultation with Pacific's legal and financial advisors, to continue discussions with Hybrid regarding the terms upon which a merger with Hybrid might be structured. In a conference telephone call on January 30, 1998, Mr. Ledbetter reported to three of Hybrid's other directors regarding the status of the discussions with Pacific and his understanding that Pacific was interested in pursuing the discussions further. At various times in January 1998, James R. Flach, a director of Hybrid, worked with Messrs. Gold and Ledbetter to prepare an outline of strategic reasons for the proposed business combination for presentation to the respective boards of directors of the two companies. Throughout February and March of 1998, there continued to be various meetings between representatives of senior managements of Pacific and Hybrid and their respective advisors to explore the advisability of a possible business combination, to conduct due diligence reviews and to discuss the principal terms of a merger. Senior management of the two companies communicated individually with members of their respective Board of Directors over this period as well. On February 2, 1998, a dinner meeting was held among Mr. Gold, representatives of UBS, Mr. Ledbetter, two directors of Hybrid (Messrs. Halprin and Leone) and representatives of NationsBanc Montgomery, during which the potential beneficial synergies of the possible business combination were discussed. The following day, the proposed business combination was the subject of a meeting of Hybrid's Board of Directors, which was attended by Mr. Steimle, by Hybrid's legal counsel and by representatives of NationsBanc Montgomery. After extensive discussion, the directors authorized Hybrid's management, in consultation with Hybrid's legal and financial advisors, to proceed with discussions regarding the business combination and to continue its due diligence investigation of Pacific. During the following week, discussions continued between representatives of UBS and NationsBanc Montgomery. On February 10, 1998, Mr. Gold met with Gary M. Lauder, a director of Hybrid, and Howard L. Strachman, who was then director of Hybrid and discussed Pacific, the possible business combination and questions about the combination that were required by the Hybrid representatives. On February 12, 1998, the business combination was the subject of further extensive discussion at a meeting of Hybrid's Board of Directors. During the meeting, issues regarding the proposed combination were considered by the directors and discussed at length with representatives of NationsBanc Montgomery and with Hybrid's legal counsel. On February 13, 1998, Mr. Ledbetter spoke with Mr. Gold over the telephone regarding a proposed meeting to discuss a number of questions regarding Pacific and the possible business combination. A meeting was held at the offices of Fenwick & West on February 18, 1998 and was attended by Mr. Gold and Mr. Hartland of Pacific, representatives of UBS, Messrs. Ledbetter and Quinones of Hybrid and representatives of NationsBanc Montgomery. Financial aspects of Pacific and the proposed combination were discussed at length. A further meeting was held by Hybrid's Board of Directors on February 25, 1998 at which the status of the negotiations with Pacific and Hybrid's due diligence investigation were discussed extensively as well as the possible terms that Hybrid might propose for the business combination. 58 On March 6, 1998, Hybrid sent a revised term sheet to Pacific. On March 12, 1998, at a regular meeting of Pacific's Board of Directors, Mr. Gold and Mr. Braham of UBS updated the Board on the status of discussions with Hybrid and reviewed the revised term sheet in detail with the Board. Mr. Braham also updated the Board on the status of other alternatives. The Board engaged in an extended discussion of the revised term sheet, Pacific's current position in its market, the advantages and disadvantages of a potential business combination with Hybrid, the current state of Hybrid's business and stock price, the proposed valuation of Pacific, and other alternatives for Pacific. The Board then authorized management of Pacific to continue negotiation of the revised term sheet with Hybrid. On March 13, 1998, following a breakfast meeting among Messrs. Ledbetter, Miller and Gold, representatives of Pacific, Hybrid, UBS, NationsBanc Montgomery and Wilson Sonsini Goodrich & Rosati, legal counsel to Pacific, met and agreed upon an outline of fundamental terms by which a merger of the two companies could be accomplished, subject to completion of a comprehensive due diligence investigation by Hybrid of the technology and operations of Pacific, the negotiation and approval of a definitive agreement, and final approval by Hybrid's Board of Directors and Pacific's Board of Directors of such an agreement. Beginning on March 16, 1998 and continuing through March 19, 1998, representatives of senior management of the two companies and their respective legal counsel met to review and negotiate drafts of the Merger Agreement and related documents. During this period, representatives of Hybrid continued their investigation into Pacific's technology and operations. On March 18, 1998, a special telephonic meeting of the Board of Directors of Hybrid was held, which included Messrs. Steimle and Quinones all of the directors (except that Mr. Lauder was present during only a portion of the meeting) and Hybrid's financial and legal advisors. At the meeting, management presented its proposal regarding the exchange ratio and other principal terms of the Merger Agreement and related documents. Senior management and legal and financial advisors of Hybrid discussed, among other things, the status of discussions, the principal terms of the Merger, the results of the due diligence evaluation of Pacific, the benefits and potential risks of the Merger, the possible impact of the Merger on the financial condition and business of Hybrid, the potential dilutive effect of the Merger and the potential market reaction to the proposed Merger. Hybrid's financial advisors then reviewed, among other things, the strategic rationale for, and certain financial analysis relating to, the proposed Merger. After extensive discussion, the Hybrid Board of Directors approved the Merger Agreement and related documents, with Mr. Flach abstaining due to a potential conflict of interest, subject to receipt of a fairness opinion from NationsBanc Montgomery regarding the business combination. A special committee of the Board was appointed to review NationsBanc Montgomery's opinion and give final approval to the execution and delivery of the Merger Agreement by Hybrid. On March 19, 1998, the special committee of the Hybrid Board, consisting of Messrs. Ledbetter, Halprin and Leone, met by conference call with Mr. Steimle of Hybrid, representatives of Fenwick & West and representatives of NationsBanc Montgomery. The representatives of NationsBanc Montgomery made a presentation regarding the proposed business combination, its potential benefits and risks, certain principal terms of the Merger Agreement, analysis as to the relative valuation of Hybrid and Pacific, analysis of valuations of comparable companies and other valuation analyses and other matters. NationsBanc Montgomery presented its opinion as to the fairness of the proposed business combination from a financial point of view to Hybrid and its stockholders. (See "--OPINION OF FINANCIAL ADVISOR.") After further discussion, the committee, acting pursuant to authority conferred by the Hybrid Board, authorized the execution and delivery of the Merger Agreement by Hybrid. On the same day, a special telephonic meeting of Pacific's Board of Directors was held, which included various members of Pacific's management, Mr. Braham of UBS and Pacific's legal advisors. At the meeting, management presented the exchange ratio and other principal terms of the Merger Agreement and related documents. Senior management, Mr. Braham and the legal advisors of Pacific reviewed, 59 among other things, the status of the discussions with Hybrid, the principal terms of the Merger, the benefits and potential risks of the Merger, and the potential impact of the Merger on the business and financial condition of Pacific. Mr. Braham then reviewed, among other things, certain factors supporting the proposed exchange ratio and terms. Mr. Braham orally informed the Board that, based upon UBS's review of the businesses of Hybrid and Pacific and its experience in the investment banking industry, UBS concurred with the Board's views as to the advantages of a business combination with Hybrid. After further discussion, the Pacific Board of Directors approved the Merger Agreement and related documents. On March 19, 1998, following final approval by the Hybrid Board and the Pacific Board of Directors, the Merger Agreement and related documents were executed by both companies. On the afternoon of March 19, 1998, following the close of the stock market, Hybrid issued a press release announcing the Merger. FINANCIAL ADVISORS Hybrid engaged NationsBanc Montgomery to act as its financial advisor in connection with the Merger. NationsBanc Montgomery is a nationally recognized firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with merger transactions and other types of acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Hybrid selected NationsBanc Montgomery as its financial advisor on the basis of NationsBanc Montgomery's experience and expertise in transactions similar to the Merger, its reputation in the technology and investment communities and its existing investment banking relationship with Hybrid. At the March 19, 1998 meeting of the special committee of the Hybrid Board, NationsBanc Montgomery delivered its opinion that the consideration to be paid by Hybrid in the Merger was fair to Hybrid from a financial point of view, as of the date of such opinion. NationsBanc Montgomery did not determine the form or amount of consideration to be paid by Hybrid in the Merger. The amount of such consideration was agreed to as a result of negotiations between Hybrid and Pacific. No limitations were imposed by Hybrid on NationsBanc Montgomery with respect to the investigations made or procedures followed in rendering its opinion. The full text of NationsBanc Montgomery's written opinion to the Hybrid Board, which sets forth the assumptions made, matters considered and limitations of review by NationsBanc Montgomery, is attached hereto as Appendix B and is incorporated herein by reference and should be read carefully and in its entirety in connection with this Joint Proxy Statement/Prospectus. The following summary of NationsBanc Montgomery's opinion is qualified in its entirety by reference to the full text of the opinion. NationsBanc Montgomery's opinion is addressed to the Hybrid Board only and does not constitute a recommendation to any Hybrid stockholder as to how such stockholder should vote at the Annual Meeting. In furnishing its opinion, NationsBanc Montgomery did not admit that it is an expert within the meaning of the term "expert" as used in the Securities Act and the rules and regulations promulgated thereunder, or that its opinion is a report or valuation within the meaning of Section 11 of the Securities Act, and statements to such effect are included in NationsBanc Montgomery's opinion. In connection with its opinion, NationsBanc Montgomery, among other things: (i) reviewed certain financial and other data with respect to Pacific and Hybrid, including the consolidated financial statements for recent years and interim periods to February 28 for Pacific and Hybrid and certain other relevant financial and operating data relating to Pacific and Hybrid made available to NationsBanc Montgomery from the internal records of Pacific and Hybrid; (ii) reviewed the financial terms and conditions of the undated draft Reorganization Agreement; (iii) compared Pacific and Hybrid from a financial point of view with certain other companies in the wireless telecommunication equipment industry which NationsBanc Montgomery deemed to be relevant; (iv) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies in the telecommunication equipment industry which 60 NationsBanc Montgomery deemed to be comparable, in whole or in part, to the Merger; (v) reviewed and discussed with representatives of the management of Hybrid and Pacific certain information of a business and financial nature regarding Hybrid and Pacific, furnished to NationsBanc Montgomery by them, including financial forecasts and related assumptions of Hybrid and Pacific; (vi) made inquiries regarding, and discussed, the Merger and the draft Reorganization Agreement and other matters related thereto with Hybrid's counsel; and (vii) performed such other analyses and examinations as NationsBanc Montgomery deemed appropriate. In connection with its review, NationsBanc Montgomery did not assume any obligation independently to verify the foregoing information and relied on such information being accurate and complete in all material respects. With respect to the financial forecasts for Pacific provided to NationsBanc Montgomery by Hybrid, NationsBanc Montgomery assumed for purposes of its opinion that the forecasts were reasonably prepared on bases reflecting the best available estimates and judgments of its management at the time of preparation as to the future financial performance of Hybrid and that they provided a reasonable basis upon which NationsBanc Montgomery could form its opinion. NationsBanc Montgomery also assumed that there were no material changes in Hybrid's or Pacific's assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to NationsBanc Montgomery. NationsBanc Montgomery has relied on advice of counsel and independent accountants to Pacific and Hybrid as to all legal and financial reporting matters with respect to Pacific and Hybrid, the Merger and the Reorganization Agreement. NationsBanc Montgomery assumed that the Merger would be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act, the Exchange Act and all other applicable federal and state statutes, rules and regulations. In addition, NationsBanc Montgomery did not assume responsibility for making an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (contingent or otherwise) of Hybrid or Pacific, nor was NationsBanc Montgomery furnished with any such evaluations or appraisals. Hybrid informed NationsBanc Montgomery, and NationsBanc Montgomery assumed, that the Merger would be recorded as a pooling of interests under generally accepted accounting principles. Finally, NationsBanc Montgomery's opinion was based on economic, monetary and market and other conditions as in effect on, and the information made available to it as of, March 19, 1998. Accordingly, although subsequent developments may affect NationsBanc Montgomery's opinion, NationsBanc Montgomery has not assumed any obligation to update, revise or reaffirm its opinion. The following is a summary of the material analyses and factors considered by NationsBanc Montgomery in connection with its opinion to the Hybrid Board dated March 19, 1998. SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. NationsBanc Montgomery compared the value of the consideration to be paid by the stockholders of Hybrid in the Merger to certain financial and stock market information of selected publicly-traded companies engaged in the wireless telecommunication industry that NationsBanc Montgomery believed were comparable in certain respects to Pacific (the "COMPARABLE COMPANIES"). The Comparable Companies were chosen by NationsBanc Montgomery as companies that, based on publicly available data, possess general business, operating and financial characteristics representative of companies in the industry in which Pacific operates, although NationsBanc Montgomery recognizes that each of the Comparable Companies is distinguishable from Pacific in certain respects. For each of the Comparable Companies and Pacific, NationsBanc Montgomery obtained certain publicly available financial, operating and stock market data, including last 12 months ("LTM") revenue, projected calendar year 1998 revenue, projected calendar year 1999 revenue, recently reported total debt and cash and cash equivalents, and closing stock price as of March 18, 1998. Calendar year 1998 revenue and calendar year 1999 revenue estimates for the Comparable Companies were based on publicly available analysts' estimates, and calendar year 1998 revenue and calendar year 1999 revenue estimates for Pacific were based on Hybrid management estimates. 61 NationsBanc Montgomery also compiled the "aggregate value" for each of the Comparable Companies and for Pacific implied in the Merger. Aggregate value is the total current equity value plus total debt less cash and cash equivalents. Based on this data, NationsBanc Montgomery calculated the following ratios for each of the Comparable Companies and for Pacific implied in the Merger: aggregate value to LTM revenue; aggregate value to projected calendar year 1998 revenue; and aggregate value to projected calendar year 1999 revenue. Based on these calculations, NationsBanc Montgomery identified a selected aggregate value to the LTM revenue range for the Comparable Companies of .66x to 1.82x, compared to .62x for Pacific implied in the Merger. The selected aggregate value to projected calendar year 1998 revenue range for the Comparable Companies was .49x to 1.30x, compared to .55x for Pacific implied in the Merger. The selected aggregate value to projected calendar year 1999 revenue range for the Comparable Companies was .81x to 1.09x, compared to .50x for Pacific implied in the Merger. SELECTED COMPARABLE MERGERS AND ACQUISITIONS ANALYSIS. NationsBanc Montgomery reviewed certain financial data for selected recently announced mergers and acquisitions in the telecommunication equipment industry that were deemed to be comparable to the Merger. For each such transaction NationsBanc Montgomery calculated the ratio of aggregate value to LTM revenue. All multiples were based on publicly available information at the time of announcement of the comparable acquisitions. Based on these calculations, NationsBanc Montgomery identified a selected aggregate value to LTM revenue range of 3.40x to 6.36x, compared to .62x for Pacific implied in the Merger PRO FORMA MERGER ANALYSIS. NationsBanc Montgomery analyzed the impact of the Merger on Hybrid stockholders on a pro forma fully diluted EPS basis for calendar years 1998 and 1999. NationsBanc Montgomery used internal estimates for calendar year 1998 for Hybrid and Hybrid management estimates for calendar year 1998 for Pacific and performed the analysis giving effect to approximately $2.5 million of cost reduction synergies anticipated to be achieved by the managements of Hybrid and Pacific to result from the Merger. The analysis indicated that, for Hybrid stockholders, the Merger would be accretive in calendar year 1998 with the realization of the synergies. NationsBanc Montgomery used NationsBanc Montgomery estimates for calendar year 1999 for Hybrid and Hybrid management estimates for calendar year 1999 for Pacific and performed the analysis giving effect to approximately $4.5 million of cost reduction synergies anticipated to be achieved by the managements of Hybrid and Pacific to result from the Merger. The analysis indicated that, for Hybrid stockholders, the Merger would be accretive in 1999 with the realization of the synergies. The actual results achieved by the combined company may vary from projected results and the variations may be material. DISCOUNTED CASH FLOW ANALYSIS. NationsBanc Montgomery performed a discounted cash flow analysis on certain projected financial statements that were provided to NationsBanc Montgomery by the management of Pacific. In performing this analysis, NationsBanc Montgomery calculated the projected stand-alone unlevered after-tax cash flows for Pacific for calendar years 1998 through 2002. NationsBanc Montgomery calculated Hybrid's terminal values in calendar year 2002 based on aggregate value to revenue multiples ranging from .75x to 1.75x. The unlevered after-tax cash flows and the terminal value were discounted to the present using discount rates ranging from 17.5% to 22.5%. This analysis yielded an equity value range for Pacific of $13.3 million to $41.1 million, compared to $12.5 million for Pacific implied by the Merger. CONTRIBUTION ANALYSIS. Using estimates and forecasts prepared by Hybrid for calendar year 1998 and NationsBanc Montgomery for calendar year 1999 with respect to Hybrid, and by Pacific with respect to 62 Pacific, NationsBanc Montgomery reviewed the estimated contribution of each of Hybrid and Pacific to estimated calendar 1998 and 1999 revenue, EBIT and net income for the combined company. NationsBanc Montgomery then compared such contributions to the pro forma share ownership of the combined company to be to be contributed by Hybrid and Pacific, assuming consummation of the Merger as described in the Reorganization Agreement. These comparisons do not consider the cost reduction synergies resulting from the Merger. Such analysis indicated that the Hybrid's stockholders would own approximately 85.6% of the combined company. Hybrid would contribute approximately 53.9%, 94.5% and 80.2% of the combined company's estimated 1998 revenue, operating income and net income, respectively, and 60.4%, 69.5% and 101.5% of the combined company's estimated 1999 revenue, operating income and net income, respectively. The summary set forth above does not purport to be a complete description of the presentation by NationsBanc Montgomery to the Hybrid Board or the analyses performed by NationsBanc Montgomery. The preparation of a fairness opinion is not necessarily susceptible to partial analysis or summary description. NationsBanc Montgomery believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses set forth in its presentation to the Hybrid Board. In addition, NationsBanc Montgomery may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions so that the ranges of valuations resulting from any particular analysis described above should not be taken to be NationsBanc Montgomery's view of the actual value of Pacific. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis. In arriving at its opinion, NationsBanc Montgomery did not ascribe a specific range of values to Pacific, but rather made its determination as to the fairness, from a financial point of view, of the consideration to be paid by Hybrid in the Merger on the basis of the financial and comparative analyses described above. In performing its analyses, NationsBanc Montgomery made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Pacific. The analyses performed by NationsBanc Montgomery are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as part of NationsBanc Montgomery's analysis of the fairness of the transaction contemplated by the Reorganization Agreement to Hybrid's stockholders and were provided to the Hybrid Board in connection with the delivery of NationsBanc Montgomery's opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. NationsBanc Montgomery used in its analyses various projections of future performance prepared by the management of Hybrid. The projections are based on numerous variables and assumptions which are inherently unpredictable and must be considered not certain of occurrence as projected. Accordingly, actual results could vary significantly from those set forth in such projections. Pursuant to the terms of NationsBanc Montgomery's engagement, Hybrid has agreed to pay NationsBanc Montgomery a fee in cash equal to 2.5% of the consideration involved in the sale (subject to a minimum fee of $600,000), $300,000 of which became payable upon delivery of its opinion and the remainder of which is contingent upon the closing of the Merger. Accordingly, a significant portion of NationsBanc Montgomery's fee is contingent upon the consummation of the Merger. In addition to the foregoing fees, Hybrid has agreed to reimburse NationsBanc Montgomery for all reasonable out-of-pocket costs and expenses (including counsel fees). Pursuant to a separate letter agreement, Hybrid had agreed to indemnify NationsBanc Montgomery, its affiliates and their respective partners, directors, officers, agents, consultants, employees and controlling persons against certain liabilities, including liabilities under federal securities laws. 63 Pacific engaged UBS to act as its financial advisor in connection with the Merger. At the March 19, 1998 telephonic meeting of Pacific's Board of Directors, UBS orally informed the Board, that, based upon its review of the businesses of Hybrid and Pacific and its experience in the investment banking industry, it concurred with the Board's views as to the advantages of a business combination with Hybrid. UBS did not render a formal "fairness opinion" on the Merger. UBS acted as one of the two managing underwriters in Hybrid's initial public offering and currently acts as a market maker for Hybrid's stock. Pursuant to the terms of UBS's engagement, Pacific has agreed to pay UBS a fee equal to 1.5% of the consideration involved in the sale, payable in cash upon the consummation of the Merger. In addition to the foregoing fee, Pacific has agreed to reimburse UBS for all travel and other out-of-pocket expenses (including counsel fees), up to a maximum of $30,000. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material federal income tax considerations of the Merger that are generally applicable to holders of Pacific Common Stock and Pacific Preferred Stock. This discussion does not deal with all income tax considerations that may be relevant to particular Pacific shareholders in light of their particular circumstances, such as considerations that might be applicable to shareholders who are dealers in securities, foreign persons, shareholders who acquired their shares in connection with previous mergers involving Pacific or an affiliate of Pacific or shareholders who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of transactions effectuated prior to or after the Merger (whether or not such transactions are in connection with the Merger), including, without limitation, transactions in which shares of Pacific Common Stock or Pacific Preferred Stock were or are acquired or in which shares of Hybrid Common Stock were or are disposed of. Furthermore, no foreign, state or local tax considerations are addressed. ACCORDINGLY, PACIFIC SHAREHOLDERS AND HYBRID STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER. The Merger is intended to constitute a "reorganization" within the meaning of Section 368(a) of the Code, with each of Pacific, Merger Sub and Hybrid intended to qualify as a "party to a reorganization" under Section 368(b) of the Internal Revenue Code of 1986, as amended (the "CODE"), in which case the following federal income tax consequences will result (subject to the limitations and qualifications referred to herein): (a) No gain or loss will be recognized by holders of Pacific Common Stock or Pacific Preferred Stock solely upon their receipt of Hybrid Common Stock in the Merger (except to the extent of cash received in lieu of a fractional share thereof) in exchange therefor; (b) The aggregate tax basis of the Hybrid Common Stock received in the Merger by a holder of Pacific Capital Stock will be the same as the aggregate tax basis of the Pacific Capital Stock surrendered in exchange therefor; (c) The holding period for the Hybrid Common Stock received in the Merger by a holder of Pacific Capital Stock will include the period during which the shareholder held the Pacific Capital Stock surrendered in exchange therefor, provided that the Pacific Capital Stock is held as a capital asset at the time of the Merger; (d) Cash payments received by holders of Pacific Capital Stock in lieu of a fractional share will be treated as if such fractional share of Hybrid Common Stock has been issued in the Merger and then redeemed by Hybrid. A holder of Pacific Capital Stock receiving such cash generally will recognize gain or loss, upon such payment, measured by the difference, if any, between the amount of cash received and the basis in such fractional share; and 64 (e) None of Hybrid, Merger Sub or Pacific will recognize material amounts of gain or loss solely as a result of the Merger. The parties are not requesting a ruling from the Internal Revenue Service ("IRS") in connection with the Merger. Hybrid and Pacific have each received an opinion from their respective legal counsel, Fenwick & West LLP and Wilson Sonsini Goodrich & Rosati, Professional Corporation, respectively, that, for federal income tax purposes, the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code. These opinions, which are collectively referred to herein as the "Tax Opinions", neither bind the IRS nor preclude the IRS from adopting a contrary position. In addition, the Tax Opinions are subject to certain assumptions and qualifications and are based on the truth and accuracy of certain representations made by Hybrid, Merger Sub and Pacific, including representations made in certificates delivered to counsel by the respective managements of Hybrid, Merger Sub and Pacific. A successful IRS challenge to the "reorganization" status of the Merger would result in a Pacific shareholder recognizing gain or loss with respect to each share of Pacific Capital Stock surrendered equal to the difference between the shareholder's basis in such share(s) and the fair market value, as of the Effective Time of the Merger, of the Hybrid Common Stock received in exchange therefor. In such event, a shareholder's aggregate basis in the Hybrid Common Stock so received would equal its fair market value and such shareholder's holding period would begin the day after the Merger. ACCOUNTING TREATMENT The Merger is intended to be treated as a pooling of interests for financial reporting purposes in accordance with generally accepted accounting principles. As a condition to Hybrid's and Pacific's obligations to consummate the Merger, Pacific and Hybrid are to receive the Pooling Opinions from Coopers & Lybrand L.L.P., independent accountants for Hybrid, and Deloitte & Touche LLP, independent accountants for Pacific, concurring in Hybrid management's conclusion as to the appropriateness of pooling-of-interests accounting treatment for the Merger under APB No. 16, if consummated in accordance with the terms of the Reorganization Agreement. GOVERNMENT AND REGULATORY APPROVALS The Merger is not subject to notification and review under the HSR Act or the rules promulgated thereunder by the FTC. Neither Hybrid nor Pacific is aware of any other material governmental or regulatory approvals required for consummation of the Merger, other than compliance with the federal securities laws and applicable securities and "blue sky" laws of the various states. APPRAISAL AND DISSENTERS' RIGHTS RIGHTS OF PACIFIC SHAREHOLDERS. The following is a brief summary of the rights of shareholders of Pacific who dissent from the Merger. It is qualified in its entirety by reference to the applicable statutory provisions of the California Code attached hereto as Appendix C. If holders of Pacific Capital Stock exercise dissenters' rights in connection with the Merger under Sections 1300-1312 of the California Code ("SECTION 1300"), any shares of Pacific Capital Stock as to which such dissenters' rights are exercised (the "DISSENTING SHARES") will not be converted into the right to receive shares of Hybrid Common Stock by virtue of the Merger but instead will be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the laws of the State of California. The following summary of the provisions of Section 1300 is not intended to be a complete statement of such provisions and is qualified in its entirety by reference to the full text of Section 1300, a copy of which is attached hereto as Annex C and is incorporated herein by reference. It is a condition to Hybrid's obligation to close the Merger that no more than 5% of the shares of Pacific Capital Stock are eligible to be Dissenting Shares. 65 If the Merger is approved by the required vote of Pacific's shareholders, each holder of shares of Pacific Capital Stock who does not vote in favor of the Merger and who follows the procedures set forth in Section 1300 will be entitled to have shares of Pacific Capital Stock purchased by Pacific for cash at their fair market value. The fair market value of shares of Pacific Capital Stock will be determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation in consequence of the proposed Merger and therefore valuing the shares of Pacific Capital Stock as if the Merger had not occurred. Within ten days after approval of the Merger by Pacific's shareholders, Pacific must mail a notice of such approval (the "APPROVAL NOTICE") to all shareholders who have not voted in favor of the Merger, together with a statement of the price determined by Pacific to represent the fair market value of the applicable Dissenting Shares, a brief description of the procedures to be followed in order for the shareholder to pursue dissenters' rights, and a copy of Sections 1300-1304 of the California Code. The statement of price by Pacific constitutes an offer by Pacific to purchase all Dissenting Shares at the stated amount. A shareholder of Pacific electing to exercise dissenters' rights must, within 30 days after the date in which the Approval Notice is mailed to such shareholder, mail or deliver the written demand to Pacific stating that the shareholder is demanding purchase of the shareholder's shares of Pacific Capital Stock, stating the number of shares which Pacific must purchase, what the shareholder claims to be the fair market value of such shares and enclosing the share certificates for endorsement by Pacific. If Pacific and the shareholder agree that the shares are Dissenting Shares and agree upon the price of the shares, Pacific must pay the shareholder the agreed upon price plus interest thereon at the legal rate from the date of the agreement on Dissenting Shares within thirty days from the later of (i) the date of the agreement on Dissenting Shares or (ii) the date all contractual conditions to the Merger are satisfied. If Pacific denies that the shares are Dissenting Shares, or if Pacific and the shareholder fail to agree upon the fair market value of shares of Pacific Capital Stock, then within six months after the date the Approval Notice was mailed to shareholders, any shareholder who has made a valid written purchase demand and who has not voted in favor of approval and adoption of the Merger may file a complaint in California superior court requesting a determination as to whether the shares are Dissenting Shares or as to the fair market value of such holder's shares of Pacific Capital Stock, or both. RIGHTS OF HYBRID STOCKHOLDERS. Under the Delaware General Corporation Law, Hybrid stockholders are not entitled to dissenters' rights or appraisal rights with respect to the proposed Merger. INTERESTS OF CERTAIN PERSONS IN THE MERGER Certain management personnel of Pacific have entered into or are expected to enter into employment agreements or arrangements and noncompetition agreements with Hybrid that will become effective upon consummation of the Merger, as described below. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER-- EMPLOYMENT/NONCOMPETITION ARRANGEMENTS." Under the employment arrangements, upon the consummation of the Merger, Richard B. Gold (the Chief Executive Officer, President and a director of Pacific) will become the President and Chief Operating Officer of Hybrid, and Michael D. Morganstern (the Vice President, Engineering of Pacific) and Allen F. Podell (the Chief Technical Officer of Pacific) will become employees of Hybrid. Pursuant to the terms of the Reorganization Agreement, it is anticipated that, following the Merger, Mr. Gold and Matthew D. Miller (the Chairman of the Board of Pacific), will be appointed directors of Hybrid. Pursuant to the Reorganization Agreement, Hybrid has agreed to indemnify Messrs. Gold and Miller in their capacity as Hybrid directors. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--INDEMNIFICATION AGREEMENTS." In addition, Mr. Miller has been a consultant to Hybrid since October 1994 and has received options to purchase 18,519 shares of Hybrid Common Stock. A consulting firm of which Mr. Miller is the President acts as a consultant to Pacific as well. See "SELECTED INFORMATION WITH RESPECT TO PACIFIC--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." As a result of the foregoing, the 66 officers and directors of Pacific referred to above may have personal interests in the Merger which are not identical to the interests of other Pacific shareholders. In addition, certain 5% or greater shareholders of Pacific, in May 1996 and September 1997, loaned Pacific an aggregate of $1.0 million and $750,000, respectively, in connection with bridge loan financings and such shareholders received promissory notes and warrants to purchase Pacific Common Stock. In connection with the Merger, the promissory notes are expected to be repaid in full, together with accrued interest. See "SELECTED INFORMATION WITH RESPECT TO PACIFIC--CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS." James R. Flach, a director of Hybrid, is an executive partner of Accel Partners which is an affiliate of both Hybrid and Pacific. As of April 30, 1998, entities associated with Accel Partners owned 879,562 shares of Hybrid Common Stock, or 8.3% of all outstanding shares of Hybrid Common Stock. As of April 30, 1998, entities associated with Accel Partners owned 1,818,182 shares of Pacific Series B Preferred Stock, or 63.5% of all outstanding shares of Pacific Series B Preferred Stock, as well as 425,532 shares of Pacific Series C Preferred Stock, or 19.3% of all outstanding shares of Pacific Series C Stock (the 2,243,714 shares of Series B Preferred Stock and Series C Preferred Stock held by these entities represent 18.2% of all outstanding shares of Pacific Preferred Stock). As of April 30, 1998, these entities beneficially owned 2,506,102 shares of Pacific Capital Stock (including shares issuable upon the exercise of warrants), representing 13.7% of Pacific Capital Stock. Mr. Flach holds no voting or dispositive power with respect to the Hybrid or Pacific shares owned by any of these entities. In addition, the entities associated with Accel Partners hold unsecured demand promissory notes of Pacific in the aggregate amount of $500,000 and warrants to purchase up to 300,000 shares of Pacific Common Stock. In connection with the Merger, these promissory notes are expected to be repaid in full, together with accrued interest, and these entities would receive or have the right to receive (based on the Assumed Exchange Ratio) approximately 226,345 shares of Hybrid Common Stock (including shares subject to issuance upon the exercise of the warrants assumed by Hybrid in the Merger), or approximately 11.7% of all shares of Hybrid Common Stock that would be issued or issuable by Hybrid in the Merger. See "SECURITY OWNERSHIP OF THE COMBINED COMPANY"; "SECURITY OWNERSHIP OF HYBRID"; AND "SECURITY OWNERSHIP OF PACIFIC." In view of the interest of these entities associated with Accel Partners, Mr. Flach abstained in the vote of Hybrid's Board of Directors to approve the Merger and recommend it to Hybrid's stockholders for approval. William H. Fry, Hybrid's Vice President and Chief Technical Officer, holds options to purchase 113,010 shares of Hybrid Common Stock, 55,262 of which were vested as of April 30, 1998. In January 1998, Hybrid's Board of Directors approved the 12-month accelerated vesting for options held by Mr. Fry if the Company hires certain senior management and his employment is terminated, voluntarily or involuntarily, within 12 months after such hiring. Mr. Gold is expected to be appointed the Chief Operating Officer of Hybrid following the consummation of the Merger, in which event Mr. Fry would have the right to receive accelerated vesting of options for up to 26,991 shares of Hybrid Common Stock, should he leave the Company within 12 months thereafter. This may give Mr. Fry a personal interest in the Merger which is not identical to the interest of other Hybrid stockholders. TERMS OF THE MERGER GENERAL The discussion in this Joint Proxy Statement/Prospectus of the Merger and the description of the principal terms of the Reorganization Agreement and the Agreement of Merger are subject to and qualified in their entirety by reference to the Reorganization Agreement and the Agreement of Merger, copies of which are attached to this Joint Proxy Statement/Prospectus as Appendices A-1 and A-2, respectively, and incorporated herein by reference. 67 EFFECTIVE TIME; CLOSING DATE The Merger will become effective upon the filing of the Agreement of Merger with the Secretary of State of the State of California or at such later time as may be agreed in writing by Hybrid, Pacific and Merger Sub and specified in the Agreement of Merger (the "EFFECTIVE TIME"). The closing date ("CLOSING DATE") will occur at a time and date to be specified by Hybrid, Pacific and Merger Sub after the satisfaction or waiver of the conditions to the Merger, or at such other time as Hybrid, Pacific and Merger Sub agree in writing. Assuming all conditions to the Merger are satisfied or waived prior thereto, it is currently anticipated that the Closing Date and Effective Time will be on or about May 28, 1998. CONDUCT OF COMBINED COMPANY FOLLOWING THE MERGER Once the Merger is consummated, Merger Sub will cease to exist as a corporation, and all of the business, assets, liabilities and obligations of Merger Sub will be merged with and into Pacific with Pacific remaining as the surviving corporation (the "SURVIVING CORPORATION"). Following the Merger, the headquarters of the combined company will be in Cupertino, California. Pursuant to the Reorganization Agreement, at the Effective Time, (i) the Articles of Incorporation of Pacific will be amended in substantially the form attached to the Agreement of Merger as Exhibit A thereto, (ii) the Bylaws of Pacific, as in effect immediately prior to the Effective Time, will be the Bylaws of the Surviving Corporation, (iii) the initial directors of Merger Sub immediately prior to the Effective Time will be the directors of the Surviving Corporation, and (iv) the initial officers of Merger Sub immediately prior to the Effective Time will be the officers of the Surviving Corporation. See "MANAGEMENT OF THE COMBINED COMPANY." MERGER CONSIDERATION CONVERSION OF CAPITAL STOCK. At the Effective Time, each share of Pacific Common Stock and Pacific Preferred Stock issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into a fraction of a share of Hybrid Common Stock equal to a fraction, the numerator of which is obtained by dividing $12,500,000 by the Closing Price and the denominator of which is the total number of shares of Pacific Common Stock and Pacific Preferred Stock outstanding plus the total number of shares of Pacific Common Stock issuable upon exercise of outstanding Pacific Options and Pacific Warrants. The Closing Price will be equal to the average of the closing sale prices of one share of Hybrid Common Stock reported in THE WALL STREET JOURNAL, on the basis of information provided by the Nasdaq Stock Market for each of the ten trading days ending two (2) trading days preceding the Closing Date; provided, however, that in no event shall the Closing Price be greater than $8.40 or less than $5.17. As of March 19, 1998, based on Hybrid's ten day average trading price of $6.46 and the number of shares of Pacific Common Stock, shares of Pacific Preferred Stock and Pacific Options and Pacific Warrants outstanding on such date, the Exchange Ratio would be approximately 0.0895193 of a share of Hybrid Common Stock for each outstanding share of Pacific Common Stock and Pacific Preferred Stock. Shares of Hybrid Common Stock received by holders of Pacific Capital Stock who are not also affiliates of Pacific will be freely salable following the Merger. ASSUMPTION OF OPTIONS AND WARRANTS. At the Effective Time, each outstanding Pacific Option and Pacific Warrant to purchase shares of Pacific Common Stock, whether or not exercisable, will be assumed by Hybrid and will continue to have, and be subject to, the same terms and conditions set forth in the applicable Pacific Option or Pacific Warrant, as applicable, immediately prior to the Effective Time and the Stock Option Agreement or Stock Warrant Agreement by which it is evidenced, except that (i) each Pacific Option or Pacific Warrant will be exercisable or become exercisable in accordance with its terms for that number of whole shares (and no fractional shares) of Hybrid Common Stock equal to the product of the number of shares of Pacific Common Stock that were issuable upon exercise of such Pacific Option or Pacific Warrant immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down 68 to the nearest whole number of shares of Hybrid Common Stock, and (ii) the per share exercise price for the shares of Hybrid Common Stock issuable upon exercise of such assumed Pacific Option or Pacific Warrant will be equal to the quotient determined by dividing the exercise price per share of Pacific Common Stock at which such Pacific Option or Pacific Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. Hybrid has agreed that as soon as practicable following the closing of the Merger that it will file a registration statement of Form S-8 registering the shares of Hybrid Common Stock issuable upon the exercise of the assumed Pacific Options. Upon such registration, shares of Hybrid Common Stock issued upon the exercise of the assumed Pacific Options will be freely salable as well. The shares of Hybrid Common Stock that will be issuable upon the exercise of assumed Pacific Warrants are not being registered in connection with the Merger. Shares of Hybrid Common Stock received upon the exercise of the assumed Pacific Warrants must either be registered for resale or otherwise qualify for an exemption from registration under applicable federal and state securities laws as, for example, by the holder of such shares complying with the provisions of Rule 144 under the Securities Act. NO FRACTIONAL SHARES. No fractional shares will be issued by virtue of the Merger, but in lieu thereof each holder of shares of Pacific Capital Stock who would otherwise be entitled to a fraction of a share of Hybrid Common Stock (after aggregating all fractional shares to be received by such holder) will receive from Hybrid an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the average closing price of one share of Hybrid Common Stock for the ten most recent days that Hybrid Common Stock has traded ending two trading days immediately prior to the Closing Date, as reported on the Nasdaq National Market. CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES Promptly after the Effective Time, Hybrid will cause the Exchange Agent to mail to each holder of record (as of the Effective Time) of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Pacific Capital Stock a letter of transmittal in customary form and instructions for use in effecting the surrender of such certificates for cancellation and in exchange for certificates representing shares of Hybrid Common Stock, and cash in lieu of any fractional shares. No dividends or other distributions declared with respect to Hybrid Common Stock with a record date after the Effective Time will be paid to the holders of any unsurrendered certificates until the holders of record of such certificates surrender such certificates, and no cash payment in lieu of fractional shares will be paid to such holder until the holder of record of such certificates shall surrender such certificates. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF PACIFIC CAPITAL STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. In the event a certificate representing Pacific Capital Stock has been lost, stolen or destroyed, the owner of such certificate will be required to provide an affidavit of such fact, and Hybrid may, in its discretion and as a condition precedent to the issuance of such certificates representing shares of Hybrid Common Stock, require the owner of such lost, stolen or destroyed certificate to deliver a bond in such sum as Hybrid may reasonably direct as indemnity against any claim that may be made against Hybrid, the surviving corporation in the Merger or the Exchange Agent with respect to the certificate alleged to have been lost, stolen or destroyed. REPRESENTATIONS AND WARRANTIES The Reorganization Agreement contains certain representations and warranties, including, without limitation, representations and warranties by Pacific as to: (i) due organization and good standing; (ii) corporate power, authorization and validity; (iii) capital structure and capitalization; (iv) subsidiaries; (v) no violation of existing charter documents and agreements; (vi) litigation; (vii) financial statements; 69 (viii) taxes; (ix) title to properties; (x) absence of certain changes; (xi) agreements and commitments; (xii) intellectual property; (xiii) compliance with laws; (xiv) certain transactions and agreements; (xv) employees; (xvi) corporate documents; (xvii) brokers; (xviii) disclosure (xix) books and records; (xx) insurance; (xxi) environmental matters; (xxii) government contracts; (xxiii) information supplied; (xxiv) board approval; and (xxv) pooling of interests accounting. The Reorganization Agreement contains further representations and warranties of Hybrid and Merger Sub as to: (i) organization and good standing; (ii) power, authorization and validity; (iii) no violation of existing agreements or laws; (iv) SEC documents; (v) authorized/outstanding capital stock; (vi) no material change; (vii) pooling of interests accounting; (viii) litigation; and (ix) board approval. The representations and warranties of Hybrid and Merger Sub contained in the Reorganization Agreement will terminate at the Effective Time. The representations and warranties of Pacific regarding its financial statements will terminate on the date of issuance of Hybrid's press release regarding its audited financial results for the fiscal year ending December 31, 1998. All other representations and warranties will terminate twelve months after the Closing. NO OTHER NEGOTIATIONS Pursuant to the Reorganization Agreement, Pacific has agreed that, from the date of the Reorganization Agreement until the termination of the Reorganization Agreement (provided such termination is not due to a breach of the Reorganization Agreement by Pacific) or the consummation of the Merger, Pacific will not, and will not authorize any officer, director, employee or affiliate of Pacific, or any other person, on its behalf, directly or indirectly, to (i) solicit, facilitate, discuss or encourage any offer, inquiry or proposal received from any party other than Hybrid, concerning the possible disposition of all or any substantial portion of Pacific's business, assets or capital stock by merger, sale or any other means or to otherwise solicit, facilitate, discuss or encourage any such disposition (other than the Merger), or (ii) provide any confidential information to or negotiate with any third party other than Hybrid in connection with any offer, inquiry or proposal concerning any such disposition. Pacific will immediately notify Hybrid of any such offer, inquiry or proposal. ADDITIONAL COVENANTS COVENANTS REGARDING THE CONDUCT OF BUSINESS OF PACIFIC. The Reorganization Agreement requires (subject to certain exceptions described therein) that from the date of execution of the Reorganization Agreement until the earlier of the termination of the Reorganization Agreement or the Effective Time: (i) Pacific will carry on and use reasonable efforts to preserve its business in substantially the same manner as it has prior to the date of the Reorganization Agreement, and use its reasonable efforts to preserve its relationships with its material customers, suppliers, employees and others with which it has business dealings; and (ii) Pacific will not do any of the following without the prior written consent of Hybrid, which is not to be unreasonably withheld: (a) borrow more than $50,000; (b) make commitments for more than $50,000 that is not in the ordinary course of business; (c) encumber its assets for more than $50,000 except in the ordinary course of its business; (d) dispose of more than $50,000 of its assets except in the ordinary course of business; (e) enter into any material lease or contract for the purchase or sale of property, except in the ordinary course of business; (f) fail to maintain its equipment and assets in good working condition; (g) pay any bonus, royalty, increased salary (except for annual increases in the ordinary course of business or as disclosed to Hybrid); (h) change accounting methods; (i) declare or pay any cash or stock dividend; (j) amend or terminate any material contract, except those amended or terminated in the ordinary course of business; (k) lend any material amount, other than advances for travel and expenses which are incurred in the ordinary course of business; (l) guarantee any material obligations except for the endorsement of checks and other negotiable instruments in the 70 ordinary course of business; (m) waive or release any material right or claim except in the ordinary course of business; (n) issue or sell any shares of its capital stock or issue or create any warrants, options, or accelerate the vesting of any outstanding option or other security, except for (i) the conversion of Pacific Preferred Stock or the exercise of Pacific Options or Pacific Warrants or (ii) the issuance of stock options under Pacific's stock option plans as provided in the Reorganization Agreement; (o) split its capital stock or enter into any recapitalization; (p) except for the Merger, merge, consolidate or reorganize with, or acquire any entity; (q) amend its Articles of Incorporation or Bylaws; (r) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have been delivered to Hybrid for its review prior to filing; (s) license any of Pacific's technology or intellectual property, except in the ordinary course of business; (t) change any insurance coverage; (u) terminate the employment of any key employee; or (v) agree to do any of the above. NOTIFICATION OF CERTAIN MATTERS. Each party to the Reorganization Agreement has agreed to give prompt notice to the other parties of the occurrence (or failure to occur) of any event, which occurrence (or failure to occur) would be reasonably likely to cause (i) any representation or warranty contained in the Reorganization Agreement to be untrue or inaccurate in any material respect at any time from the date of the Reorganization Agreement to the Effective Time such that the condition to closing of the Merger regarding the accuracy of representations and warranties would not be satisfied as a result thereof or (ii) any Material Adverse Effect on Pacific or Hybrid. MATERIAL ADVERSE EFFECT. For purposes of the Reorganization Agreement, when used in connection with Pacific, the term "Material Adverse Effect" means any change, event or effect that is or reasonably likely to be materially adverse to the business (including, but not limited to the development, sales and marketing of Pacific's downconverter and CypherPoint line of products), assets (including intangible assets), liabilities, financial condition or results of operations of Pacific; provided, however, that a Material Adverse Effect will not include any adverse effect following the date of this Agreement on the business, financial condition or results of operations of Pacific that is directly attributable to adverse reaction to the Merger or the announcement of the Merger or that is consistent with an economic downturn in the industry in which Pacific operates or a national economic downturn. When used in connection with Hybrid, the term "Material Adverse Effect" means any change, event or effect that is or is reasonably likely to be materially adverse to the business, assets (including intangible assets), liabilities, financial condition or results of operations of Hybrid except that a decline in Hybrid's stock price and its failure to meet its own or analysts' financial expectations for the quarter ended March 31, 1998 as described in Hybrid's press release dated March 12, 1998 will not be deemed to be a Material Adverse Effect. REASONABLE EFFORTS TO EFFECTUATE THE MERGER. The parties to the Reorganization Agreement have agreed to use their respective reasonable efforts to effectuate the Merger and other transactions contemplated by the Reorganization Agreement, to fulfill and cause to be fulfilled the conditions to closing of the Merger and to effect the closing of the Merger as soon as practicable. CERTAIN OTHER COVENANTS OF THE PARTIES. The Reorganization Agreement also contains certain additional covenants of the parties including covenants relating to: (i) the preparation of this Joint Proxy Statement/Prospectus and the Registration Statement; (ii) Pacific's and Hybrid's obligations with respect to the Pacific Special Meeting and the submission of the Merger to the vote of Hybrid's stockholders; (iii) confidentiality of, and access to, the parties' business information, (iv) public statements with respect to the Merger; (v) compliance with legal requirements; (vi) obtaining required consents of third parties; (vii) Pacific stock options and employee benefit plans; (viii) listing of the Hybrid Common Stock on the Nasdaq National Market; (ix) affiliate and voting agreements; (x) regulatory filings; (xi) treatment of the Merger as a tax-free reorganization; and (xii) accounting for the Merger as a pooling of interests. 71 INDEMNIFICATION AGREEMENTS Hybrid has agreed that, from and after the Effective Time, it will enter into indemnification agreements with Richard B. Gold in his capacity as an officer and director and Matthew D. Miller in his capacity as a director of Hybrid. CONDITIONS TO THE MERGER CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The respective obligations of each party to the Reorganization Agreement to effect the Merger are subject to the satisfaction at or prior to the closing of the following conditions: (i) there will be no order or decree of any governmental agency or threat thereof which would prohibit or render illegal the Merger; (ii) there will have been obtained any permits or authorizations required to consummate the Merger by any regulatory authority; (iii) each party will have received all written consents necessary to consummate the Merger; (iv) the Form S-4 will have become effective under the Securities Act and will not be the subject of any stop order or proceedings threatened by the Commission; (v) the principal terms of the Reorganization Agreement will have been approved and adopted, and the Merger will have been duly approved, by the requisite vote under applicable law, by the stockholders of Hybrid and the shareholders of Pacific; and (vi) the Employment and Noncompetition Arrangements will have been executed and delivered by Hybrid and the other parties thereto. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PACIFIC TO EFFECT THE MERGER. The obligation of Pacific to consummate and effect the Merger will be subject to the satisfaction at or prior to the closing of each of the following conditions, any of which may be waived, in writing, exclusively by Pacific: (i) the representations and warranties of Hybrid contained in the Reorganization Agreement will be true and correct in all material respects (a) as of the date of the Reorganization Agreement, except where the failure to be so true and correct would not have a Material Adverse Effect on Hybrid, and (b) as of the closing except for changes contemplated by the Reorganization Agreement and except for those representations and warranties which address matters only as of a particular date (which will remain true and correct in all material respects as of the closing) with the same force and effect as if made as of the closing except in such cases where the failure to be so true and correct would not have a Material Adverse Effect on Hybrid; (ii) Hybrid will have performed or complied in all material respects with all agreements and covenants required by the Reorganization Agreement to be performed or complied with by them on or prior to the closing; (iii) Pacific will have received a certificate with respect to the two foregoing conditions signed on behalf of Hybrid by the Chief Executive Officer or the Chief Financial Officer of Hybrid; (iv) no Material Adverse Effect with respect to Hybrid will have occurred since the date of the Reorganization Agreement; (v) Hybrid will have executed and delivered to Pacific the Investor Rights Agreement; (vi) Richard B. Gold and Matthew D. Miller will have been appointed to the Hybrid Board of Directors and Hybrid will have executed its standard form of indemnity agreement with Messrs. Gold and Miller as Hybrid directors; (vii) Pacific will have received a legal opinion from Fenwick & West LLP; and (viii) the shares of Hybrid Common Stock issuable to shareholders of Pacific in the Merger will have been authorized for listing on the Nasdaq National Market upon official notice of issuance. ADDITIONAL CONDITIONS TO OBLIGATIONS OF HYBRID TO EFFECT THE MERGER. The obligations of Hybrid to consummate and effect the Merger will be subject to the satisfaction at or prior to the closing of each of the following conditions, any of which may be waived, in writing, exclusively by Hybrid: (i) the representations and warranties of Pacific contained in the Reorganization Agreement will be true and correct in all material respects (a) as of the date of the Reorganization Agreement, except where the failure to be so true and correct would not have a Material Adverse Effect on Pacific, and (b) as of the closing except for changes contemplated by the Reorganization Agreement and except for those representations and warranties which address matters only as of a particular date (which will remain true and correct in all material respects as of the closing) with the same force and effect as if made as of the closing, except in such cases where the failure to be so true and correct would not have a Material Adverse Effect on Pacific; 72 (ii) Pacific will have performed or complied in all material respects with all agreements and covenants required by the Reorganization Agreement to be performed or complied with by it on or prior to the closing; (iii) Hybrid will have received a certificate with respect to the two foregoing conditions signed on behalf of Pacific by the President and the Chief Financial Officer of Pacific; (iv) no Material Adverse Effect with respect to Pacific will have occurred since the date of the Reorganization Agreement; (v) Hybrid will have received a legal opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation; (vi) Hybrid will have received the Escrow Agreement executed by the representative of the Pacific shareholders; (vii) Hybrid will have received from Coopers & Lybrand L.L.P., independent accountants for Hybrid, and Deloitte & Touche LLP, independent accountants for Pacific, the Pooling Opinions dated as of the closing concurring with Hybrid's management's conclusions that as of that date, no conditions exist that would preclude Hybrid from accounting for the Merger as a pooling of interests; (viii) no litigation or proceeding will be pending which will have the probable effect of enjoining or preventing the consummation of any of the transactions provided for in the Reorganization Agreement or which could reasonably be expected to have a Material Adverse Effect not disclosed to Hybrid in such agreement; (ix) the Pacific Affiliates will have executed and delivered the Pacific Affiliate Agreements (see "--AFFILIATE AGREEMENTS--PACIFIC AFFILIATE AGREEMENTS" below); and (x) no more than 5% of the outstanding shares of Pacific Capital Stock will be eligible to be Dissenting Shares. TERMINATION; TERMINATION FEE The Reorganization Agreement may be terminated at any time prior to the Effective Time of the Merger, whether before or after approval of the Merger by the shareholders of Pacific, by mutual written consent of Hybrid and Pacific by either Hybrid or Pacific (i) as a result of a breach by the other party of a representation, warranty or covenant set forth in the Reorganization Agreement which breach has or can reasonably be expected to result in a Material Adverse Effect on such party and which the other party fails to cure within thirty days after written notice thereof (except that no cure period will be provided for a breach which by its nature cannot be cured), (ii) if all the conditions for closing the Merger are not satisfied or waived on or before the Final Date (as defined below) other than as a result of the breach of the Reorganization Agreement by the terminating party or the breach of certain affiliates agreements by such party's affiliates, (iii) if the required approval of the stockholders or shareholders of Hybrid or Pacific, as applicable, are not obtained by reason of the failure to obtain the required vote, or (iv) if a permanent injunction or other order by a federal or state court which would make illegal or otherwise restrain or prohibit consummation of the Merger is issued and has become final and nonappealable. The term "FINAL DATE" is defined in the Reorganization Agreement as July 31, 1998 except that if a temporary, preliminary or permanent injunction or other order by any federal or state court which would prohibit or otherwise restrain consummation of the Merger is issued and in effect on July 31, 1998, and such injunction has not become final and nonappealable, either Hybrid or Pacific may, upon written notice to the other party on or before July 31, 1998, extend the time for consummation of the Merger up to and including the earlier of the date such injunction becomes final and nonappealable or 45 days after July 31, 1998. If the Reorganization Agreement is terminated by Hybrid because more than 5% of Pacific Capital Stock are eligible for the exercise of dissenters' rights under the California Code, or if Coopers & Lybrand L.L.P. does not issue a Pooling Opinion because of actions taken by Pacific after the date of the Reorganization Agreement, Pacific would be required to pay Hybrid a termination payment in the amount of $375,000. If the Reorganization Agreement is terminated by Pacific because Coopers & Lybrand L.L.P. does not issue a Pooling Opinion as a result of actions taken by Hybrid after the date of the Reorganization Agreement, Hybrid would be required to pay Pacific a termination payment in the amount of $375,000. 73 EXPENSES Pursuant to the Reorganization Agreement, all fees and expenses incurred in connection with the Reorganization Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses if the Merger is not consummated. If the Merger is consummated, Hybrid will bear all costs and expenses in connection with the Reorganization Agreement and the transactions provided for therein. Expenses incurred by Pacific for accounting, attorneys and other professionals' fees and expenses (other than those of UBS) in excess of $175,000, if paid by Hybrid, will constitute a claim under the Escrow. AMENDMENT The Reorganization Agreement may be amended by Hybrid and Pacific at any time before or after approval by the Hybrid stockholders or the Pacific shareholders, except that, after such approval, no amendment may be made which by law requires the further approval of the Hybrid stockholders or the Pacific shareholders unless such approval is obtained. ESCROW AGREEMENT In connection with the Merger, Hybrid, State Street Bank, as escrow agent, and Alan F. Dishlip, as representative of the Pacific shareholders, will enter into the Escrow Agreement. Pursuant to the Escrow Agreement, upon consummation of the Merger, Hybrid will deposit into escrow stock certificates representing 10% of the shares of Hybrid Common Stock issuable to each of the Pacific shareholders pursuant to the Merger. The Escrow Shares will be held in escrow as collateral for the indemnification obligations of the Pacific shareholders under the Reorganization Agreement. Pursuant to such indemnification obligations, the Pacific shareholders will indemnify and hold harmless Hybrid and its officers, directors, agents, employees and affiliates from and against all damages arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties and covenants given or made by Pacific in the Reorganization Agreement or any certificate, document or instrument delivered by or on behalf of Pacific pursuant thereto. Indemnification obligations will not apply unless and until the "Damages" (as defined) exceed $100,000, in which event such indemnification obligations will include all Damages. The indemnification obligations of the Pacific shareholders with respect to the Pacific financial statements expire when Hybrid issues its press release regarding its audited financial results for its fiscal year ending December 31, 1998. The indemnification obligations of the Pacific shareholders with respect to all other Pacific representations and warranties expire on the first anniversary of the Closing Date. VOTING AGREEMENTS PACIFIC VOTING AGREEMENT. As an inducement to Hybrid to enter into the Reorganization Agreement, affiliates of Pacific (who beneficially own approximately 3,357,515 shares or 58.8% of the outstanding Pacific Common Stock and 7,509,644 shares or 61.0% of the outstanding Pacific Preferred Stock) have entered into a Voting Agreement with Hybrid that they (a) will vote their shares in favor of the Merger, the execution and delivery by Pacific of the Reorganization Agreement and the adoption and approval of the terms thereof and in favor of each of the other actions contemplated by the Reorganization Agreement and any action required in furtherance hereof and thereof; and against any action or agreement that would result in a breach of any representation, warranty, covenant or obligation of Pacific in the Reorganization Agreement; and (b) will not and will not permit any entity under the undersigned's control to (i) solicit proxies or become a "participant" in a "solicitation" (as such terms are defined in Regulation 14A under the Exchange Act), in opposition to or in competition with the consummation of the Merger or otherwise encourage or assist any person or entity in taking or planning any action which would compete with, restrain or otherwise serve to interfere with or inhibit the timely consummation of the Merger in accordance with the terms of the Plan; (ii) initiate a Pacific shareholder vote or action by written consent of any Pacific shareholder in opposition to or in competition with the consummation of the Merger; or (iii) become a member of a "group" (as such term is used in Section 13(d) of the Exchange Act), with respect 74 to any voting securities of Pacific for the purpose of opposing or competing with the consummation of the Merger. This Voting Agreement terminates upon the earlier to occur of the Effective Date or the termination of the Reorganization Agreement in accordance with its terms. Pursuant to this Voting Agreement, the Pacific affiliates have also delivered to Hybrid an irrevocable proxy with respect to matters covered by the Voting Agreement, empowering Hybrid and certain officers of Hybrid to vote their shares on these matter. Neither Hybrid nor Pacific paid any additional consideration to the Pacific affiliates in connection with the execution and delivery of the Voting Agreement. HYBRID VOTING AGREEMENT. As an inducement to Pacific to enter into the Reorganization Agreement, affiliates of Hybrid (who beneficially own approximately 1,384,512 shares or 13.3% of the outstanding Hybrid Common Stock) have entered into a Voting Agreement with Pacific that they (a) will vote their shares in favor of the Merger, the execution and delivery by Hybrid of the Reorganization Agreement and the adoption and approval of the terms thereof and in favor of each of the other actions contemplated by the Reorganization Agreement and any action required in furtherance hereof and thereof; and against any action or agreement that would result in a breach of any representation, warranty, covenant or obligation of Hybrid in the Reorganization Agreement; and (b) will not and will not permit any entity under the undersigned's control to (i) solicit proxies or become a "participant" in a "solicitation" (as such terms are defined in Regulation 14A under the Exchange Act), in opposition to or in competition with the consummation of the Merger or otherwise encourage or assist any person or entity in taking or planning any action which would compete with, restrain or otherwise serve to interfere with or inhibit the timely consummation of the Merger in accordance with the terms of the Plan; (ii) initiate a Hybrid stockholder vote or action by written consent of any Hybrid stockholder in opposition to or in competition with the consummation of the Merger; or (iii) become a member of a "group" (as such term is used in Section 13(d) of the Exchange Act), with respect to any voting securities of Hybrid for the purpose of opposing or competing with the consummation of the Merger. This Voting Agreement terminates upon the earlier to occur of the Effective Date or the termination of the Reorganization Agreement in accordance with its terms. Pursuant to this Voting Agreement, the Hybrid affiliates have also delivered to Pacific an irrevocable proxy with respect to matters covered by the Voting Agreement, empowering Pacific and certain officers of Pacific to vote their shares on these matter. Neither Hybrid nor Pacific paid any additional consideration to the Hybrid affiliates in connection with the execution and delivery of the Voting Agreement. AFFILIATE AGREEMENTS PACIFIC AFFILIATE AGREEMENTS. Each person determined by Pacific to be an "affiliate" of Pacific within the meaning of Rule 145 promulgated under the Securities Act has executed an agreement that prohibits: (i) the sale, transfer or other disposition of Hybrid Common Stock received by such person in connection with the Merger unless (a) such transaction is permitted pursuant to Rule 145(d) under the Securities Act; or (b) legal counsel, representing stockholder and reasonably satisfactory to Hybrid, shall have advised Hybrid in a written opinion letter (satisfactory in form and content to Hybrid and Hybrid' legal counsel), and upon which Hybrid and its legal counsel may rely, that such sale, transfer or other disposition will be exempt from registration under the Securities Act; or (c) a registration statement under the Securities Act covering the Merger Securities proposed to be sold, transferred or otherwise disposed of, shall have been filed with, and declared effective by, the Commission; or (d) an authorized representative of the Commission shall have rendered written advice to Stockholder to the effect that the Commission would take no action, or that the staff of the Commission would not recommend that the Commission take action, with respect to the proposed disposition of such Hybrid Common Stock if consummated; and (ii) the sale, transfer or other disposition of, or any other similar transaction intended to reduce its risk relative to any securities of Hybrid or Pacific, during the period beginning 30 days preceding the Effective Time of the Merger through the date on which financial results covering at least 30 days' combined operations of Hybrid and Pacific are published by Hybrid unless the sale or disposition is in accordance 75 with the "de minimis" test set forth in SEC Staff Accounting Bulletin No. 76. Such persons have also made certain representations pertaining to the "continuity of interest" requirements for the Merger to constitute a "reorganization" within the meaning of Section 368(a) of the Code. See "PROPOSAL NO. 1: THE MERGER-- APPROVAL OF THE MERGER--CERTAIN FEDERAL INCOME TAX CONSIDERATIONS." HYBRID'S AFFILIATE AGREEMENTS. Each person determined by Hybrid to be an "affiliate" of Hybrid within the meaning of Rule 145 promulgated under the Securities Act has executed an agreement that prohibits: the sale, transfer or other disposition of Hybrid Common Stock or any other similar transaction intended to reduce its risk relative to any securities of Hybrid, during the period beginning 30 days preceding the Effective Time of the Merger through the date on which financial results covering at least 30 days' combined operations of Hybrid and Pacific are published by Hybrid unless the sale or disposition is in accordance with the "de minimis" test set forth in SEC Staff Accounting Bulletin No. 76. EMPLOYMENT/NONCOMPETITION ARRANGEMENTS Richard B. Gold (the Chief Executive Officer, President and a director of Pacific) has entered into an employment agreement with Hybrid, effective as of the closing of the Merger, which states that (i) as of the closing Mr. Gold will become President and Chief Operating Officer of Hybrid; (ii) his salary will be $240,000 per year and he will be eligible for target bonuses of up to $120,000 per year; and (iii) two years from the closing, this employment agreement will terminate, and thereafter he will be an "at-will" employee of Hybrid, subject to Hybrid's standard employment policies and practices. Mr. Gold has also entered into a Noncompetition Agreement with Hybrid, restricting him for a period of two years from the closing from (i) carrying on or engaging in the design, research, development, marketing, sale or licensing of any product that is substantially similar to or competitive with any wireless or wired cable modem product, including any product similar to the downconverter or Cypherpoint product lines, created, distributed, or known to be under development by Pacific prior to the termination of employee's employment with Hybrid anywhere in the world; or (ii) soliciting any employee of Pacific to discontinue his or her employment relationship with Hybrid or Pacific. It is anticipated that Michael D. Morganstern (the Vice President, Engineering of Pacific) and Allen F. Podell (the Chief Technical Officer of Pacific) will enter into employment arrangements and noncompetition agreements with Hybrid, effective upon the closing of the Merger, although the terms of those arrangements and agreements have not yet been determined. Under the Reorganization Agreement, it is a condition of Hybrid's and Pacific's obligations to consummate the Merger that such arrangements and agreements be entered into before the closing. INVESTOR RIGHTS AGREEMENT Hybrid and Oak Investment Partners IV, IVP III, Accel IV L.P., Allen F. Podell and Christopher J. Weseloh will enter into an Investor Rights Agreement which grants such shareholders certain rights to have their shares of Hybrid Common Stock registered on certain registration statements that may be utilized by Hybrid in the future to register its securities. 76 SELECTED HISTORICAL FINANCIAL DATA OF HYBRID The following selected historical financial data should be read in conjunction with the Hybrid Financial Statements and related notes thereto and "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere in this Joint Proxy Statement/ Prospectus. The statement of operations data for each of the three years in the period ended December 31, 1997 and the balance sheet data at December 31, 1997 and 1996 are derived from the financial statements of Hybrid which have been audited by Coopers & Lybrand, L.L.P., independent accountants, and are included elsewhere in this Joint Proxy Statement/Prospectus. The balance sheet data at December 31, 1995, 1994 and 1993 and the statement of operations data for the years ended December 31, 1994 and 1993 are derived from financial statements that have been audited by Coopers & Lybrand L.L.P. that are not included in this Joint Proxy Statement/Prospectus. Hybrid's unaudited historical financial statement data as of and for the three months ended March 31, 1998 and 1997 has been prepared on the same basis as the historical financial information and, in the opinion of Hybrid's management, contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial position and results of operations for such periods. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1997 1996 1995 1994 1993 1998 1997 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales................................... $ 14,270 $ 2,962 $ 630 $ 668 $ 1,010 $ 3,528 $ 1,852 Cost of sales............................... 12,258 3,130 761 1,362 746 2,897 1,974 --------- --------- --------- --------- --------- --------- --------- Gross profit (loss)..................... 2,012 (168) (131) (694) 264 631 (122) --------- --------- --------- --------- --------- --------- --------- Operating expenses: Research and development.................. 7,108 5,076 3,862 1,251 271 2,042 1,726 Sales and marketing....................... 4,319 1,786 390 348 133 977 1,274 General and administrative................ 3,606 1,714 748 533 250 1,390 1,233 --------- --------- --------- --------- --------- --------- --------- Total operating expenses................ 15,033 8,576 5,000 2,132 654 4,409 4,233 --------- --------- --------- --------- --------- --------- --------- Loss from operations.................. (13,021) (8,744) (5,131) (2,826) (390) (3,778) (4,355) Interest income and other expense, net...... 399 257 166 30 5 302 87 Interest expense............................ (968) (28) (304) (101) -- (224) (12) --------- --------- --------- --------- --------- --------- --------- Net loss................................ $ (13,590) $ (8,515) $ (5,269) $ (2,897) $ (385) $ (3,700) $ (4,280) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted loss per share............ $ (3.84) $ (3.36) $ (2.37) $ (1.30) $ (0.18) $ (0.36) $ (1.67) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in basic and diluted per share calculations(1)........................... 3,541 2,535 2,223 2,226 2,094 10,353 2,561 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AS OF DECEMBER 31, AS OF ----------------------------------------------------- MARCH 31, 1997 1996 1995 1994 1993 1998 --------- --------- --------- --------- --------- ----------- BALANCE SHEET DATA: Cash, cash equivalent and short term investments...... $ 27,148 $ 6,886 $ 3,353 $ 1,426 $ 1,031 $ 20,001 Working capital....................................... 35,911 6,944 3,149 1,129 484 31,985 Total assets.......................................... 43,119 10,539 4,586 1,892 1,353 39,194 Long-term debt........................................ 6,118 472 228 2,108 604 6,087 Total stockholders' equity (deficit).................. 33,164 7,709 3,661 (708) 1 29,294
- -------------------------- (1) See Note 2 of Notes to Financial Statements for an explanation of the number of shares used to compute basic and diluted net loss per share. 77 HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HYBRID SHOULD BE READ IN CONJUNCTION WITH THE HYBRID FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. HYBRID'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 "PROPOSAL NO. 1: THE MERGER--RISK FACTORS." OVERVIEW Hybrid is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. Hybrid'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, wireless and cable modems and management software for use with either wireless transmission or cable TV facilities. From its inception in June 1990 until September 1996, Hybrid 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, Hybrid introduced its third generation product line, the Series 2000, which provides 30 Mbps downstream access speeds. Hybrid 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. Hybrid 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. Hybrid sells its products primarily in the United States, and markets its products to a variety of customers, including broadband wireless system operators, cable system operators, ISPs, resellers and certain distributors and communications equipment resellers. Historically, a small number of customers has accounted for a substantial portion of Hybrid's net sales. From quarter-to-quarter, the Company has experienced a significant variation in the mix of type of customers, as well as the identity of its largest customers. Although Hybrid has expanded its customer base, Hybrid expects that a limited number of customers will continue to account for a substantial portion of Hybrid's net sales for the foreseeable future. Hybrid 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, Hybrid 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, canceled or otherwise fail to materialize in any particular period, or any significant customer delays payment or fails to pay, Hybrid can experience significant operating losses in such period. In addition, historically, a substantial majority of Hybrid's net sales in a given quarter have been recorded in the third month with a concentration in the last two weeks of the quarter. Accordingly, any delay in the closing of quarter end transactions can have a significant impact on Hybrid's operating results for a particular quarter. Further, Hybrid's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. In order to address the needs and competitive factors facing the emerging broadband access market, Hybrid on occasion has provided customers extended payment, promotional pricing or other terms. Hybrid has experienced collectibility problems with a number of its customers, including major customers. For example, as of March 31, 1998, 16.7% of Hybrid's outstanding 78 accounts receivable were owed by its principal customer in 1997 (accounting for 13.7% of net sales for that year), and 13.2% and 7.5% of outstanding accounts receivable were owed by its two principal customers, respectively, for the quarter ended March 31, 1998 (accounting for 20.6% and 11.5% of net sales for that quarter, respectively). The provision of extended credit terms and collection problems have contributed to increases in accounts receivable. The amounts of outstanding accounts receivable increased from $1,348,000 as of December 31, 1996 to $10,045,000 as of December 31, 1997 and to $12,153,000 as of March 31, 1998, and days of sales outstanding increased from 71 as of December 31, 1996 to 165 as of December 31, 1997 and to 251 as of March 31, 1998. Accounts receivable past due increased to $3,912,000 as of December 31, 1997 and to $4,865,000 as of March 31, 1998. In 1997, Hybrid established a reserve of $1,175,000 for doubtful accounts and increased the reserve by $450,000 for the quarter ended March 31, 1998. In addition, Hybrid recorded a $800,000 sales return reserve for the three months ended March 31, 1998 for potential adjustments to inventory. These increases in accounts receivable and collectibility issues have adversely affected Hybrid's business, operating results and financial condition. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--INEXPERIENCE IN EMERGING MARKET," "--DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS," "--DEPENDENCE ON CABLE SYSTEM OPERATORS," "--CUSTOMER CONCENTRATION" and "--COMPETITION." The market for high speed network connectivity products and services is intensely competitive and is characterized by rapid technological change, new product development and product obsolescence and evolving industry standards. Hybrid's ability to develop and offer competitive products on a timely basis that satisfy industry demands and standards, such as MCNS, could have a material effect on Hybrid's business, operating results or financial condition: See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS" and "--COMPETITION." In addition the market for Hybrid's products has historically experienced significant price erosion over the life of a product, and Hybrid has experienced and expects to continue to experience pressure on its unit average selling prices. While Hybrid has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will keep pace with competitive price pressures or lead to improved gross margins. If Hybrid is unable to reduce costs, its gross margins and profitability will be adversely affected. Hybrid's gross margins are also adversely affected by the sales mix of PoPs and modems. Hybrid's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than Hybrid's headends. Due to current customer demand, Hybrid 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. "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--COMPETITION," "--NEED TO REDUCE COST OF CLIENT MODEMS, DOWNCONVERTERS, ANTENNAS AND VIDEO DECODERS," and "--LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING." Hybrid has recently initiated patent infringement litigation against two parties, who in response are seeking declarations of invalidity, unenforceability and non-infringement of Hybrid's patent. Such litigation could be time consuming and costly and therefore have a material adverse effect on Hybrid's business, operating results or financial condition. See "Business of Hybrid--Legal Proceedings." Hybrid incurred net losses for the quarter ended March 31, 1998 and the years ended December 31, 1997, 1996 and 1995 of $3,700,000, $13,590,000, $8,515,000 and $5,269,000, respectively. As a result, Hybrid had an accumulated deficit of $34,632,000 as of March 31, 1998. Hybrid expects to increase its capital expenditures, as well as its research and development and other operating expenses, in order to support and expand Hybrid's operations. As a result, Hybrid expects to incur losses for the foreseeable future. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--LIMITED OPERATING HISTORY; HISTORY OF LOSSES,"--FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING DECLINE OF AVERAGE SELLING PRICES" and "--LENGTHY SALES CYCLE." As of December 31, 1997, Hybrid had approximately $14,052,000 in gross deferred tax assets comprised primarily of net operating loss carryforward and research and development tax credits. Hybrid 79 believes that, based on a number of factors, there is uncertainty regarding the realizability of the deferred tax assets. These factors include Hybrid's history of net losses since its inception and the fact that the market in which Hybrid competes is intensely competitive and characterized by rapidly changing technology. As a result, Hybrid believes that, based on the current available evidence, it is more likely than not that Hybrid will not generate sufficient taxable income to realize its net deferred tax assets. 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 Code and similar state provisions. Hybrid will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. See Note 12 of Notes to Financial Statements. In the past, Hybrid and Pacific have each required substantial amounts of capital to design, develop, market, sell and manufacture its products and to finance customer purchases by providing extended payment terms and other accommodations. Neither Hybrid nor Pacific has been able to generate sufficient cash from operations to meet its cash flow needs. See "--LIQUIDITY AND CAPITAL RESOURCES" below and "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." In connection with the proposed Merger, Hybrid anticipates incurring a charge of from $3.0 million to $3.5 million in the quarter in which the Merger occurs and paying Pacific's indebtedness of approximately $2.0 million (inclusive of accrued interest) for bridge loans made by principal shareholders of Pacific. See "--LIQUIDITY AND CAPITAL RESOURCES" below. RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in Hybrid's statements of operations for the periods indicated:
FOR THE THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------- --------------------- 1997 1996 1995 1998 1997 -------- -------- -------- -------- -------- Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........................... 85.9 105.7 120.8 82.1 106.6 -------- -------- -------- -------- -------- Gross margin........................ 14.1 (5.7) (20.8) 17.9 (6.6) -------- -------- -------- -------- -------- Operating expenses: Research and development.............. 49.8 171.4 613.0 57.9 93.2 Sales and marketing................... 30.2 60.3 61.9 27.7 68.8 General and administrative............ 25.3 57.8 118.7 39.4 66.6 -------- -------- -------- -------- -------- Total operating expenses............ 105.3 289.5 793.6 125.0 228.6 -------- -------- -------- -------- -------- Loss from operations................ (91.2) (295.2) (814.4) (107.1) (235.2) Interest income and other expense, net................................... 2.8 8.7 26.3 8.6 4.7 Interest expense........................ (6.8) (1.0) (48.2) (6.3) (0.6) -------- -------- -------- -------- -------- Net loss............................ (95.2)% (287.5)% (836.3)% (104.8)% (231.1)% -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997. NET SALES. Net sales were $3,528,000 for the quarter ended March 31, 1998, compared to net sales of $1,852,000 for the comparable period in 1997. 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 as a result of competitive pressures and volume purchase commitments. Net sales for the quarter ended March 31, 1998 decreased by $1,590,000, or 31%, from net sales of $5,118,000 for the quarter ended December 31, 1997 primarily as a result of delays in anticipated orders and weakness in demand for both cable and wireless systems that utilize telephone 80 return. Net sales were also adversely affected by cancellation by a major customer of an order for approximately $400,000 of telco return products that were scheduled for delivery in the quarter. The cancellation resulted from litigation involving the customer and others which, though unrelated to Hybrid or its products, remains unresolved and may affect orders for similar amounts that were expected in future quarters. In addition, orders for the quarter ended March 31, 1998 were slowed, reducing net sales by approximately $300,000 from the amount anticipated, due to a delay in the introduction of Hybrid's new QPSK two-way transmission product for both cable and wireless environments. Net sales for the quarter ended March 31, 1998 were further reduced by a $800,000 sales return reserve which Hybrid reported for the quarter in anticipation of potential adjustments to inventory held by distributors and value added resellers. While these customers do not have the contractual right to require product returns, Hybrid believes that, given current market weakness, it was appropriate to reserve for potential returns that have been or may be requested. For the three months ended March 31, 1998, cable systems operators accounted for 47.5% of net sales, broadband wireless systems operators accounted for 27.8% of net sales and distributors accounted for 24.7% of net sales. During the same period in 1997, ISPs accounted for 56.0% of net sales, broadband wireless system operators accounted for 29.5% of net sales and cable system operators accounted for 14.5% of net sales. International sales accounted for 29.9% and 7.4% of net sales for the quarters ended March 31, 1998 and 1997, respectively. Hybrid had three customers that accounted for 20.6%, 18.5% and 11.1% of net sales, respectively, during the three months ended March 31, 1998. Hybrid had one customer that accounted for 50.9% of net sales for the comparable period in 1997. GROSS PROFIT. Gross margin was 17.9% and negative 6.6%, for the quarters ended March 31, 1998 and 1997, respectively. The improvement in gross margin was primarily due to increased sales of POPs, lower per unit manufacturing costs and greater absorption of overhead due to increased sales. However, gross margins for the first quarter of 1998 declined from 21.0% in the quarter ended December 31, 1998, reflecting the continuing competitive pressures in the broadband access market. 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 manufacturability of its existing products. Research and development expenses were $2,042,000 and $1,726,000 during the quarters ended March 31, 1998 and 1997, respectively, representing 57.9% and 93.2% 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. Hybrid intends to continue to increase its investment in research and development programs in future periods. 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 $977,000 and $1,274,000 during the three months ended March 31, 1998 and 1997, respectively, representing 27.7% and 68.8% of net sales, respectively. The decrease in sales and marketing expenses in absolute dollars was principally due to lower trade show, promotion and outside service costs. The decrease in sales and marketing expenses was offset by increased headcount and related payroll costs and, increased commissions as a result of higher net sales. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, provision for doubtful accounts, travel expenses, legal fees and costs of outside services. General and administrative expenses were $1,390,000 and $1,233,000 during the quarters ended March 31, 1998 and 1997, respectively, representing 39.4% and 66.6% of net sales, respectively. The increase in absolute dollars was due to increased headcount and related payroll costs, increased legal costs to support the Hybrid's patent program and higher outside service costs. Included in general and administrative expense in the first quarter of 1998 and 1997 was a bad debt provision of $450,000 and $650,000, respectively, for potential customer account write-offs as a result of the financial condition of certain customers. 81 INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Hybrid earned net interest income of $78,000 and $75,000 during the quarters ended March 31, 1998 and 1997, respectively. Net interest income earned during the quarter ended March 31, 1998 was the result of higher cash balances as a result of the issuance of Common Stock in Hybrid's initial public offering in November 1997, offset in part by the interest expense incurred on outstanding capital lease obligations and the $5.5 Million Debenture. Net interest income earned during the first quarter of 1997 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in February 1997, offset in part by the interest expense incurred on outstanding capital lease obligations. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996. NET SALES. Net sales were $14,270,000 for the year ended December 31, 1997, compared to net sales of $2,962,000 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. In 1997, broadband wireless system operators accounted for 50.6% of net sales, distributors accounted for 20.4% of net sales, cable systems operators accounted for 19.3% of net sales and ISPs accounted for 9.7% of net sales. During 1996, cable system operators accounted for 40.6% of net sales, ISPs accounted for 43.5% of net sales and broadband wireless system operators accounted for 15.7% of net sales. International sales accounted for 8.5% and 10.1% of net sales for the years ended 1997 and 1996, respectively. Hybrid had one customer that accounted for 13.7% of net sales during 1997. Hybrid had two customers that accounted for 41.0% and 20.7%, respectively, of net sales during 1996. GROSS PROFIT. Gross margin was 14.1% and negative 5.7%, in 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 manufacturability of its existing products. Research and development expenses were $7,108,000 and $5,076,000 during the years ended December 31, 1997 and 1996, respectively, representing 49.8% and 171.4% 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. Hybrid intends to continue to increase its investment in research and development programs in future periods, focusing on wireless technologies, cost improvement and software enhancements. 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 $4,319,000 and $1,786,000 during the years ended December 31, 1997 and 1996, respectively, representing 30.2% and 60.3% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increased headcount and related payroll costs, increased commissions as a result of higher net sales and increased costs for marketing and promoting Hybrid's Series 2000 product line. Hybrid expects sales and marketing expenses to increase in the future. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, provision for doubtful accounts, travel expenses, legal fees and costs of outside services. General and administrative expenses were $3,606,000 and $1,714,000 during the years ended December 31, 1997 and 1996, respectively, representing 25.3% and 57.8% of net sales, respectively. The increase in absolute dollars was due to increased charges to the provision for doubtful accounts, increased legal costs to support Hybrid's patent program and increased headcount and related payroll costs. 82 INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Hybrid incurred net interest expense during 1997 of $569,000 and earned net interest income of $229,000 during 1996. Net interest expense incurred during 1997 was the result of Hybrid's use of capital lease financing to fund a majority of its capital expenditures, and interest expense (including noncash expense incurred in the fourth quarter of 1998 related to issuance of warrants with respect to certain loans obtained in September 1997) incurred on loans obtained to support working capital requirements. Net interest income earned during 1996 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in December 1995 and July 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 Hybrid's vice presidents of sales and marketing, increased commissions as a result of higher net sales and increased costs for marketing and promoting Hybrid's products. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,714,000 and $748,000 for 1996 and 1995, respectively, representing 57.8% and 118.7% of net sales, respectively. The increase in general and administrative expenses in absolute dollars during 1996 was due to increased allowances for doubtful accounts, higher legal costs to prosecute patents, and increased headcount and related personnel costs. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. During 1996, Hybrid 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 July 1996. The interest income earned during 1996 was offset in part by interest expense incurred on outstanding capital lease obligations. LIQUIDITY AND CAPITAL RESOURCES Hybrid has historically financed its operations primarily through a combination of debt and equity and equipment lease financing. As of March 31, 1998, Hybrid had working capital of $31,985,000, including $20,001,000 in cash, cash equivalents and short-term investments, as compared to working capital of $35,911,000 and $27,148,000 in cash and cash equivalents as of December 31, 1997. This $7,147,000 decrease in cash, cash equivalents and short-term investments during the three months ended March 31, 1998 resulted from the use of cash in operating activities, investing activities and financing activities discussed below. 83 Cash used in operating activities during the quarter ended March 31, 1998 was $6,662,000, resulting primarily from the net loss of $3,700,000; an increase in accounts receivable of $2,226,000 attributable principally to higher net sales made late in the quarter and the limited capital resources of and extended payment terms given to certain customers; the increase in inventories of $2,214,000 due to anticipated sales increases that did not occur and the delay of sales orders by several customers in the quarter; and a decrease in accrued liabilities of $116,000. Cash used in operating activities during the quarter ended March 31, 1998 was offset principally by the increase of $800,000 in reserves for potential sales returns by distributors and the increase of $450,000 in reserves for doubtful accounts as a result of Hybrid's assessment of the risks associated with several slow paying customers and with continuing collection problems reflected in an increase of $953,000 accounts receivable past due during the quarter, from $3,912,000 as of December 31, 1997 to $4,865,000 as of March 31, 1998. Cash used in operating activities during the quarter was further offset by depreciation and amortization of $304,000. Cash used in investing activities during the quarter ended March 31, 1998 was $11,977,000, resulting primarily from purchases of short term investments of $12,753,000, the change in other assets of $154,000 and purchases of property and equipment of $51,000, offset by the proceeds from the maturity of short term investments of $981,000. During the quarter ended March 31, 1998, capital expenditures for property and equipment were primarily for computers, furniture, fixtures and engineering test equipment. Hybrid 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 March 31, 1998, Hybrid is committed to $1.5 to $2.0 million in capital expenditures for tenant improvements in connection with its new subleased headquarters. Hybrid expects capital expenditures for the next twelve months (including such tenant improvements) to be between $4.0 million to $5.0 million. Cash used in financing activities during the quarter ended March 31, 1998 was $280,000, attributable primarily to payment of capital lease obligations and additional costs incurred in connection with Hybrid's initial public offering. Hybrid's principal source of liquidity at March 31, 1998 was cash, cash equivalents and short-term investments of $20,001,000 and Hybrid's $4.0 Million Credit Facility. The $4.0 Million Credit Facility, which expires in October 1998, bears interest at the bank's prime rate and is collateralized by certain of Hybrid's assets. As of March 31, 1998, Hybrid has no borrowings outstanding under the $4.0 Million Credit Facility. Under the $5.5 Million Debenture, Hybrid 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. In addition, under the $4.0 Million Credit Facility, Hybrid may not declare dividends. The $5.5 Million Debenture is collateralized by substantially all of Hybrid's assets. Any borrowings under the $4.0 Million Credit Facility will be collateralized by a first priority security interest in certain of Hybrid's assets, and any borrowings under the $4.0 Million Credit Facility will be collateralized by a first priority security interest in certain of Hybrid's assets. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--RESTRICTIVE DEBT COVENANTS" and Notes 6 and 7 to Financial Statements. The Merger is intended to be treated as a pooling of interests for accounting purposes. If the Merger is consummated, Hybrid anticipates incurring a charge of approximately $3.0 to $3.5 million in the quarter in which the Merger occurs in connection with the write-off of certain assets, personnel severance costs, the cancellation and continuation of contractual obligations and direct transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. Actual costs may substantially exceed such estimates. In addition, upon consummation of the Merger, Hybrid anticipates paying Pacific's indebtedness of approximately $2.0 million in bridge loans (inclusive of accrued interest) made by principal 84 shareholders of Pacific. Such repayment is not required under the terms of the Merger and Hybrid does not expect to make any other cash payments to former shareholders of Pacific. Total costs associated with the Merger are anticipated to result in an operating loss and a net loss for Hybrid's quarter ending June 30, 1998 and for its fiscal year ending December 31, 1998 and could negatively affect financial results in future periods. Holders of Pacific Capital Stock may, by complying with Sections 1300 through 1312 of the California Code, be entitled to dissenters' rights with respect to the Merger. It is a condition to Hybrid's obligation to close the Merger that holders of no more than 5% of the outstanding shares of Pacific Capital Stock shall be eligible to exercise dissenters' rights. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS OF THE MERGERS;" "--COSTS OF INTEGRATION; TRANSACTION EXPENSES;" "--POSSIBLE NEED FOR ADDITIONAL FINANCING;" and "--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--LIMITED OPERATING HISTORY; HISTORY OF LOSSES" and "--APPROVAL OF THE MERGER--APPRAISAL AND DISSENTERS' RIGHTS." Hybrid is seeking to reduce its cash utilization in operations and believes that, notwithstanding the proposed merger with Pacific, cash generated from operations, if any, and existing cash resources and credit facilities will provide Hybrid with sufficient funds to finance its operations for at least the next 12 months. However, Hybrid 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 Hybrid'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 Hybrid or its stockholders. IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Such items may include foreign currency translation adjustments, unrealized gains/losses from investing and hedging activities, and other transactions. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement was adopted in the Company's first quarter of 1998, and its effect on the financial statements was not material. In June 1997, the Financial Accounting Standards Board issued Statement No.131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stock holders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is required to be adopted for fiscal years beginning after December 15, 1997. Hybrid has yet to determine the affect of adoption of this statement. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates. While uncertainty exists concerning the potential effects associated with such compliance, Hybrid does not believe that year 2000 compliance will result in a material adverse effect on its financial condition or results of operations. 85 SELECTED HISTORICAL FINANCIAL DATA OF PACIFIC The following selected historical financial data should be read in conjunction with the Pacific Financial Statements and related notes thereto and "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere in this Joint Proxy Statement/ Prospectus. The statement of operations data for each of the three years in the period ended September 30, 1997 and the balance sheet data at September 30, 1997 and 1996 are derived from financial statements of Pacific which have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this Joint Proxy Statement/Prospectus. The selected historical financial data for the years ended September 30, 1994 and 1993 were derived from financial statements of Pacific which were audited and are not included in this Joint Proxy Statement/Prospectus. Pacific unaudited historical financial statement data as of and for the three and six months ended March 31, 1998 and 1997 has been prepared on the same basis as the historical financial information and, in the opinion of Pacific management, contains all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial position and results of operations for such periods. March 31, 1998 financial results are not necessarily indicative of the results that may be expected for the year ended September 30, 1998. See "PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, MARCH 31, ----------------------------------------------------- -------------------- -------------------- 1997 1996 1995 1994 1993 1998 1997 1998 1997 --------- --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues................ $ 35,369 $ 29,141 $ 24,925 $ 20,135 $ 11,332 $ 5,018 $ 8,350 $ 11,981 $ 21,500 Total cost of revenues........ 26,014 23,246 15,964 12,870 7,929 4,140 5,904 9,686 15,533 --------- --------- --------- --------- --------- --------- --------- --------- --------- Gross profit.................. 9,355 5,895 8,961 7,265 3,403 878 2,446 2,295 5,967 Operating expenses: Research and development.... 4,824 5,421 3,169 2,318 1,764 1,059 1,319 2,021 2,639 Sales and marketing......... 3,690 3,104 2,514 1,819 1,579 633 917 1,306 1,907 General and administrative............ 1,649 2,839 2,434 1,553 1,210 453 228 874 966 --------- --------- --------- --------- --------- --------- --------- --------- --------- Total operating expenses................ 10,163 11,364 8,117 5,690 4,553 2,145 2,464 4,201 5,512 --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations............ (808) (5,469) 844 1,575 (1,150) (1,267) (18) (1,906) 455 Interest income and other (expense), net.............. (45) (12) 100 154 12 (28) (20) (61) (33) Interest expense.............. (554) (462) (400) (146) (320) (201) (131) (348) (259) --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes............ (1,407) (5,943) 544 1,583 (1,458) (1,496) (169) (2,315) 163 --------- --------- --------- --------- --------- --------- --------- --------- --------- Provision for income taxes.... 3 91 --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)............. $ (1,407) $ (5,943) $ 541 $ 1,492 $ (1,458) $ (1,496) $ (169) $ (2,315) $ 163 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic income (loss) per share....................... $ (0.29) $ (1.42) $ 0.15 $ 0.46 $ (0.66) $ (.28) $ (.04) $ (.45) $ .04 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in basic per share calculation(1).............. 4,866 4,184 3,701 3,216 2,200 5,285 4,619 5,186 4,600 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted income (loss) per share....................... $ (0.29) $ (1.42) $ 0.03 $ 0.10 $ (0.66) $ (.28) $ (.04) $ (.45) $ .01 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in diluted per share calculation(1)........ 4,866 4,184 15,553 14,291 2,200 5,285 4,619 5,186 19,142 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
86
SEPTEMBER 30, ----------------------------------------------------- MARCH 31, 1997 1996 1995 1994 1993 1998 --------- --------- --------- --------- --------- ----------- BALANCE SHEET DATA: Cash, cash equivalents and short term investment........ $ 1,931 $ 900 $ 1,555 $ 698 $ 102 $ 162 Working capital......................................... 4,163 5,390 7,437 4,119 2,289 2,119 Total assets............................................ 16,669 18,991 16,232 12,793 7,817 16,819 Long-term debt.......................................... 442 383 1,382 2,057 232 458 Total shareholders' equity.............................. 6,570 7,876 8,608 3,400 3,536 4,264
- ------------------------------ (1) See Notes to Financial Statements for an explanation of the number of shares ued to compute basic and diluted net loss per share. 87 PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PACIFIC SHOULD BE READ IN CONJUNCTION WITH THE PACIFIC FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PACIFIC'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 "PROPOSAL NO. 1: THE MERGER--RISK FACTORS." OVERVIEW Pacific designs, develops, manufactures and markets radio frequency devices and systems for providers of wireless communication services. Since its inception in 1984, Pacific has been involved in the development of gallium arsenide RFIC products, including power amplifiers, switches, attenuators, converters and oscillators for telephony, remote data collection and wireless point-to-point communications applications. In 1991, Pacific began applying its RFIC design expertise and radio frequency system engineering skills to the development of system solutions for the broadband wireless video market. Since 1991, Pacific has produced and sold over one million broadband wireless antenna/downconverters. Additionally, since the introduction of Pacific's CypherPoint video encoding system in 1996, Pacific has produced and sold over 50 encoding systems and 100,000 decoders. Broadband wireless and RFIC products comprise Pacific's principal product lines with broadband wireless products (including both downconverters and CypherPoint) currently comprising more than 90% of its revenues. Pacific markets its products through a direct sales force supplemented by distributors. The majority of Pacific's sales are made by its sales force directly to broadband wireless operators, while distributors, which sell only Pacific's RFIC products, account for less than 10% of Pacific's sales. Pacific has no current plans to materially increase the size of its direct sales force. The sales cycle associated with Pacific's products is typically lengthy and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond Pacific's control. In addition, Pacific's customers include companies in the early stage of development or in need of capital to deploy or expand their services. Further, timing and volume of customer orders are difficult to forecast because a substantial majority of Pacific's sales are booked and shipped in the same quarter and Pacific has a limited backlog or orders. If orders from current customers are canceled, decreased or delayed, or Pacific fails to obtain significant orders from new customers, or any significant customer delays payment or fails to pay, Pacific's business, operating results and financial condition could be materially adversely affected. SEE "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--INEXPERIENCE IN EMERGING MARKET" and "--CUSTOMER CONCENTRATION." To date, a small number of customers has accounted for a substantial portion of Pacific's net sales. Pacific expects that sales to a small number of customers will continue to account for a substantial portion of its net sales and also 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 and regulatory considerations. In addition, Pacific's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. While Pacific has not increased its reserves for doubtful accounts due to the assessment of risks associated with collectability or billing problems with respect to any of its current, major customers, there can be no assurance that problems relating to uncollectability or billing will not arise with respect to any of its current or future, major customers. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--CUSTOMER CONCENTRATION." The markets in which Pacific participates are highly competitive. Broadband wireless competitors include California Amplifier, Inc., Conifer Corporation, TransSystems, Inc., and TeleLynx, Inc. RFIC competitors include Celeritek, Inc., ANADIGICS, Inc., Teledyne, Inc., Philips Semiconductors, RF Micro 88 Devices, Inc. and Motorola, Inc. In addition, Pacific anticipates increased competition from new companies entering such markets, some of whom may have financial and technical resources substantially greater than those of Pacific. Furthermore, because some of Pacific's products may not be proprietary, they may be duplicated by low-cost producers, resulting in price and margin pressures. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--COMPETITION." Sales to customers of Pacific outside the United States have accounted for a significant portion of net sales in the past. International sales are subject to a number of risks including longer payment cycles, export and import restrictions and tariffs, including existing United States restrictions on the export of certain high technology products that could limit Pacific's sales abroad, unexpected changes in regulatory requirements, 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. Fluctuations in currency exchange rates could cause Pacific's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. To the extent that international revenues increase as a percentage of total revenues in the future, foreign currency fluctuation exposure may also increase. In addition, Pacific has in the past experienced a decline in sales to Mexico due to the devaluation of the Mexico peso. There can be no assurance that future economic or political instability in countries where Pacific sells its products will not have a material adverse effect on Pacific's sales in such countries, and consequently, on the business financial condition or results of operations of Pacific. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS-- RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY." Pacific had no income tax provision or benefit in fiscal 1997 and 1996 due principally to net operating losses and a valuation allowance reserving 100% of its deferred tax assets. As a result of Pacific's history of recent operating losses, management believes that recognition of the deferred tax assets is considered less likely than not. Accordingly, Pacific has recorded a valuation allowance against its net deferred tax asset. At March 31, 1998, net operating loss carryforwards of approximately $19,717,000 and $4,877,000 were available to offset future federal and state taxable income, respectively. These carryforwards expire beginning in 2002 and 2000. At March 31, 1998, research and development credit carryforwards of $284,000 and $151,000 were available to offset future federal and state taxable income, respectively. These carryforwards expire beginning in 2009 for federal purposes. As a result of the Merger, the annual utilization of operating losses will be significantly limited. 89 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in Pacific's statements of operations for the periods indicated:
THREE MONTHS SIX MONTHS FISCAL YEARS ENDED ENDED ENDED SEPTEMBER 30, MARCH 31, MARCH 31, ------------------------------ ------------------- ------------------- 1997 1996 1995 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- -------- Product Sales........................... 99.2% 96.3% 75.7% 99.7% 98.6% 99.7% 98.9% Development Contracts and Licensing Revenue............................... 0.8 3.7 24.3 0.3 1.4 0.3 1.1 -------- -------- -------- -------- -------- -------- -------- Net Sales............................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of Sales........................... 73.6 79.8 64.1 82.5 70.7 80.8 72.2 -------- -------- -------- -------- -------- -------- -------- Gross Margin.......................... 26.4 20.2 35.9 17.5 29.3 19.2 27.8 -------- -------- -------- -------- -------- -------- -------- Operating Expenses Research and Development.............. 13.6 18.6 12.7 21.1 15.8 16.9 12.3 Sales and Marketing................... 10.4 10.6 10.1 12.6 11.0 10.9 8.9 General and Administrative............ 4.7 9.8 9.8 9.0 2.7 7.3 4.5 -------- -------- -------- -------- -------- -------- -------- Total Operating Expenses............ 28.7 39.0 32.6 42.7 29.5 35.1 25.7 -------- -------- -------- -------- -------- -------- -------- Net Income (Loss) from Operations....... (2.3) (18.8) 3.4 (25.2) (0.2) (15.9) 2.1 Interest Income and Other Expense, Net................................. (0.1) (0.1) 0.1 (0.6) (0.2) (0.5) (0.1) Interest Expense...................... (1.6) (1.6) (1.6) (4.0) (1.6) (2.9) (1.2) -------- -------- -------- -------- -------- -------- -------- Net Income (Loss)....................... (4.0%) (20.4%) 2.2% (29.8%) (2.0%) (19.3%) 0.8% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 NET SALES. Pacific's total sales consist of product sales of downconverters, CypherPoint and RFIC, and development contracts and licensing revenue. Net sales were $5,018,000 for the three months ended March 31, 1998, compared to net sales of $8,350,000 for the three months ended March 31, 1997. The significant decline in net sales was primarily due to a reduction in shipments to Pacific's largest customer of the downconverter and CypherPoint product lines. Such customer's product purchases are not expected to return to historic levels. To the extent that such customer is not replaced with other customers accounting for significant additional sales, this will likely adversely affect Pacific's future results of operations and financial position. There can be no assurance that Pacific will be able to acquire such additional customers. In the three months ended March 31, 1998, product sales accounted for 99.7% of net sales and contract/ licensing revenue accounted for .3% of net sales. For the three months ended March 31, 1997, product sales accounted for 98.6% and the contract/licensing revenues accounted for 1.4%. International sales accounted for 54.3% and 53.5% of net sales for the three months ended March 31, 1998 and 1997, respectively. Pacific had one customer that accounted for 35.8% of net, sales in the three months ended March 31, 1998. Pacific had three customers that accounted for 28.0%, 23.3% and 15.5%, respectively, of net sales in the three months ended March 31, 1997. GROSS MARGIN. Gross margins were 17.5% and 29.3% for the three months ended March 31, 1998 and 1997, respectively. The decrease in the gross margin was primarily due to the reduction in shipments of all product lines, price reductions of downconverters due to competitive pressures and non-absorption of manufacturing overhead due to excess capacity. RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing decoder and headend CypherPoint product development expenses, two-way product development, as well as design 90 expenditures associated with cost reduction programs. Research and development expenses were $1,059,000 and $1,319,000 for the three months ended March 31, 1998 and 1997, respectively. These expenditures represented 21.1% and 15.8% of net sales for the three months ended March 31, 1998 and 1997, respectively. The expenditures decreased between the quarters primarily as a result of high CypherPoint product development costs incurred in the former quarter. 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 $633,000 and $917,000 for the three months ended March 31, 1998 and 1997, respectively, representing 12.6% and 11.0% of net sales, respectively. The decrease in sales and marketing expenses in absolute dollars was principally due to a reduction in headcount and related payroll costs and a reduction in spending in the area of marketing and promotions. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, legal and audit fees, travel expenses and professional services. General and administrative expenses were $453,000 and $228,000 for the three months ended March 31, 1998 and 1997, respectively, representing 9.0% and 2.7% of net sales, respectively. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Pacific incurred interest expense during the three months ended March 31, 1998 of $201,000 and earned interest income of $6,000. Pacific incurred interest expense during the three months ended March 31, 1997 of $131,000 and earned interest income of $6,000. The increase in net interest expense was due to increased loans obtained to support working capital requirements. SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997 NET SALES. Net sales were $11,981,000 for the six months ended March 31, 1998, compared to net sales of $21,500,000 for the six months ended March 31, 1997. The significant decrease in net sales was primarily due to a reduction in units shipped of the downconverter and CypherPoint product line and to a decline in the rate of product purchases by Pacific's largest customer. Such customer's product purchases are not expected to return to historic levels. To the extent that such customer is not replaced with other customers accounting for significant additional sales, this will likely adversely affect Pacific's future results of operations and financial position. There can be no assurance that Pacific will be able to acquire such additional customers. For the six months ending March 31, 1998, product sales accounted for 99.7% of net sales and the contract/licensing revenues accounted for .3% of net sales. For the six months ending March 31, 1997, product sales accounted for 98.9% of net sales and contract/licensing revenues accounted for 1.1% of net sales. International sales accounted for 19.5% and 53.8% of net sales for the 6 months ended March 31, 1998 and 1997, respectively. Pacific had four customers that accounted 31.3%, 13.6%, 11.5% and 10.1%, respectively, of net sales for the six-month period ending March 31, 1998. Pacific had two customers that accounted for 48.6% and 19.3%, respectively, of net sales for the six-month period ending March 31, 1997. GROSS PROFIT. Gross margin was 19.2% and 27.8%, for the six-month period ending March 31, 1998 and 1997, respectively. The decrease in the gross margin was primarily due to the reduction in shipments, price erosion within the downconverter product line and non-absorption of manufacturing overhead. RESEARCH & DEVELOPMENT. Research and development expenses include development of decoder and headend CypherPoint products, downconverter and RFIC products as well as design expenditures associated with cost reduction. Research and development expenses were $2,021,000 and $2,639,000 for the six-month period ending March 31, 1998 and 1997, respectively. These expenditures represented 16.9% and 12.3% of net sales for the six-month period ending March 31, 1998 and 1997, respectively. This reduction was primarily due to the completion of CypherPoint product development. 91 SALES & MARKETING. Sales and marketing expenses consist primarily of salaries and related payroll costs for sales and marketing personnel, commissions, advertising, promotions and travel. Sales and marketing expenses were $1,306,000 and $1,907,000 for the six-month period ending March 31, 1998 and 1997, respectively, representing 10.9% and 8.9% of net sales, respectively. The decrease in sales and marketing expenses in absolute dollars was principally due to reductions in headcount and related payroll costs and a reduction in spending in the area of marketing and promotions. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, legal and audit fees, travel expenses and costs of outside services. General and administrative expenses were $874,000 and $966,000 for the six-month period ending March 31, 1998 and 1997, respectively, representing 7.3% and 4.5% of net sales, respectively. The decrease in absolute dollars was due to lower legal and audit fees and payroll costs. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Pacific incurred net interest expense for the six-month period ending March 31, 1998 of $348,000 and earned interest income of $12,000. The company incurred net interest expense for the six-month period ending March 31, 1997 of $259,000 and earned interest income of $11,000. The increase in net interest expense was due to increased loans obtained to support working capital requirements. FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1996 NET SALES. Net sales were $35,369,000 for the year ended September 30, 1997, compared to net sales of $29,141,000 for fiscal 1996. The significant growth in net sales was primarily due to increased unit sales of the CypherPoint product line, which product line had a 242.5% increase in sales from 1996. This growth was offset, in significant part, by a decline in shipments of downconverter products, which products had a 20% decrease in net sales from 1996. In fiscal 1997, product sales accounted for 99.2% of net sales and contracts/licensing revenue accounted for 0.8% of net sales. In fiscal 1996, product sales accounted for 96.3% of net sales and contracts/licensing revenues accounted for 3.7%. International sales accounted for 30.4% and 28.5% of net sales for the fiscal years 1997 and 1996, respectively. Pacific had two customers that accounted for 30.4% and 21.5%, respectively, of net sales in fiscal 1997. Pacific had two customers that accounted for 35.7% and 12.4%, respectively, of net sales in fiscal 1996. GROSS PROFIT. Gross margin was 26.4% and 20.2%, in fiscal years 1997 and 1996, respectively. The improvement in gross margin was due in part to a $1,126,000 inventory provision. The provision was accrued in 1996 in connection with inventory components and products unique to an international customer and reversed in 1997 when the products were shipped. The remainder of the improvement was due to a number of factors including the volume production of the CypherPoint product line, greater contributions from higher margin RFIC products, the completion of the high cost non-recurring engineering contract work, and greater absorption of manufacturing overhead due to increased sales volumes. RESEARCH AND DEVELOPMENT. Research and development expenses were $4,824,000 and $5,421,000 during the fiscal years 1997 and 1996, respectively. These expenditures represented 13.6% and 18.6% of net sales for fiscal years 1997 and 1996, respectively. This year to year reduction was primarily the result of decreased CypherPoint product development costs in fiscal 1997. Pacific intends to continue to increase its investment in research and development programs for future periods, focusing on two-way wireless technologies and cost improvement. SALES AND MARKETING. Sales and marketing expenses were $3,690,000 and $3,104,000 during the fiscal years 1997 and 1996, respectively, representing 10.4% and 10.7% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increases in headcount and related payroll costs and an increase in sales support efforts and marketing activities associated with the increase in revenues. Pacific expects sales and marketing expenses to increase in the future. 92 GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,649,000 and $2,839,000 during the fiscal years 1997 and 1996, respectively, representing 4.7% and 9.8% of net sales, respectively. The decrease was due primarily to the reversal of a $817,000 bad debt provision associated with the collection of certain receivables from an international customer in 1997. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Pacific incurred net interest expense during fiscal 1997 of $554,000 and earned interest income of $25,000. Pacific incurred net interest expense during fiscal 1996 of $462,000 and earned interest income of $37,000. The increase in net interest expense was due to increased loans obtained to support working capital requirements. FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 NET SALES. Net sales were $29,141,000 for the year ended September 30, 1996, compared to net sales of $24,925,000 for the year ended September 30, 1995. The significant growth in net sales was primarily due to an increase in units shipped with the expansion of the downconverter product line, which product line had a 22.6% increase in net sales from 1995, and the mid-year introduction of the CypherPoint product line, as opposed to an increase in sales prices of such products. This growth was offset by a reduction of revenue under contracts/licensing due to a transition from military contracts to commercial products. In fiscal 1996, product sales accounted for 96.3% of net sales and the contract/licensing revenues accounted for 3.7% of net sales. In fiscal 1995, product sales accounted for 75.7% of net sales and contract/ licensing revenues accounted for 24.3% of net sales. International sales accounted for 28.5% and 36.7% of net sales for the fiscal years 1996 and 1995, respectively. Pacific had two customers that accounted for 35.7% and 12.4%, respectively, of net sales in 1996. Pacific had two customers that accounted for 18.8% and 17.5%, respectively, of net sales in 1995. GROSS PROFIT. Gross margin was 20.2% and 35.9%, in fiscal years 1996 and 1995, respectively. The decrease in the gross margin was due to inventory provisions for products unique to an international customer, the transition away from the higher margin military contracts to a non-recurring engineering contract, price erosion within the downconverter product line and non-absorption of manufacturing overhead related to CypherPoint production start-up. RESEARCH AND DEVELOPMENT. Research and development expenses were $5,421,000 and $3,169,000 during the fiscal years 1996 and 1995, respectively. These expenditures represented 18.6% and 12.7% of net sales for fiscal years 1996 and 1995, respectively. This was primarily the result of a one time charge of $2,051,000 associated with a design change of CypherPoint products. SALES AND MARKETING. Sales and marketing expenses were $3,104,000 and $2,514,000 during the fiscal years 1996 and 1995, respectively, representing 10.7% and 10.1% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increases in headcount and related payroll costs and in spending in the area of marketing and promotions. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2,839,000 and $2,434,000 during the fiscal years 1996 and 1995, respectively, representing 9.8% and 9.8% of net sales, respectively. The increase in absolute dollars was due primarily to an $817,000 provision associated with uncertainty regarding account receivable collections from an international customer. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. Pacific incurred interest expense during fiscal 1996 of $462,000 and earned interest income of $37,000. Pacific incurred interest expense during fiscal 1995 of $400,000 and earned interest income of $28,000. The increase in net interest expense was due to increased loans obtained to support working capital requirements. 93 LIQUIDITY AND CAPITAL RESOURCES Pacific has financed its operations primarily through financial support from its majority shareholders in the form of capital infusions and promissory notes, bank debt, and lease financing of capital equipment. As of March 31, 1998, Pacific had working capital of $2,119,000, including $162,000 in cash and cash equivalents. The $1,344,000 decrease in cash and cash equivalents in the first six months of fiscal 1998 was primarily the result of a net loss of $2,315,000. As of September 30, 1997, Pacific had working capital of $4,163,000, including $1,506,000 in cash and cash equivalents, as compared to working capital of $5,390,000 and $475,000 in cash and cash equivalents as of September 30, 1996. The $1,031,000 increase in cash and cash equivalents for the fiscal year ended September 30, 1997 was primarily a result of obtaining a shareholder note of $750,000 in September 1997. Cash used in operating activities in the six months ended March 31, 1998 was $3,907,000 and was primarily the result of an increase in accounts receivable of $2,211,000 and the net loss of $2,315,000. The increase in accounts receivable was primarily attributable to a shift in the customer base to international customers resulting in longer average collection periods. Cash used in operating activities during the six months ending March 31, 1998 was offset by depreciation and amortization of $597,000 and prepaid expense decreases of $109,000. Cash provided by operating activities during fiscal 1997 was $2,583,000, primarily the result of the decrease in accounts receivable of $3,931,000 as a result of collections and lower net sales in the final quarters of the fiscal year, and depreciation and amortization of $1,234,000. Cash provided by operating activities during fiscal year 1997 was offset by the net loss of $1,407,000, a decrease in the provision for doubtful accounts of $930,000 as a result of Pacific's assessment of collectability of accounts receivable and decreases in accounts payable of $330,000. Cash flows from investment activities during the six months ended March 31, 1998 was $322,000 and resulted primarily from decreases in short-term investments. Cash used in investing activities during fiscal 1997 was $348,000, and resulted primarily from the purchases of property and equipment. During the six months ended March 31, 1998 and fiscal year 1997, capital expenditures for property and equipment were primarily for computers, furniture, fixtures, and manufacturing and engineering test equipment. Pacific has financed a substantial portion of its property and equipment expenditures from several sources including direct vendor leasing programs and third party commercial leasing arrangements. As of March 31, 1998, Pacific had no material commitments for capital expenditures. Cash provided by financing activities during the six months ended March 31, 1998 was $2,241,000, and was primarily the result of cash advances of $2,568,000 on the recently established bank credit line. Cash provided by financing activities during the six months ended March 31, 1998 was offset by the repayment of capital lease obligation of $341,000. Cash used in financing activities during fiscal year 1997 was $1,204,000, and was primarily the result of repayments of $1,261,000 to the bank line of credit and the repayment of capital lease obligations of $763,000. Cash used in financing activities during fiscal year 1997 was offset by the result of proceeds from shareholder loans of $750,000. Pacific's principal sources of liquidity at March 31, 1998 were cash and cash equivalents of $162,000 and an $8,000,000 revolving bank line of credit. The line of credit was entered into with Coast in November 1997, bears interest at Coast's reference rate (8.5% at March 31, 1998) plus 2.25%, has a term which expires in the year 2000, and is collateralized by substantially all of the Pacifics's assets. Advances on the line of credit are limited to a percentage of certain current assets (i.e. accounts receivable and inventory). The line of credit requires Pacific to maintain a minimum Tangible Net Worth of $5,750,000. Tangible Net Worth is defined as consolidated owner's equity plus subordinated debt less any assets that would be treated as intangible assets in accordance with generally accepted accounting principles. As of March 31, 1998, Pacific had a Tangible Net Worth of $6,014,000. Coast has consented to the Merger of Pacific with Hybrid and is currently reviewing the terms of the line of credit to determine whether modifications will be made to the Tangible Net Worth covenant with respect to the combined company. As of April 30, 1998, Pacific had $3,733,000 in borrowings outstanding under the line of credit and no additional borrowings 94 were available. The Comerica line of credit outstanding as of September 30, 1997 was repaid and canceled with borrowings under the Coast line of credit. Pacific is currently in need of immediate additional capital to finance its operations and to meet its short term liquidity needs. While Pacific is seeking additional financing up to an approximate amount of $1.0 million, there can be no assurance that the additional required financing will be available through equity offerings, bank borrowings, or otherwise, or that, if such financing is available, it will be available on terms favorable to Pacific or its shareholders. If Pacific is unable to secure financing prior to the consummation of the Merger, Pacific will have to scale back sales and marketing and research and development efforts and Pacific's business, financial condition and operating results will be materially adversely affected. If the Merger with Hybrid is consummated, Pacific will have access to the capital resources of this combined company. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--PACIFIC'S NEED FOR IMMEDIATE ADDITIONAL FINANCING," "--RESTRICTED DEBT COVENANTS" and "--POSSIBLE NEED FOR ADDITIONAL FINANCING." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates. While uncertainty exists concerning the potential effects associated with such compliance, Pacific does not believe that year 2000 compliance will result in a material adverse effect on its financial condition or results of operations. 95 BUSINESS OF HYBRID This Business section and other parts of this Joint Proxy Statement/Prospectus contain forward-looking statements that involve risks and uncertainties. Hybrid'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 below and separately in "PROPOSAL NO. 1: THE MERGER--RISK FACTORS," and "HYBRID MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION." Hybrid Networks, Inc. is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. Hybrid'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 customers include broadband wireless system operators, cable system operators, ISPs, resellers 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, wireless or cable modems and management software for use with either cable TV or wireless transmission facilities. Because the substantial majority of wireless and cable 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 wireless or cable system, providing system operators with flexible, scalable and upgradeable solutions that allow them to offer cost-effective broadband access to their subscribers. PRODUCTS, TECHNOLOGY AND SERVICES Hybrid's Series 2000 product line provides broadband wireless system operators, cable system operators, ISPs and other businesses with a cost-effective, high speed Internet and intranet access solution. Hybrid's products include secure headend routers, wireless and cable modems and management software for use with either wireless transmission facilities or cable TV transmission facilities. Hybrid's headend products are used by broadband wireless system operators, cable 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 Hybrid's customers and can be used as single-user devices or in multi-user local area networks ("LANS"). Hybrid's products incorporate proprietary technology that enables the same system to be deployed in either broadband wireless or cable systems and supports both one-way downstream transmission accompanied by upstream transmission via modem and router return or two-way wireless or cable transmission. 96 PRODUCTS The following table outlines the primary components of Hybrid'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. Upstream Router, Telephone Return Performs the functions of an analog modem bank (Ascend Max 4048, 4060) and terminal server in a telephone return configuration. Supports up to 48/60 incoming telephone lines. CyberMaster Upstream Router QPSK Return Upstream receiver and demodulator for two-way (CMU 2000-14C and QDC-030-2) QPSK configuration.
SINGLE-USER EQUIPMENT (1)(3) Headend Router (HER-2010) Highspeed downstream RF router that supports up to 60 Mbps aggregate throughout in 12 MHz of spectrum. Multi-User Modem/Router (CCM-201) Client modem and router that can be used in either wireless or cable systems. Supports up to 20 users. Client modem that can be used in either wireless or cable systems. Supports a single user.
(1) All products are available for use with wireless or cable systems. (2) Headend equipment typically ranges in price from $40,000 to $90,000 for a single system. (3) Modem list prices range from approximately $440 to $795 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 wireless or cable spectrum. UPSTREAM ROUTER, TELEPHONE RETURN. The Upstream Router, Telephone Return is an Ascend modem bank sold by Hybrid for terminating headend telephone lines in the telephone return configuration. The Ascend 4048 provides a 71 digital interface for 48 lines in the United States and the 97 Ascend 4060 provides an E1 digital or a primary rate interface for international applications. The system also operates with modem banks and upstream router from US Robotics, Motorola and other suppliers provided by the customer. CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router is a rack mounted, Pentium based, PCI/ISA bus industrial microcomputer. The product houses dual QPSK receiver cards which demodulate upstream QPSK signals. The CMU-2000-14C has a 100 BaseT interface to connect to a fast ethernet switch at the headend. The CMU supports up to 28 upstream signals each with 256 to 5 Mbits data rate. END-USER EQUIPMENT HEADEND ROUTER. The Series 2000 Headend Router (HER-2010) is a rack-mounted, Pentium based, PCI/ISA bust industrial microcomputer. The product supports SIF and QAM cards, which are used for downstream routing and for 64QAM downstream modulation. The HER-2010 has a 1000BaseT interface to connect to a fast Ethernet switch within the headend. The HER-2010 supports up to six independent 10 Mbs downstream channels. Each 10 Mbps channel occupies 2MHz of either wireless or cable spectrum. The HER-2010 can be deployed in one-way RF configurations (cable/wireless downstream and telco/router return). MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router (CCM-201) supports 10 Mbps, 64QAM downstream data transmission on both wireless and cable systems and upstream transmission via analog modem, router or wireless 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, 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 wireless and cable systems and upstream transmission via analog modem, router, and wireless or 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 wireless or cable 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 wireless or cable system and asymmetric telephone- or router-return on either a broadband wireless or cable system. Hybrid's proprietary sub-channelization technology splits a standard 6 MHz channel into three 2 MHz slices for downstream transmission, providing greater flexibility and minimizing the effects of multipath interference in wireless systems. By providing 2 MHz sub-channelization, Hybrid's products are also positioned to serve the newly auctioned WCS frequencies, which are only 5 MHz wide. 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 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 Hybrid 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 98 sales representatives and customers in defining the specifications for the system to be installed. Hybrid's network operations group also works with the customer during site preparation to aid in systems engineering, system integration, installation and acceptance testing to ensure a successful system start-up. Services are provided on a time and materials basis. Each customer is required to enroll, for a fee, at least one person in Hybrid'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 Hybrid's products and cover the installation, operation and maintenance of Hybrid's headend and client modem products in a network operating environment. Hybrid typically provides a one-year warranty on its hardware 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 Hybrid's software and firmware products that contain application code. Hybrid provides support after expiration of the warranty period as a purchase option, including on-site field support. CUSTOMERS Hybrid's customers include broadband wireless system operators, cable system operators, ISPs, resellers and other businesses. To date, a small number of customers has accounted for a substantial portion of Hybrid's net sales. Hybrid 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. Hybrid 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. In addition the mix of Hybrid's customers, whether cable, wireless, ISPs or distributors, has changed from quarter-to-quarter. A limited number of broadband wireless system operators and cable system operators account for a majority of capital equipment purchases in their respective markets, and Hybrid's success will be dependent upon its ability to establish and maintain relationships with these companies. In addition, Hybrid has increased sales through distributors and value added reseller , with 3D Communications, a subsidiary of IKON Corporation, becoming the largest distributor customer in 1997, accounting for 13.7% of Hybrid's net sales. No other customer accounted for 10% or more of net sales in 1997. In 1996, AT&T Corporation ("AT&T") and Intel accounted for 41.0% and 20.7%, respectively, of Hybrid's net sales; and in 1995, Intel and AT&T accounted for 51.6% and 28.2%, respectively, of Hybrid's net sales. During 1994, 1995 and 1996, Intel manufactured certain products based on Hybrid's design, and jointly marketed Hybrid's products with its own. Intel no longer purchases products from Hybrid, but it remains a stockholder of Hybrid and maintains certain licensing and manufacturing rights to certain Hybrid products. AT&T continued to purchase products from Hybrid in 1997, although the volume of those purchases was less than 10% of Hybrid's net sales. During 1997, approximately one-half of Hybrid's net sales were attributable to broadband wireless system customers and the balance to cable system customers. Hybrid anticipates that the trend of increasing sales to broadband wireless customers will continue during 1998 although changes could occur in Hybrid's product offerings or other circumstances that might affect this trend. Hybrid's customers, particularly those in the broadband wireless industry, include companies in the early stage of development or in need of capital to upgrade or expand their services. In order to address the needs and competitive factors facing the emerging broadband access market, Hybrid on occasion has provided customers extended payment, promotional pricing or other terms. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms can have a material adverse effect on Hybrid's business, operating results and financial condition. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 99 SALES, MARKETING AND DISTRIBUTION Hybrid markets and sells its products in the United States through its domestic field sales force and sales support organization. Hybrid also sells its products through distributors, VARs and OEMs. Hybrid'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 and Tinton Falls, New Jersey. The sale of Hybrid'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 Hybrid'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 Hybrid'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 payment or fails to pay, Hybrid's operating results for that quarter could be materially adversely affected. In addition, Hybrid'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 broadband wireless system operators, cable system operators and ISPs, Hybrid on occasion has provided customers extended payment, promotional pricing or other terms which can have a material adverse effect on Hybrid's business, operating results and financial condition. See "HYBRID MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The timing and volume of customer orders are difficult to forecast because wireless and cable companies typically require prompt delivery of products and a substantial majority of Hybrid's sales are booked and shipped in the same quarter. Accordingly, Hybrid has a limited backlog of orders. Further, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or canceled with little or no penalty. Hybrid believes that its backlog at any given time is not a meaningful indicator of future sales. Hybrid's marketing efforts are targeted at broadband wireless system operators, cable system operators and existing ISPs. Hybrid 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. Hybrid 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. Hybrid maintains its industry presence by exhibiting at wireless and cable tradeshows and speaking at conferences and seminars. In order to market and sell Hybrid's products internationally, Hybrid has entered into several distribution relationships and is seeking to enter into distribution relationships as well. Alcatel Standard Electrica S.A. has worldwide nonexclusive distribution rights for Hybrid's products and is Hybrid's main distributor in Europe. MANUFACTURING Hybrid'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. Hybrid's future success will depend, in significant part, on its ability to successfully manufacture its products cost-effectively and in sufficient volumes. Hybrid maintains a limited in-house manufacturing capability for performing system integration and testing on all headend products and for 100 manufacturing small quantities of modems at its headquarters in Cupertino. Hybrid'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. Hybrid's future success will depend, in significant part, on its ability to obtain high volume manufacturing at low costs. Hybrid entered into an agreement pursuant to which Sharp has been the exclusive OEM supplier through Itochu of certain of Hybrid'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, Hybrid 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 Hybrid will not experience similar supply problems in the future at Sharp or any other manufacturer. Hybrid has had only limited experience manufacturing its products to date, and there can be no assurance that Hybrid, Sharp or any other manufacturer of Hybrid's products will be successful in increasing the volume of its manufacturing efforts. Hybrid 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. Hybrid 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. Subcontractors supply both standard components and subassemblies manufactured to Hybrid'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 Hybrid'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 Hybrid's specification. Hybrid's proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU. Hybrid is dependent upon certain key suppliers for a number of the components for its products. For example, Hybrid currently only has one vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are used in Hybrid's server and client modem products, and in past periods these semiconductors have been in short supply. In 1997, BroadCom announced a program whereby certain of its technological and product enhancements may be made available to certain of Hybrid's competitors before making them available to Hybrid. This could have the effect of putting Hybrid at a competitive disadvantage with regard to time to market or cause Hybrid 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 Hybrid's modems. In addition, certain other components for products that Hybrid has under development are currently only available from a single source. For example, Stanford Telecom, which is a competitor for at least one of Hybrid's broadband wireless products, is currently the sole supplier for certain of Hybrid's products, although Hybrid is in the process of developing one or more alternative sources. 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 Hybrid's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on Hybrid'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 Hybrid 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 Hybrid's products, and there can be no assurance that, despite testing by Hybrid and use by current and potential customers, errors will not be found in Hybrid's current and future products. The 101 occurrence of such errors, defects or failures could result in product returns and other losses to Hybrid or its customers. Such occurrence could also result in the loss of or delay in market acceptance of Hybrid's products, which could have a material adverse effect on Hybrid's business, operating results and financial condition. Hybrid's products generally carry a one-year warranty for replacement of parts. Due to the relatively recent introduction of the Series 2000 products, Hybrid has limited experience with the problems that could arise with this generation of products. Hybrid's purchase agreements with its customers typically contain provisions designed to limit Hybrid's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in Hybrid's purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although Hybrid has not experienced any significant product liability claims to date, the sale and support of Hybrid's products may entail the risk of such claims. A successful product liability claim brought against Hybrid could have a material adverse effect on Hybrid's business, operating results and financial condition. RESEARCH AND DEVELOPMENT As of March 31, 1998, Hybrid's research and development staff consisted of 36 full-time employees. Hybrid's total research and development expenses for 1997, 1996 and 1995 were $7,108,000, $5,076,000 and $3,862,000, respectively, and for the three months ended March 31, 1998 were $2,240,000. Hybrid 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. Hybrid 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. Hybrid 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. Hybrid has recently completed development of and released for sale a new two-way product utilizing QPSK modulation in place of the current FSK return product. This QPSK product utilizes standards-compliant chipsets and a cost-effective channel sharing algorithm. It will support both wireless and cable return. In addition, Hybrid 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 "PROPOSAL NO. 1: THE MERGER--RISK FACTORS-- RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS." To address competitive and pricing pressures, Hybrid expects that it will have to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning Hybrid's products to utilize more highly integrated components and more automated manufacturing techniques. There can be no assurance that Hybrid 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 Hybrid to reduce the list price of its client cable modems significantly. In addition, from time to time, Hybrid considers collaborative relationships with other entities to gain access to certain technologies that could enhance Hybrid's product offerings, broaden the market for Hybrid's products or accelerate time to market. In connection with such collaborative relationships, Hybrid may seek to jointly develop products, share its technology with other entities and license technology from such entities. In November 1997, Hybrid entered into a Warrant Purchase Agreement with Alcatel pursuant to which Alcatel agreed to provide Hybrid with certain technical information and the parties agreed to use commercially reasonable efforts to define and carry out a development program regarding broadband data modulation technology and to cross-license the technology developed. As of March 31, 1998, the parties had not defined such a program. In connection with entering into the Warrant Purchase Agreement, Hybrid issued to Alcatel a five-year warrant to purchase 458,295 shares of Common Stock at 102 an exercise price of $10.91 per share. The relationship between Hybrid and Alcatel is in the early stages, and, accordingly, there can be no assurance that the relationship will result in the development of commercially viable products or that Hybrid will otherwise significantly benefit from its relationship with Alcatel. 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 MCNS specifications, Hybrid will need to work toward complying with such standards. There can be no assurance that Hybrid's engineering and product design efforts will be successful or that Hybrid 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 Hybrid's business, operating results and financial condition. BACKLOG Because Hybrid generally ships its products within a short period after receipt of an order, Hybrid does not have a backlog of firm unfilled orders, and sales in any quarter are substantially dependent on orders booked in that quarter. 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 broadband wireless and cable system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of Hybrid'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 Hybrid's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put Hybrid at a disadvantage in relation to its competitors. Hybrid's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of Hybrid'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 Hybrid. In addition, many of Hybrid's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of Hybrid'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, Hybrid 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, could become competitors should they decide to enter Hybrid's markets directly. Stanford Telecom, which manufacturers QPSK components and is the sole supplier for certain of Hybrid's products, has become a competitor for at least one of Hybrid's products in the broadband wireless market. There can be no assurance that Hybrid will be able to compete effectively in its target markets. Hybrid's principal competitors in the wireless modem market, Bay Networks, Harmonic Lightwaves through its acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are providing wireless Internet connectivity over wireless cable and LMDS frequencies. 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 103 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. For example, Cisco Systems has announced intentions to develop solutions based on the MCNS standard with several cable modem vendors and in December 1997 announced an MCNS-compliant integrated router and cable modem to offer high-speed Internet access. Certain of Hybrid's competitors have already introduced or announced high speed connectivity products that are priced lower than Hybrid'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 Hybrid's products. To be successful, Hybrid's Series 2000 products must achieve market acceptance and Hybrid must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. Hybrid 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 Hybrid will meet these challenges, that it will be able to compete successfully against current or future competitors, or that the competitive pressures faced by Hybrid will not materially and adversely affect Hybrid's business, operating results and financial conditions. Further, as a strategic response to changes in the competitive environment, Hybrid may make certain extended payment, pricing, service, marketing or other promotional decisions or enter into acquisitions or new ventures that can have a material adverse effect on Hybrid's business, operating results or financial conditions. Broadband wireless and cable 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. Recently several companies, including Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent, several RBOCs, MCI and others announced the formation of a group focused on accelerating the pace of ADSL service. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, Hybrid's business, operating results and financial condition could be materially adversely affected. INTELLECTUAL PROPERTY Hybrid relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. Hybrid 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. Hybrid's two issued U.S. patents relate to Hybrid's basic client cable modem device and methodology and asymmetric system architecture and methodology. Hybrid initially obtained U.S. Patent No. 5,347,304 in September 1994, filed an application for the reissuance of the patent with the U.S. Patent and Trademark Office in November 1994 and anticipates that the patent was reissued on April 21, 1998 as U.S. Patent No. RE 35,774. In the future, Hybrid 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 Hybrid'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 Hybrid's products can be sold, to provide meaningful protection or any commercial advantage to Hybrid. Moreover, any patents that have been or may be issued might be challenged, as is the case with Hybrid's recently initiated patent litigation. Any such challenge could result in time consuming and costly litigation and result in Hybrid'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. 104 Hybrid 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 Hybrid to protect its intellectual property will prove sufficient to prevent misappropriation of Hybrid's technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect Hybrid's products or intellectual property rights to the same extent as do the laws of the United States. In the past, Hybrid has received, and in the future may receive, notices from third parties claiming that Hybrid's products or proprietary rights infringe the proprietary rights of third parties. Hybrid expects that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in Hybrid'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 Hybrid to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to Hybrid or at all, which could have a material adverse effect upon Hybrid's business, operating results and financial condition. Hybrid 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 Hybrid. Further Hybrid has recently, and may in the future, elect to initiate claims or litigation against third parties for infringement of Hybrid's patents or proprietary rights or to establish the validity of Hybrid's patents or proprietary right. Hybrid has sent notices to certain third parties offering to license Hybrid's patents for products which may be infringing Hybrid's patent rights. Hybrid has recently initiated patent infringement litigation against two parties, and in response, one party is seeking a declaration of invalidity, unenforceability and non-infringement of Hybrid's patents and attorneys fees, and the other party is seeking to be dismissed from the litigation. Hybrid has not yet determined if it will assert claims against additional parties or others. There can be no assurance that such notifications will not involve additional potential litigation initiated by Hybrid or additional related countersuits by third parties seeking to challenge Hybrid's patents or asserting infringement by Hybrid. Patent litigation can be time consuming and costly and, although no monetary claim is asserted against the Company, the action, if resolved adversely to the Company, could have a material adverse effect on Hybrid's business, operating results and financial condition. EMPLOYEES As of March 31, 1998, Hybrid had 88 full-time employees. None of Hybrid's employees is represented by a collective bargaining unit with respect to his or her employment with Hybrid, nor has Hybrid ever experienced an organized work stoppage. PROPERTIES Hybrid leases approximately 14,900 square feet of office, research and development and manufacturing space in Cupertino, California. Hybrid also subleases approximately 10,200 square feet and 9,200 square feet in Cupertino under sublease agreements. The current leases for the Cupertino facilities expire between May 1998 and September 1998. Hybrid plans to move out of these three facilities and consolidate into an single facility which Hybrid subleased in February 1998. The new subleased facility is for approximately 55,000 square feet of office, research and development and manufacturing space in San Jose, California. The sublease expires in April 2004 and Hybrid has an option to extend the term of the lease through October 2009. Hybrid also leases approximately 900 square feet of office space in Tinton Falls, New Jersey, approximately 1,000 square feet of office space in Atlanta, Georgia and approximately 2,400 square feet of office space in San Francisco, California under leases expiring in September 1998, March 1999 and March 2002, respectively. Hybrid believes that its 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. 105 LEGAL PROCEEDINGS Hybrid initiated a civil action for patent infringement against Com21, Inc., and Celestica, Inc. on January 23, 1998 in the U.S. District Court for the Eastern District of Virginia. In response to Hybrid's action, Com21, Inc. initiated a declaratory judgment action on January 29, 1998 against Hybrid in the U.S. District Court for the Northern District of California to obtain a declaration of invalidity, unenforceability and non-infringement of Hybrid's patents and the collection of attorneys fees. Separately, Celestica is seeking to be dismissed from the action. The action in the Eastern District of Virginia was subsequently transferred to the Northern District of California on February 23, 1998. The litigation is expected to be time consuming and costly, and, although no monetary claim is asserted against Hybrid, other than attorneys fees, the litigation, if resolved adversely to Hybrid, could have a material adverse effect on Hybrid's business, operating results or financial condition. 106 BUSINESS OF PACIFIC This Business section and other parts of this Joint Proxy Statement/Prospectus contain forward-looking statements that involve risks and uncertainties. Pacific's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and separately in "PROPOSAL NO. 1: THE MERGER--RISK FACTORS" and "PACIFIC PROPERTIES DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Pacific designs, manufactures and markets radio frequency devices and systems for providers of wireless communication services. Since its inception in 1984, Pacific has been involved in the development of radio frequency integrated circuits (RFICS) employing gallium arsenide (GAAS) for use in a variety of commercial and military applications. In 1991, Pacific began applying its RFIC design expertise and radio frequency system engineering skills to the development of system solutions for the broadband wireless video market. Since 1991, Pacific has produced and sold over one million broadband wireless antenna/ downconverters. Additionally, since the introduction of Pacific's CypherPoint video encoding system in 1996, Pacific has produced and sold over 50 encoding systems and 100,000 decoders. Pacific's strategy is to leverage its position in broadband wireless video communications to address more extensive "wireless last mile" voice, data and video applications. It has recently begun field trials of an RF Transverter which, when used in combination with a two-way cable modem, can provide high-speed wireless Internet access using the RF spectrum. PRODUCTS, TECHNOLOGY AND SERVICES PRODUCTS Broadband wireless and RFIC products comprise Pacific's principal product lines, with broadband wireless products currently comprising more than 90% of its revenues. BROADBAND WIRELESS DOWNCONVERTERS AND ANTENNAS. Downconverters were Pacific's entry into the broadband wireless market and, when combined with Pacific's antennas, currently comprise the majority of Pacific's revenues. These products convert a block of microwave frequencies to a block of cable television frequencies that television sets can process. They perform this process while filtering out unwanted frequencies and adding as little noise as possible. Downconverters differ in the number of channels processed, the amount of filtering applied to the out-of band frequencies and the amount of signal amplification. Pacific has developed integrated antenna/downconverters that are designed to reduce the number of connections and improve performance and reliability in the field. Pacific's latest generation of DigiSite downconverters incorporates Pacific's proprietary Fil-Tenna, which is designed to filter unwanted signals with minimal in-band loss. In addition, Pacific has introduced a new line of smaller planar array antennas that are targeted at urban and suburban markets and designed to offer optimal gain and side lobe performance to reduce multipath interference. CYPHERPOINT VIDEO ENCODING SYSTEM. CypherPoint, Pacific's video encoding and decoding system, was commercially introduced in 1996. The development of CypherPoint relied heavily on Pacific's RFIC expertise, system level design experience and hardware and software integration skills, including DES encryption, digital ASIC design and remote network management. CypherPoint utilizes proprietary broadband encoding techniques to provide video signal security and customer addressability. CypherPoint eliminates the need for broadband wireless operators to rely on a set top converter for each television set or VCR in order to decode encoded programming. Operators can have signal security and addressability without the cost and inconvenience of set top converters. RFIC PRODUCTS. The communications industry is migrating toward the use of higher frequencies in response to the need to manipulate large amounts of data and to provide high data integrity. Their intrinsic 107 electrical properties make GaAs RFICs a popular choice for applications at 1 GHz and above. Pacific manufactures a line of low-cost, plastic packaged GaAs RFIC products for common frequency bands between 800 and 2500 MHz, including power amplifiers, switches, attenuators, converters and oscillators. Applications include telephony, remote data collection and wireless point-to-point communications. TECHNOLOGY In the 14 years since its inception, Pacific has developed a broad range of skills and competencies applicable to the wireless communication market. GAAS RFIC DESIGN. Gallium arsenide integrated circuits are central to Pacific's product capability. GaAs RFICs have been engineered for use in component products such as power amplifiers, final products such as downconverters and systems such as wireless data. Pacific has proprietary tools and technologies to design, package and perform complex wafer testing and qualification of GaAs RFICs at frequencies ranging from DC to beyond 20 GHz. OTHER PROPRIETARY TECHNOLOGIES. Pacific engineers have designed, developed and engineered for manufacturing a wide variety of wireless communication products. These products incorporate multiple proprietary technologies addressing a number of frequencies and applications. While products such as broadband wireless downconverters have utilized the 2.5 GHz frequency range, Pacific's video encoding/decoding system, CypherPoint, typically operates in the 200 to 400 MHz frequency range. CypherPoint also includes extensive, proprietary embedded and system control software developed by Pacific for this application, with capabilities including DES encryption and remote network management. Pacific's antennas, filters and electro-mechanical designs also include numerous proprietary technical elements. SERVICES Pacific provides field installation, support and training services. In some cases, these services are purchased by customers as part of a system sale, while in other cases they are provided on a time and materials basis. Pacific employs six field application engineers who are located throughout North America, with an average of over seven years direct experience in wireless technical operations. In addition, Pacific provides training and remote software support from its facility in Sunnyvale, California. Pacific typically provides a two-year warranty on its broadband wireless downconverters and decoders. CUSTOMERS Pacific's customers include broadband wireless system operators as well as distributors, installers, resellers and other manufacturers. As of March 31, 1998, Pacific's largest domestic customers included BellSouth Corporation, CS Wireless Systems, Inc., Heartland Wireless Communications, Wireless Broadcasting Systems of America, Inc. and Wireless One, Inc. Pacific's largest international customers included Caribbean Broadcast Corp. (Barbados), Megacable (Mexico), MVS Multivision (Mexico), TV Filme Inc. (Brazil) and VTR Cablexpress (Chile). To date, a small number of customers has accounted for a substantial portion of Pacific's net sales in any given period. Pacific expects that 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. Pacific 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 and regulatory considerations. In addition, Pacific's customers include companies in the early stage of development or in need of capital to deploy or expand their services. A limited number of broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, and Pacific's success will be dependent upon its ability to establish and maintain relationships with these companies. Pacific had two customers that accounted for 35.7% and 12.4%, respectively, of Pacific's net sales in fiscal 1996 and two customers that accounted for 30.4% and 21.5%, respectively, of net sales in fiscal 1997. In the six months ended 108 March 31, 1998 two customers accounted for 31.3% and 13.6%, respectively, of Pacific's net sales. Pacific's international sales accounted for 29.5%, 28.5% and 36.7% of net sales in 1997, 1996 and 1995, respectively, and 53.2% of net sales for the six months ended March 31, 1998. See "PROPOSAL NO. 1: THE MERGER--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--CUSTOMER CONCENTRATION." SALES, MARKETING AND DISTRIBUTION Pacific markets its products through a direct sales force supplemented by distributors. The majority of Pacific's sales are made by its sales force directly to broadband wireless operators. Pacific has sales offices and personnel in Sunnyvale and San Diego, California. Currently Pacific employs five field salespeople, three internal salespeople and one corporate officer whose primary responsibility is sales. Manufacturers' representatives supplement this in-house sales staff in selected international markets, as well as in the United States for RFIC products. Pacific also has a nonexclusive worldwide stocking distributorship with Richardson Electronics, Ltd., for its RFIC products. Hills Industries, Ltd. is Pacific's exclusive distributor in Australia for broadband wireless products as well as a manufacturing licensee for selected downconverters and antennas. The sale of Pacific'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 Pacific'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 Pacific'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 payment or fails to pay, Pacific's operating results for that quarter could be materially adversely affected. In addition, Pacific's customers include companies in the early stage of development or in need of capital to deploy or expand their services. Accordingly, in order to address the needs and competitive factors facing the emerging markets serviced by wireless system operators, distributors, installers and other manufacturers, Pacific on occasion has provided customers extended payment, promotional pricing or other terms which can have a material adverse effect on Pacific's business, operating results and financial condition. Pacific's future success will depend in significant part upon the decision of Pacific's current and prospective customers to continue to purchase products from Pacific. There can be no assurance that Pacific's current customers will continue to place orders with Pacific or that Pacific will be able to obtain orders from new customers. If orders from current customers are canceled, decreased or delayed, or Pacific fails to obtain significant orders from new customers, or any significant customer delays payment or fails to pay, Pacific's business, operating results and financial condition could be materially adversely affected. The timing and volume of customer orders are difficult to forecast because broadband wireless companies typically require prompt delivery of products and a substantial majority of Pacific's sales are booked and shipped in the same quarter. Pacific's backlog was approximately $3.1 million at March 31, 1998. Because of the possibility of customer changes in delivery schedules or cancellation of orders, with little or no penalty, Pacific's backlog at any point in time may not be a good indicator of actual revenues for any future period and cannot be predicted with any degree of accuracy. Accordingly, Pacific's expectations for both short- and long-term future net revenues are based in large part on its own estimate of future demand and not on firm customer orders. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING DECLINE OF AVERAGE SELLING PRICES." 109 MANUFACTURING Pacific's manufacturing strategy is to perform systems integration, testing and quality inspection internally while outsourcing the majority of component production to low-cost, offshore manufacturing partners. Pacific has established a manufacturing partnership for component assembly with Sun Denki (HK) Ltd. in the People's Republic of China, where the majority of Pacific's broadband wireless products are produced. Antennas are produced under a similar partnership arrangement in Mexico. For GaAs wafer fabrication, Pacific uses multiple foundries. Currently, TriQuint Semiconductor performs the majority of wafer fabrication. Pacific also has a manufacturing licensing arrangement with Hills Industries, Ltd. in Australia for antennas and downconverters. Manufacturing operations consist primarily of assembling, tuning and testing electronic assemblies built from semiconductors, fabricated parts, printed circuit boards and other electronic devices. Electronic devices, components and raw materials used in Pacific's products are obtained from a number of suppliers, although certain materials are obtained from a limited number of sources or, in some cases, a sole source. Some devices or components are standard items while others are manufactured to Pacific's specifications by its suppliers. Any significant interruption in the delivery of such items could have a material adverse effect on Pacific's operations. RESEARCH AND DEVELOPMENT The wireless communications market is fiercely competitive and characterized by rapid technological change, which requires industry participants to make continuous expenditures of substantial resources for product enhancement and innovation. Pacific is committed to the creation of new products and the enhancement of existing products. Pacific is currently focusing its research and development resources on products designed to interface with high speed cable modems and allow for two-way, high speed wireless Internet communications. In addition, development resources are allocated to broaden existing product lines, reducing product costs and improving performance by product redesign efforts. During fiscal years 1997, 1996 and 1995, Pacific spent approximately $4.8 million, $5.4 million and $3.2 million, respectively, on product research and development. These amounts represent approximately 14%, 19% and 13%, respectively, of net sales in each of those periods. COMPETITION The markets in which Pacific participates are highly competitive. Broadband wireless competitors include California Amplifier, Inc., Conifer Corporation, Trans-Systems, Inc., and TeleLynx, Inc. RFIC competitors include Celeritek, Inc., ANADIGICS, Inc., Teledyne, Inc., Philips Semiconductors, RF Micro Devices, Inc. and Motorola, Inc. In addition, Pacific anticipates increased competition from new companies entering such markets, some of whom may have financial and technical resources substantially greater than those of Pacific. Furthermore, because some of Pacific's products may not be proprietary, they may be duplicated by low-cost producers, resulting in price and margin pressures. Pacific believes that competition in its markets is based primarily on price, performance, reputation and product reliability. Pacific's continued success in these markets will depend upon its ability to continue to design and manufacture quality products at competitive prices. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--COMPETITION." INTELLECTUAL PROPERTY Pacific relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. Pacific currently has 23 patents issued in the United States as well as pending applications in the United States, Mexico, Europe and Japan that relate to the design features for its RFIC and broadband wireless products. Any patents that have been or 110 may be issued might be challenged and any such challenge could result in time consuming and costly litigation and result in Pacific'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. See "PROPOSAL NO. 1: THE MERGER--RISK FACTORS--RISKS RELATING TO HYBRID, PACIFIC AND THE COMBINED COMPANY--PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS." Pacific has entered into confidentiality and invention assignment agreements with its employees and certain of its 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 Pacific to protect its intellectual property will prove sufficient to prevent misappropriation of Pacific's technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect Pacific's products or intellectual property rights to the same extent as do the laws of the United States. In the past, Pacific has received, and in the future may receive, notices from third parties claiming that Pacific's products or proprietary rights infringe the proprietary rights of third parties. Pacific expects that participants in the wireless communications market will be increasingly subject to infringement claims as the number of products and competitors in Pacific'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 Pacific to enter into royalty or licensing agreements. Such agreements may not be available on terms acceptable to Pacific or at all, which could have a material adverse effect upon Pacific's business, operating results and financial condition. EMPLOYEES As of March 31, 1998, Pacific had 100 full-time employees. Of the total, 38 were engaged in engineering, 13 in marketing and sales, 35 in operations and 14 in finance and administration. None of Pacific's employees is represented by a labor union. Pacific has experienced no work stoppages and believes its employee relations are good. PROPERTIES Pacific's principal offices are located in approximately 75,000 square feet of space in Sunnyvale, California. This facility is leased to Pacific through October 2000. 111 MANAGEMENT OF THE COMBINED COMPANY EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding persons who are expected to serve as the executive officers and directors of the combined company after the consummation of the Merger, which is expected to occur in May 1998:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Executive Officers Carl S. Ledbetter.................................. 48 Chief Executive Officer and Chairman of the Board of Directors Richard B. Gold.................................... 43 President, Chief Operating Officer and Director Gustavo (Gus) Ezcurra.............................. 42 Vice President, Sales William H. Fry..................................... 60 Vice President, Manufacturing Vishwas R. (Victor) Godbole........................ 51 Vice President, Engineering Dan E. Steimle..................................... 50 Vice President, Finance and Administration, Chief Financial Officer and Secretary Other Directors(1) James R. Flach..................................... 51 Director Gary M. Lauder..................................... 35 Director Matthew D. Miller.................................. 50 Director
- ------------------------ (1) Stephen E. Halprin and Douglas M. Leone, current directors of Hybrid are expected to resign upon the Effective Time of the Merger and to be replaced by Richard B. Gold and Matthew D. Miller. CARL S. LEDBETTER. Mr. Ledbetter joined Hybrid in January 1996 as its President and Chief Executive Officer, and in August 1996, he became Chairman of the Board. It is expected that, effective upon consummation of the Merger, Mr. Ledbetter will resign from his position as President of Hybrid, but will remain as Chief Executive Officer and Chairman of the Board of Directors of Hybrid. Prior to joining Hybrid, 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. RICHARD B. GOLD. It is expected that, effective upon consummation of the Merger, Mr. Gold will become the President and Chief Operating Officer and a director of Hybrid. Mr. Gold joined Pacific as Vice President, Engineering in November 1991 and was promoted to Chief Operating Officer in March of 1994 and to his current position as President and Chief Executive Officer in January 1997. Mr. Gold holds a B.S. in Engineering Physics from Cornell University, an M.B.A. from Northeastern University, and an M.S.E.E. and Ph.D.E.E. from Stanford University. GUSTAVO (GUS) EZCURRA. Mr Ezcurra joined Hybrid 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. Mr. Fry joined Hybrid in August 1995 as its interim Chief Operating Officer and Acting Vice President, Operations, and in May 1996 he became Vice President, Operations. He is expected to become Vice President, Manufacturing after the consummation of the Merger. From July 1994 to 112 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. VISHWAS R. (VICTOR) GODBOLE. Mr. Godbole joined Hybrid 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, Stretegic 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. DAN E. STEIMLE. Mr. Steimle joined Hybrid 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 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. JAMES R. FLACH. Mr. Flach has been a director of Hybrid since May 1995, and he served as acting Chief Executive Officer of Hybrid from November 1995 to January 1996. Since September 1992, Mr. Flach has been an executive 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. GARY M. LAUDER. Mr. Lauder has been a director of Hybrid 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. MATTHEW D. MILLER. It is expected that Mr. Miller, effective upon consummation of the Merger, will become a director of Hybrid. Mr. Miller has been a Director of Pacific since 1994 and Chairman since January 1997. Since November 1997, Mr. Miller has served as President and Chief Executive Officer of Sarnoff Digital Communications, a digital video technology development company. Mr. Miller currently also serves as President of M-Squared Media and Technology, an investing and consulting firm he founded in August 1994 focusing on emerging digital multimedia hardware, software, communications and service markers. Prior to founding M-Squared, Mr. Miller was Vice President of Technology at General Instrument Corporation, the world's leading supplier of broadband communications equipment. Mr. Miller is a director of Lumisys, LogicVision and Faroudja Images. Mr. Miller holds a B.A. degree in Physics from Harvard University and an M.A. and Ph.D. in Physics from Princeton University. Each officer serves at the discretion of the Hybrid Board. Hybrid's certificate of incorporation and bylaws provide for a classified Hybrid Board. Accordingly, the terms of the office of the Hybrid Board of Directors have been 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 1998 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 113 meeting following election and until their successors were duly elected and qualified, or until their earlier resignation or removal, if any. 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. HYBRID BOARD COMMITTEES The Hybrid Board has, and the Board of the Combined Company will have the following committees: AUDIT COMMITTEE. The Audit Committee of the Hybrid Board currently consists of Mr. Flach and Mr. Halprin. The Audit Committee reviews Hybrid's financial statements and accounting practices, makes recommendations to the Hybrid Board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by Hybrid's independent auditors. COMPENSATION COMMITTEE. The Compensation Committee of the Hybrid Board currently consists of Mr. Flach and Mr. Leone. The Compensation Committee makes recommendations to the Hybrid Board concerning salaries and incentive compensation for Hybrid's officers and employees and administers Hybrid's employee benefit plans. SELECTED INFORMATION WITH RESPECT TO HYBRID EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to Hybrid in all capacities during the years ended December 31, 1996 and 1997 by (i) Hybrid'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 Hybrid at December 31, 1997 (collectively, the "HYBRID NAMED EXECUTIVE OFFICERS"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARD ------------------------------------------------ ---------- OTHER SECURITIES ANNUAL UNDERLYING NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS(#) - ---------------------------------------- ----- ---------- ----------- ----------- ---------- Carl S. Ledbetter....................... 1997 $ 187,500 $ 36,853 $ 77,924(1)(2) 170,000 President and Chief Executive Officer 1996 175,000 -- 61,299(1) 487,919 Gustavo Ezcurra(3)...................... 1997 126,875 97,154(4) 1,129(2) 14,815 Vice President, Sales 1996 17,625 12,835(4) -- 77,876 William H. Fry.......................... 1997 131,250 34,501 2,252(2) -- Vice President, Operations 1996 70,000 -- -- 89,815 Dan E. Steimle(5)....................... 1997 68,750 86,250 -- 111,111 Vice President, Finance and Administration and Chief Financial Officer
- ------------------------ (1) Includes temporary living expenses paid by Hybrid of $72,000 and $61,299 to Mr. Ledbetter in 1996 and 1997, respectively. (2) Includes value of stock bonuses of $5,924, $1,129 and $2,252 for Messrs. Ledbetter, Ezcurra and Fry, respectively. 114 (3) Mr. Ezcurra joined Hybrid in September 1996. (4) Includes commissions of $94,904 in 1997 and $12,835 in 1996. (5) Mr. Steimle joined Hybrid in July 1997. The following table sets forth further information regarding option grants pursuant to Hybrid's Executive Officer Plan and Hybrid's 1996 Equity Incentive Plan during 1997 to each of the Hybrid 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 or ten 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 1997
RATES OF STOCK PRICE APPRECIATION FOR NUMBER OF PERCENTAGE OF POTENTIAL REALIZABLE SECURITIES TOTAL OPTIONS VALUE AT ASSUMED ANNUAL UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------ NAME GRANTED(1) 1997 SHARE DATE 5% 10% - ------------------------------------ ----------- --------------- ----------- ----------- ---------- ------------ Carl S. Ledbetter................... 170,000 19.59 $ 11.04 09/16/02 $ 518,526 $ 1,145,805 Gustavo Ezcurra..................... 14,815 1.71 1.08 01/28/02 4,421 9,768 William H. Fry...................... -- -- -- -- -- -- Dan E. Steimle...................... 111,111 12.81 5.40 07/16/02 165,769 366,306
- ------------------------ (1) Options granted pursuant to the Hybrid Executive Officer Plan and Hybrid's 1996 Equity Incentive Plan in 1997 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 Hybrid. 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 Hybrid's estimate or projection of future Common Stock prices. The following table sets forth the number of shares acquired upon the exercise of stock options during 1997 and the number of shares covered by both exercisable and unexercisable stock options held by each of the Hybrid Named Executive Officers as of December 31, 1997. 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 Hybrid's Common Stock as of December 31, 1997 ($11.12) as determined by the Hybrid Board. AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING EXERCISED IN-THE- MONEY OPTIONS AT OPTIONS AT YEAR-END YEAR-END SHARES ACQUIRED ON VALUE -------------------------- --------------------------- NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------- ------------------- ------------- ----------- ------------- ------------ ------------- Carl S. Ledbetter.............. -- -- 219,750 438,168 $ 2,324,955 $ 2,850,817 Gustavo Ezcurra................ -- -- 27,730 64,961 278,409 652,208 William H. Fry................. -- -- 40,219 47,744 425,517 505,132 Dan E. Steimle................. -- -- -- 111,111 -- 635,555
EMPLOYMENT AGREEMENTS In January 1996, Hybrid entered into a two year employment agreement with Mr. Ledbetter in which he agreed to serve as Hybrid'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 115 during the first year, based on achieving certain milestones, as well as regular employee benefits, relocation costs of up to $97,500 and five year options to purchase up to 353,104 shares of Hybrid'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). Hybrid is prohibited from terminating Mr. Ledbetter's employment except for "Cause" (as defined in the employment agreement). Pursuant to a July 1997 employment letter, Mr. Steimle received an option to purchase 111,111 shares of Hybrid Common Stock, which provides for accelerated vesting in the event of a "Change of Control Transaction" (as defined in Hybrid's Executive Officer Plan) and is entitled to severance equal to three (3) months of his base salary if he is terminated without cause. In January, 1998, the Hybrid Board approved the 12-month acceleration of vesting for options held by Mr. Fry if Hybrid hires certain senior management and Mr. Fry's employment is terminated within 12 months. In addition, Mr. Fry is entitled to severance equal to three months of his base salary if he is terminated by Hybrid without cause. INCENTIVE BASED COMPENSATION PROGRAM In July 1997, Hybrid adopted a bonus plan for Hybrid's officers and certain managers with respect to the three quarters ending December 31, 1997. Under the bonus plan, Hybrid's 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 Hybrid's net sales and operating income for the quarter as well as Hybrid'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 Hybrid'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 quarters ended September 30, 1997 and December 31, 1997, Hybrid made no cash payments and issued no shares pursuant to the bonus plan. DIRECTOR COMPENSATION Directors of Hybrid do not receive cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending meetings of the Hybrid Board. In September 1997, the Hybrid Board adopted Hybrid's 1997 Directors Stock Option Plan (the "DIRECTORS PLAN") and reserved a total of 100,000 shares of Hybrid's Common Stock for issuance thereunder. Hybrid's stockholders approved the Directors Plan in October 1997. Members of the Board who are not employees of Hybrid, or any parent, subsidiary or affiliate of Hybrid, are eligible to participate in the Directors Plan. Each eligible director who first becomes a member of the Hybrid Board on or after Hybrid's initial public offering in November 1997 will initially be granted an option for 15,000 shares (an "INITIAL GRANT") on the later of the effective date of the initial public offering 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 of the initial public offering 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 Hybrid. 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the Board was an officer or employee of Hybrid during 1997. No executive officer of Hybrid serves as a member of the board of directors or 116 compensation committee of any entity that has one or more executive officers serving on Hybrid's Board or Compensation Committee. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1, 1997, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which Hybrid 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 Hybrid Common Stock 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 April 1997, London Pacific Life & Annuity Company ("LONDON PACIFIC") and Hybrid entered into a senior secured convertible debenture agreement pursuant to which London Pacific loaned $5.5 million to Hybrid in exchange for a senior secured convertible debenture due 2002. In connection with the issuance of the $5.5 Million Debenture, Hybrid 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 Hybrid's assets, and Hybrid 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 Hybrid Common Stock, assuming a conversion price of $10.71 per share, at the option of BG Services Limited at any time. In September 1997, Dan Steimle, Hybrid's Vice President, Finance and Administration and Chief Financial Officer and Sequoia Partnerships loaned Hybrid $500,000 and $300,000, respectively, under a demand note exchangeable for subordinated notes. In September 1997, Hybrid 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 Hybrid participated in the subordinated notes and related warrant transaction:
NUMBER OF ISSUES OF SUBORDINATED 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 M. Lauder............................................. 100,000 3,667 Dan E. Steimle............................................. 500,000 18,335
COMPENSATION COMMITTEE REPORT This Report of the Compensation Committee is required by the Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act, or under the Exchange Act, except to the extent that Hybrid specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts. 117 To the Hybrid Board: Final decisions regarding executive compensation and stock option grants to executives are made by the Compensation Committee of the Hybrid Board (the "COMMITTEE"). The Committee is composed of two independent non-employee directors, none of whom have any interlocking relationships as defined by the Commission. GENERAL COMPENSATION POLICY The Committee acts on behalf of the Hybrid Board to establish the general compensation policy of Hybrid for all employees of Hybrid. The Committee typically reviews base salary levels and target bonuses for the Chief Executive Officer ("CEO") and other executive officers and employees of Hybrid at or about the beginning of each year. The Committee administers Hybrid's incentive and equity plans, including the 1997 Equity Incentive Plan (the "INCENTIVE PLAN"). The Committee's philosophy in compensating executive officers, including the CEO, is to relate compensation to corporate performance. Consistent with this philosophy, the incentive component of the compensation of the executive officers of Hybrid is contingent on gross margin, operating expenses, sales performance and cash management. Each executive's incentive compensation is based on the executive's quarterly performance with respect to the two of these factors most closely. Long-term equity incentives for executive officers are effected through the granting of stock options under the Incentive Plan (and, prior to their termination, the 1993 Equity Incentive Plan, the 1996 Equity Incentive Plan and the Executive Incentive Plan). Stock options generally have value for the executive only if the price of Hybrid's stock increases above the fair market value on the grant date and the executive remains in Hybrid's employ for the period required for the shares to vest. The base salaries, incentive compensation and stock option grants of the executive officers are determined in part by the Committee reviewing data on prevailing compensation practices in companies with whom Hybrid competes for executive talent and by their evaluating such information in connection with Hybrid's corporate goals. The Committee's goal is to maintain base salary, target bonuses, and stock option awards in the range of 50% to 75% of those paid by other companies in the industry. In preparing the performance graph for this Joint Proxy Statement/Prospectus, Hybrid used the Hambrecht & Quist Technology Index and the Nasdaq Stock Market Composite Index. The compensation practices of most of the companies in these indices were not reviewed by the Company when the Committee reviewed the compensation information described above because such companies were determined not to be competitive with Hybrid for executive talent. 1997 EXECUTIVE COMPENSATION BASE COMPENSATION. The Committee reviewed the recommendations and performance and market data outlined above and established a base salary level for each executive officer, including the CEO. Prior to Hybrid's initial public offering the Committee did not consult market surveys in establishing base salaries. After Hybrid's initial public offering, using the Radford Executive Compensation Survey as a guide, the Committee set base salaries for officers in a range of 50% to 75% of salaries paid by San Francisco Bay Area companies with sales of less than or equal to $40 million. To that end, the Committee awarded salary increases to executive officers and other employees in January 1998. INCENTIVE COMPENSATION. For 1997, Hybrid did not rely on market data as the basis for determining incentive compensation for the CEO and the other executives. The target amount of bonus for each executive and the CEO was established by the Company at the beginning of the fiscal year. The actual amount of bonus paid was based on Hybrid's achievement of Company-wide specified financial performance targets. For 1997, executive officers and other employees received approximately 20% of the annual 118 target bonus. Bonuses are paid 50% in cash and 50% in stock. For 1998, Hybrid will review performance and the market data as the basis for determining incentive compensation. STOCK OPTIONS. In 1997, stock options were granted to certain executive officers as incentives for them to become employees or to aid in the retention of executive officers and to align their interests with those of the stockholders. Stock options typically have been granted to executive officers when the executive first joins Hybrid, in connection with a significant change in responsibilities and, occasionally, to achieve equity within a peer group. The Committee may, however, grant additional stock options to executives for other reasons. The number of shares subject to each stock option granted is within the discretion of the Committee and is based on anticipated future contribution and ability to impact corporate and/or business unit results, past performance or consistency within the executive's peer group. In 1998, the Committee considered these factors, as well as the number of options held by such executive officers as of the date of grant that remained unvested. In the discretion of the Committee, executive officers may also be granted stock options under the Incentive Plan to provide greater incentives to continue their employment with Hybrid and to strive to increase the value of Hybrid's Common Stock. The stock options generally become exercisable over a four-year period and are granted at a price that is equal to the fair market value of Hybrid's Common Stock on the date of grant. In keeping with this general approach, the Committee made option grants to Dan E. Steimle, Vice President of Finance, and Carl S. Ledbetter, President and Chief Executive Officer of the Company. COMPANY PERFORMANCE AND EXECUTIVE COMPENSATION. Based upon the criteria set forth above, Mr. Ledbetter received an incentive bonus of $11,853 in 1997 as well as a special bonus of $25,000, pursuant to the terms of his employment, for accomplishing a specific task. Mr. Ledbetter's incentive bonus represents approximately 20% of his annual target bonus established by the Committee prior to the beginning of the fiscal year. COMPLIANCE WITH SECTION 162(m) OF THE INTERNAL REVENUE CODE OF 1986. Hybrid intends to comply with the requirements of Section 162(m) of the Code. The Incentive Plan is already in compliance with Section 162(m) by limiting stock awards to named executive officers. Hybrid does not expect cash compensation for 1998 to be in excess of $1,000,000 or consequently affected by the requirements of Section 162(m). COMPENSATION COMMITTEE James R. Flach Douglas Leone 119 HYBRID STOCK PRICE PERFORMANCE The stock price performance graph below is required by the SEC and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Joint Proxy Statement/ Prospectus into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that Hybrid specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such Acts. The graph below compares the cumulative total stockholder return on the Common Stock of Hybrid from the first day of trading of Hybrid's Common Stock upon Hybrid's initial public offering (November 12, 1997) to December 31, 1997 with the cumulative total return on the Nasdaq Stock Market and the Hambrecht & Quist Technology Index (assuming the investment of $100 in Hybrid's Common Stock and in each of the indexes on the date of Hybrid's initial public offering, and reinvestment of all dividends). EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HYBRID NASDAQ HAMBRECHT NETWORKS COMPOSITE & QUIST INDEX TECHNOLOGY INDEX 11/12/97 $100.00 $100.00 $100.00 12/31/97 $69.80 $101.90 $96.60
The above graph was plotted using the following data:
NASDAQ STOCK MARKET HAMBRECHT & QUIST HYBRID NETWORKS, INC. COMPOSITE INDEX TECHNOLOGY INDEX ------------------------- ----------------------- ----------------------- INVESTMENT INVESTMENT INVESTMENT MARKET PRICE VALUE INDEX VALUE INDEX VALUE ------------ ----------- ---------- ----------- ---------- ----------- 11/12/97............................ $ 15.938 $ 100.00 1,541.720 $ 100.00 1,202.510 $ 100.00 12/31/97............................ 11.125 69.80 1,570.350 101.90 1,161.790 96.60
120 SELECTED INFORMATION WITH RESPECT TO PACIFIC EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of Pacific as of April 30, 1998 who will be serving as executive officers and directors of Hybrid, upon the closing of the Merger.
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Executive Officers Richard B. Gold.................................... 43 President, Chief Executive Officer and Director Other Director Matthew D. Miller.................................. 50 Chairman of the Board of Directors
RICHARD B. GOLD joined Pacific as Vice President, Engineering in November 1991 and was promoted to Chief Operating Officer in March of 1994 and to his current position as President and Chief Executive Officer in January 1997. Mr. Gold holds a B.S. in Engineering Physics from Cornell University, an M.B.A. from Northeastern University, and an M.S.E.E. and Ph.D.E.E. from Stanford University. MATTHEW D. MILLER has been a Director of Pacific since 1994 and Chairman since January 1997. Since November 1997, Mr. Miller has served as President and Chief Executive Officer of Sarnoff Digital Communications, a digital video technology development company. Mr. Miller currently also serves as President of M-Squared Media and Technology, an investing and consulting firm he founded in August 1994 focusing on emerging digital multimedia hardware, software, communications and service markers. Prior to founding M-Squared, Mr. Miller was Vice President of Technology at General Instrument Corporation, the world's leading supplier of broadband communications equipment. Mr. Miller is a director of Lumisys, LogicVision and Faroudja Images. Mr. Miller holds a B.A. degree in Physics from Harvard University and an M.A. and Ph.D. in Physics from Princeton University. BOARD COMMITTEES The Board of Directors has a Compensation Committee and an Audit Committee. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for Pacific's officers and employees and administers Pacific's 1986 Stock Option Plan and 1996 Equity Plan. See "SELECTED INFORMATION WITH RESPECT TO PACIFIC--COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" below. The Audit Committee reviews the results and scope of the audit and other accounting related services and reviews and evaluates Pacific's internal audit and control functions. The Audit Committee currently consists of Alan S. Dishlip. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Pacific's Compensation Committee was formed to review and approve the compensation and benefits for Pacific's executive officers, administer Pacific's stock option plans and make recommendations to the Board of Directors regarding such matters. The Compensation Committee of the currently consists of Messrs. Dishlip and Miller, neither of whom is an officer or employee of Pacific. No member of the Compensation Committee or executive officer of Pacific has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. DIRECTOR COMPENSATION No directors of Pacific receive cash remuneration for serving on the Board of Directors. Directors are entitled to participate in Pacific's 1986 Incentive Stock Option Plan and 1996 Equity Plan. See "SELECTED INFORMATION WITH RESPECT TO PACIFIC--STOCK PLANS--1986 INCENTIVE STOCK OPTION PLAN" and "--1996 EQUITY PLAN" below. 121 EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Pacific in all capacities during the fiscal year ended September 30, 1997 to Pacific's Chief Executive Officer in the 1997 fiscal year (the "PACIFIC NAMED EXECUTIVE OFFICER"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM ---------------------------------- COMPENSATION AWARD COMPENSATION(1) SECURITIES --------------------- UNDERLYING OPTIONS NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS (#) - ------------------------------------------------------------- ----------- ---------- --------- ------------------- Richard B. Gold ............................................. 1997 $ 148,159 $ 10,800 140,000(2) President and Chief Executive Officer
- ------------------------ (1) Excludes certain perquisites and other personal benefits, such as life insurance premiums paid by Pacific. These amounts reflect salary and bonus paid for the full fiscal year 1997. These amounts, in the aggregate, did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for the Pacific Named Executive Officer. (2) Shares granted January 21, 1997 under Pacific's 1996 Equity Incentive Plan. The shares are immediately exercisable. The shares vested 25% on January 21, 1998 and vest an additional 2.083% each full calendar month thereafter. On February 21, 1997 Mr. Gold exercised his option for 140,000 shares. OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR The following tables set forth information regarding stock options granted to and exercised by the Pacific Named Executive Officer during the last fiscal year, as well as options held by such officer as of September 30, 1997, the last day of Pacific's 1997 fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENTAGE OF TOTAL SECURITIES OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION NAME UNDERLYING OPTIONS EMPLOYEES IN 1997 PER SHARE DATE - ---------------------------------------------- ------------------ --------------------- --------------- ------------- Richard B. Gold............................... 140,000(1) 15.2% $ 0.25 N/A
- ------------------------ (1) The option listed in the table was granted pursuant to Pacific's 1996 Equity Incentive Plan, is immediately exercisable and is subject to the terms of such plan as described herein. The shares purchasable thereunder are subject to repurchase by Pacific at the original exercise price paid per share upon the optionee's cessation of service prior to the vesting in such shares. The repurchase right lapses and the optionee vests as to 25% of the option shares on January 21, 1998 and the balance in a series of equal monthly installments over the next 48 months of service thereafter. 122 AGGREGATE UNEXERCISED OPTIONS IN 1997
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL YEAR END FISCAL YEAR END ($)(1) SHARES ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Richard B. Gold................ 140,000(2) -- 495,312 39,688 $ 96,875 $ 7,125
- ------------------------ (1) Market value at underlying securities price as determined by the Board of Directors as of September 1997 of $0.25 minus exercise price. (2) All shares subject to repurchase rights in favor of Pacific. The shares vested 25% on January 21, 1998 and an additional 2.083% vest each calendar month thereafter. STOCK PLANS 1986 INCENTIVE STOCK OPTION PLAN Pacific's 1986 Incentive Stock Option Plan (the "1986 PLAN") provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Code and for the granting to employees and consultants of nonstatutory stock options. The 1986 Plan was approved by the Board of Directors in October 1986 and by the shareholders in November 1986. The 1986 Plan terminated in October 1996, and no further option grants will be made thereunder. A total of 3,500,000 shares of Common Stock were reserved for issuance under the 1986 Plan, and a total of 3,017,140 shares of Common Stock were actually issued thereunder. The 1986 Plan may be administered by the Board of Directors or a committee of the Board (the "COMMITTEE"). The Committee has the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Committee has the authority to amend, suspend or terminate the 1986 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1986 Plan. Options granted under the 1986 Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1986 Plan must generally be exercised within three months of the end of optionee's status as an employee of Pacific, or within six months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term. The exercise price of all incentive stock options granted under the 1986 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1986 Plan must be at least equal to 85% of the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Pacific's outstanding capital stock, the exercise price of an option granted under the 1986 Plan must equal at least 110% of the fair market value on the date of grant. The term of options granted under the 1986 Plan generally may not exceed ten years; provided that the term of an incentive stock option granted to a participant who owns more than 10% of the voting power of all classes of Pacific's outstanding capital stock may not exceed five years. The 1986 Plan provides that in the event of a merger of Pacific with or into another corporation, a sale of substantially all of Pacific's assets or a like transaction involving Pacific as a result of which Pacific is not the surviving corporation or as a result of which the outstanding shares of Pacific are exchanged for or converted into cash, property or securities not of Pacific, each outstanding option shall be assumed by the successor corporation or, if not assumed, shall terminate as of a date fixed by the Committee. 123 1996 EQUITY INCENTIVE PLAN Pacific's 1996 Equity Incentive Plan (the "1996 PLAN") provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Code, and for the granting to employees, officers, directors and consultants of nonstatutory stock options, rights to purchase Common Stock ("PURCHASE RIGHTS") and stock bonuses. The 1996 Plan was approved by the Board of Directors in March 1996 and by the shareholders in April 1996. Unless terminated sooner, the 1996 Plan will terminate automatically in March 2006. A total of 3,000,000 shares of Common Stock were reserved for issuance pursuant to the 1996 Plan. As of March 19, 1998, 1,935,500 shares of Common Stock are subject to outstanding awards under the 1996 Plan and 460,000 shares of Common Stock were issued pursuant to awards thereunder. The 1996 Plan may be administered by the Board of Directors or a committee of the Board (the "COMMITTEE"). The Committee has the power to determine the terms of the awards granted, including the exercise price, the number of shares subject to each award, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Committee has the authority to amend, suspend or terminate the 1996 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any award previously granted under the 1996 Plan. Awards granted under the 1996 Plan are not generally transferable by the optionee, and each award is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1996 Plan must generally be exercised within three months of the end of optionee's status as an employee or consultant of Pacific, or within twelve months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term. In the case of Purchase Rights and stock bonuses, the Restricted Stock Purchase Agreement or Stock Bonus Agreement shall impose such restrictions on the shares of Common Stock acquired pursuant thereto as the Committee shall determine. The exercise price of all incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1996 Plan must be at least equal to 85% of the fair market value on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Pacific's outstanding capital stock, the exercise price of an option granted under the 1996 Plan must equal at least 110% of the fair market value on the date of grant. The term of options granted under the 1996 Plan generally may not exceed ten years; provided that the term of an incentive stock option granted to a participant who owns more than 10% of the voting power of all classes of Pacific's outstanding stock may not exceed five years. The exercise price of Purchase Rights granted under the 1996 Plan must equal at least 85% of the fair market value on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Pacific's outstanding capital stock, the exercise price of Purchase Rights must be at least equal to the fair market value of the common stock on the date of grant. The 1996 Plan provides that in the event of a merger of Pacific with or into another corporation, a dissolution or liquidation of Pacific, a sale of substantially all of Pacific's assets or a like transaction involving Pacific, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding awards are not assumed or substituted for as described in the preceding sentence, they will terminate upon the expiration of such period thereafter as the Committee determines. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Pacific's Amended and Restated Articles of Incorporation limit the liability of Pacific's directors for monetary damages to the maximum extent permitted by California law. Such limitation of liability has no effect on the availability of equitable remedies, such as injunctive relief or recision. Pacific's By-laws provide that Pacific shall indemnify its officers and directors, it may indemnify its employees and other agents to the fullest extent provided by California law. Pacific has entered into 124 indemnification agreements with each of its current officers and directors that provide for indemnification of, and advancement of expenses to, such person to the maximum extent provided by California law. At the present time, there is no pending litigation or proceeding involving any director or officer, employee, or agent of Pacific where indemnification will be required or permitted. Pacific is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS Pacific has granted options to certain of its executive officers. SEE "--OPTION GRANTS IN LAST FISCAL YEAR" above and "SECURITY OWNERSHIP OF PACIFIC." Pacific has entered into indemnification agreements with each of its officers and directors. SEE "--LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS" ABOVE. Pacific has, in past and currently does, retain the services of M-Squared Media and Technology, an investment and consulting firm, which Mr. Matthew D. Miller, the Chairman of the Board of Pacific, serves as President. In fiscal year 1997, Pacific paid consulting fees totaling $40,000 to the consulting firm and in fiscal 1998 Pacific is paying it $5,000 per month for consulting services. Such agreement is on a month to month basis. In June 1996 and September , 1997, Pacific entered into bridge loan agreements with, and issued promissory notes and warrants to purchase Pacific Common Stock to, certain 5% or greater shareholders of Pacific including Accel IV L.P., Accel Investors '94 L.P., Accel Keiretsu L.P., Ellmore C. Patterson Partners, Prosper Partners, Institutional Venture Partners III, Institutional Venture Management III, Jafco, Oak Investment Partners III and certain of their affiliates (collectively, the "INVESTORS"), whereby the Investors loaned an aggregate amount of $1.0 million and $750,000, respectively, to Pacific and were issued an aggregate of 450,000 warrants by Pacific. In connection with the Merger, the promissory notes are expected to be repaid in full, together with accrued interest. See "PROPOSAL NO. 1: THE MERGER--APPROVAL OF THE MERGER--INTERESTS OF CERTAIN PERSONS IN THE MERGER." Pacific believes that all of the transactions set forth above were made on terms no less favorable to Pacific than could have been obtained from unaffiliated third parties. All future transactions, including loans, between Pacific and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested directors, and will continue to be on terms no less favorable to Pacific than could be obtained from unaffiliated third parties. 125 SECURITY OWNERSHIP OF THE COMBINED COMPANY The following table sets forth certain information with respect to beneficial ownership of Hybrid's Common Stock after giving effect to the Merger, as of April 30, 1998 by (i) each Hybrid stockholder and Pacific Shareholder expected to be the beneficial owner of more than 5% of Hybrid's Common Stock, (ii) each person expected to be a director of the Combined Company, (iii) each of the Hybrid Named Executive Officers and Pacific Named Executive Officers and (iv) all persons expected to be executive officers and directors as a group.
NUMBER OF SHARES BENEFICIALLY PERCENTAGE OF SHARES NAME OF BENEFICIAL OWNER OWNED(1)(2) BENEFICIALLY OWNED(1)(2) - --------------------------------------------- ---------------------- ------------------------- Intel Corporation (3)........................ 1,207,020 10.0% James R. Flach Accel Partners (4)......................... 1,107,152 9.0 Strachman Family Revocable Trust (5)......... 916,710 7.6 Douglas M. Leone Sequoia Capital (6)........................ 870,691 7.1 Eduardo J. Moura (7)......................... 687,532 5.7 Carl S. Ledbetter (8)........................ 313,711 2.6 Gary M. Lauder (9)........................... 294,570 2.4 Richard B. Gold (10)......................... 73,367 * William H. Fry (11).......................... 56,260 * Dan E. Steimle (12).......................... 48,795 * Gustavo Ezcurra (13)......................... 39,531 * Matthew D. Miller (14)....................... 38,418 * Stephen E. Halprin (15)...................... 1,543 * All executive officers and directors as a group (11 persons) (16).................... 2,882,086 21.7% ---------- -----
- ------------------------ * Represents less than 1% of the outstanding Hybrid Common Stock expected to be outstanding after consummation of the Merger. (1) Reflects beneficial ownership as of April 30, 1998 and is based on the Assumed Exchange Ratio of 0.0894714 shares of Hybrid Common Stock for each outstanding share of Pacific Common Stock and Pacific Preferred Stock, resulting in an aggregate of approximately 12,023,518 shares of Hybrid Common Stock after the Merger. (2) Based upon information supplied by Hybrid and Pacific officers, directors and principal shareholders. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that deem shares to be beneficially owned by any person who has or shares voting power or investment power with respect to such shares. Unless otherwise power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Hybrid Common Stock that will be issuable to the identified person or entity pursuant to stock options and warrants that are either immediately exercisable or exercisable within sixty days of April 30, 1998 are deemed to be outstanding and to be beneficially owned by the person holding such options or warrants 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. (3) Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052. (4) Represents ownership by the following entities associated with Accel Partners some of which owned shares of Hybrid and some of which owned shares of Pacific before the Merger: 729,078 shares and 275,264 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., 17,511 shares and 6,613 shares subject to warrants held by 126 Ellmore C. Patterson Partners, 15,123 shares and 5,712 shares subject to warrants held by Accel Keiretsu L.P., 7,432 shares and 990 shares subject to warrants held by Accel Investors, '94 L.P and 1,204 shares and 161 shares subject to warrants held by Prosper Partners. Also includes 10,701 shares subject to options exercisable within 60 days of April 30, 1998 held by Mr. Flach granted in connection with services performed by Mr. Flach for Hybrid. Mr. Flach, a director of Hybrid, is an executive 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 428 University Ave., Palo Alto, CA 94301. (5) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a co-founder of Hybrid and served as its President and Chief Executive Officer from June 1990 until his resignation in July 1995. Mr. Strachman resigned as a director of Hybrid in February 1998. Mr. Strachman's address is c/o Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA 95014. (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 Hybrid, 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. Mr. Leone is expected to resign from the Board of Hybrid immediately after the Merger. (7) Mr. Moura was a co-founder of Hybrid 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) Includes 312,614 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Ledbetter is expected to remain as the Chief Executive Officer and Chairman of the Board of Directors of Hybrid after the Merger. (9) Includes 83,018 shares subject to warrants and 18,519 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Lauder is a director of Hybrid. (10) Includes 47,420 shares subject to options exercisable within 60 days of April 30, 1998 to be assumed by Hybrid. Mr. Gold is expected to be appointed President and Chief Operating Officer and a director of Hybrid after the Merger. (11) Includes 51,215 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Fry is Vice President, Operations of Hybrid. (12) Represents 25,460 shares subject to options exercisable within 60 days of April 30, 1998 and 18,335 shares subject to currently exercisable warrants, half of which were issued to Mr. Steimle's spouse. Mr. Steimle is Vice President, Finance and Administration and Chief Financial Officer of Hybrid. (13) Includes 39,316 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Ezcurra is Vice President, Sales of Hybrid. (14) Includes 16,050 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Miller is expected to be appointed a director of Hybrid after the Merger. (15) Represents shares subject to options exercisable within 60 days of April 30, 1998. Does not include 429,852 shares of Common Stock and 66,553 shares subject to warrants held by OSCCO III, L.P., an entity which Mr. Halprin is affiliated with. Mr. Halprin is a director of Hybrid, but is expected to resign immediately after the Merger. (16) Includes 677,364 shares subject to warrants and 559,950 shares subject to options exercisable within 60 days of April 30, 1998 held by executive officers and directors of Hybrid. 127 The following table sets forth certain information known to Hybrid with respect to beneficial ownership of Hybrid's Common Stock as of April 30, 1998 by (i) each stockholder known by Hybrid to be the beneficial owner of more than 5% of Hybrid's Common Stock, (ii) each director of Hybrid, (iii) each of the Hybrid Named Executive Officers and (iv) all executive officers and directors as a group. SECURITY OWNERSHIP OF HYBRID
NUMBER OF SHARES BENEFICIALLY PERCENTAGE OF SHARES NAME OF BENEFICIAL OWNER OWNED(1) BENEFICIALLY OWNED - ----------------------------------------------------------------------- -------------------- --------------------- Intel Corporation (2).................................................. 1,207,020 11.6% Strachman Family Revocable Trust (3)................................... 916,710 8.8 James R. Flach Accel Partners (4)................................................... 879,562 8.2 Douglas M. Leone Sequoia Capital (5).................................................. 870,691 8.2 Eduardo J. Moura (6)................................................... 687,532 6.6 Carl S. Ledbetter (7).................................................. 313,711 2.9 Gary M. Lauder (8)..................................................... 294,570 2.8 William H. Fry (9)..................................................... 56,260 * Dan E. Steimle (10).................................................... 48,795 * Gustavo Ezcurra (11)................................................... 39,531 * Stephen E. Halprin (12)................................................ 1,543 * All executive officers and directors as a group (9 persons) (13)....... 2,542,712 22.0
- ------------------------ * Represents less than 1% of Hybrid's 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 Hybrid's Common Stock subject to options or warrants that are currently exercisable or exercisable within 60 days of April 30, 1998, are deemed to be outstanding and to be beneficially owned by the person holding such options warrants 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) Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052. (3) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a co-founder of Hybrid and served as its President and Chief Executive Officer from June 1990 until his resignation in July 1995. Mr. Strachman resigned as a director of Hybrid in February 1998. Mr. Strachman's address is c/o Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA 95014. (4) 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 April 30, 1998 held by Mr. Flach granted in connection with services performed by Mr. Flach for Hybrid. Mr. Flach, a director of Hybrid, is an executive 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 428 University Ave., Palo Alto, CA 94301. (5) 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 STP VI, 16,932 shares and 440 shares subject to 128 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 Hybrid, 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. (6) Mr. Moura was a co-founder of Hybrid 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. (7) Includes 312,614 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Ledbetter is the President, Chief Executive Officer and Chairman of the Board of Directors of Hybrid. (8) Includes 83,018 shares subject to warrants and 18,519 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Lauder is a director of Hybrid. (9) Includes 51,215 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Fry is Vice President, Operations of Hybrid. (10) Represents 25,460 shares subject to options exercisable within 60 days of April 30, 1998 and 18,335 shares subject to currently exercisable warrants, half of which were issued to Mr. Steimle's spouse. Mr. Steimle is Vice President, Finance and Administration and Chief Financial Officer of Hybrid. (11) Includes 39,316 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Ezcurra is Vice President, Sales of Hybrid. (12) Represents shares subject to options exercisable within 60 days of April 30, 1998. Does not include 429,852 shares and 66,553 shares subject to warrants held by OSCCO III, L.P., an entity which Mr. Halprin is affiliated with. Mr. Halprin is a director of Hybrid. (13) Includes 650,523 shares subject to warrants and 496,480 shares subject to options exercisable within 60 days of April 30, 1998 held by executive officers and directors of Hybrid. 129 SECURITY OWNERSHIP OF PACIFIC The following table sets forth certain information with respect to the beneficial ownership of Pacific Capital Stock as of April 30, 1998, by (i) each person (or group of affiliated persons) who is known by Pacific to own beneficially 5% or more of Pacific Common Stock, (ii) each of Pacific's directors, (iii) each of the Pacific Named Executive Officers, and (iv) all directors and officers as a group. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of Pacific Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
PERCENTAGE OF NUMBER OF PREFERRED PERCENTAGE OF PERCENTAGE OF SHARES STOCK COMMON STOCK CAPITAL STOCK 5% BENEFICIAL OWNERS, DIRECTORS BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY AND NAMED EXECUTIVE OFFICERS OWNED(1) OWNED(1) OWNED(1) OWNED(1) - -------------------------------------------------------- ------------ ------------- ------------- ------------- Oak Investment Partners III(2) 3,050,813 21.4% 7.0% 16.6% Institutional Venture Partners III(3)................... 2,925,353 21.4 4.9 16.0 Accel Partners(4)....................................... 2,506,102 18.2 4.4 13.7 Shaw Venture Partners IV, L.P. (5)...................... 1,440,092 11.7 -- 8.0 U.S. Information Technology Investment Enterprise Partnership(6)............................. 1,366,595 10.4 1.6 7.5 Vanguard Associates II(7)............................... 1,194,728 9.1 1.4 6.6 OFFICERS Allen F. Podell(8)...................................... 1,117,200 -- 19.6 6.2 Richard B. Gold(9)...................................... 820,000 -- 13.1 4.4 DIRECTORS Reid W. Dennis(3)....................................... 2,925,353 21.4 4.9 16.0 Christopher J. Weseloh(10).............................. 1,424,065 -- 25.0 7.9 Matthew D. Miller....................................... 250,000 -- 4.4 1.4 Alan S. Dishlip(11)..................................... 109,450 -- 1.9 * James F. Gibbons........................................ 100,000 -- 1.8 * All Directors and Executive Officers as a group(12 persons)(12)................................. 7,327,056 21.4% 67.4% 38.0%
- ------------------------ * Less than 1% (1) In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 30, 1998 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name. (2) Represents 125,123 shares of Pacific Common Stock, 2,632,965 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 292,725 Pacific Common Stock shares. The address for Oak Investment Partners is 525 University Avenue, Suite 1300, Palo Alto, California 94301. (3) Represents ownership by the following entities affiliated with Institutional Venture Partners; 2,593,469 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 288,000 shares of Pacific Common Stock held by Institutional Venture Partners III; and 39,496 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 4,388 130 shares of Pacific Common Stock held by Institutional Venture Management III. Mr. Reid W. Dennis, a director of Pacific is a General Partner of Institutional Venture Management. Mr. Dennis disclaims beneficial ownership of the shares held by the above listed entities. The address for Institutional Ventures Partners is 3000 Sand Hill Road, Building 2, Suite 290, Menlo Park, California 94025. (4) Represents ownership by the following entities affiliated with Accel Partners; 2,055,242 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 240,338 shares of Pacific Common Stock held by Accel IV, L.P.; 83,018 shres of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 9,600 shares of Pacific Common Stock held by Accel Investors 94, L.P.; 42,630 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 4,875 shares of Pacific Common Stock held by Accel Keiretsu L.P.; 49,362 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 6,000 shares of Pacific Common Stock held by Elmore C. Patterson Partrners; and 13,462 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 1,575 shares of Pacific Common Stock held by Prosper Partners. The address for Accel Partners is 428 University Avenue, Palo Alto, California 94301. (5) Represents 1,440,092 shares of Pacific Preferred Stock. The address for Shaw Venture Partners IV, L.P. is 400 Southwest 6th Avenue, Suite 1100, Portland, Oregon 97204. (6) Represents ownership by the following entities affiliated with U.S. Information Technology Investment Enterprise Partnership: 1,021,276 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 72,000 shares of Pacific Common Stock held by U.S. Information Technology Investment Enterprise Partnership; 204,255 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 14,400 shares of Pacific Common Stock held by JAFCO G5 Partnership; and 51,064 shares of Pacific Preferred Stock and warrants exercisable within 60 days of April 30, 1998 to purchase 3,600 shares of Pacific Common Stock held by Japan Associated Finance Co. Ltd. The address for U.S. Information Technology Investment Enterprise Partnership is 505 Hamilton Avenue, Suite 310, Palo Alto, California 94301. (7) Represents 77,982 shares of Pacific Common Stock and 1,116,746 shares of Pacific Preferred Stock. The address for Vanguard Associates II is 325 Distal Circle, Suite 100, Los Altos, California 94022. (8) Mr. Podell is Chief Technical Officer and a director of Pacific. Correspondence should be sent c/o Pacific Monolithics, Inc., 1308 Moffett Park Drive, Sunnyvale, California 94089. (9) Includes 530,000 shares subject to options exercisable within 60 days of April 30, 1998, and 140,000 shares that were purchased pursuant to a Restricted Stock Purchase Agreement of which 49,583 shares will be vested within 60 days of April 30, 1998. Mr. Gold is President, Chief Executive Officer and a director of Pacific. (10) Correspondence should be sent c/o Pacific Monolithics, Inc., 1308 Moffett Park Drive, Sunnyvale, California 94089. (11) Includes 58,323 shares subject to options exercisable within 60 days of April 30, 1998. Mr. Dishlip is a General Partner of Utah Venture Partners. (12) Includes 1,247,999 shares subject to options and warrants exercisable within 60 days of April 30, 1998. 131 COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION Hybrid Common Stock is traded on the Nasdaq National Market under the symbol "HYBR." The following table sets forth the range of high and low sale prices reported on the Nasdaq National Market for Hybrid Common Stock for the periods indicated:
HIGH LOW --------- --------- FISCAL YEAR ENDING DECEMBER 31, 1998 Second Quarter (through May 1, 1998).......................................................... $ 7.38 $ 6.00 First Quarter................................................................................. 13.00 3.88 FISCAL YEAR ENDED DECEMBER 31, 1997 Fourth Quarter (beginning November 12, 1997).................................................. $ 24.25 $ 9.25
The Pacific Common Stock and Pacific Preferred Stock are not listed on any exchange and do not trade publicly. The following table sets forth the closing sales prices per share of Hybrid Common Stock on the Nasdaq National Market on March 19, 1998, the last trading day before the announcement of the proposed Merger and on May 1, and the equivalent per share price for Pacific Capital Stock. The "equivalent per share price" for Pacific Common Stock and Pacific Preferred Stock as of such dates equal the closing sale price per share of Hybrid Common Stock on such dates multiplied by the Assumed Exchange Ratio of 0.0894714. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--MERGER CONSIDERATION."
HYBRID COMMON PACIFIC STOCK EQUIVALENT --------------- ----------- March 19, 1998.................................................... $ 7.81 $ 0.70 May 1, 1998....................................................... $ 6.13 $ 0.55
At March 31, 1998, the closing price per share of Hybrid Common Stock, book value per share of Pacific Capital Stock, pro forma combined book value per share and book value per share of Pacific Capital Stock based on the application of the Assumed Exchange Ratio to the closing price per share of Hybrid Common Stock were as follows:
HYBRID COMMON PACIFIC CAPITAL PRO FORMA PACIFIC STOCK STOCK COMBINED EQUIVALENT --------------- --------------- ----------- ----------- March 31, 1998........................ $ 7.13 $ 0.24 $ 2.68 $ 0.24
Pacific shareholders are advised to obtain current market quotations for Hybrid Common Stock. No assurance can be given as to the market prices of Hybrid Common Stock at any time before the Effective Time or as to the market price of Hybrid Common Stock at any time thereafter. In the event the market price of Hybrid Common Stock decreases or increases prior to the Effective Time, the value at the Effective Time of the Hybrid Common Stock to be received in the Merger in exchange for the Pacific Capital Stock would correspondingly increase or decrease, subject to the range described on the cover page of this Joint Proxy Statement/Prospectus. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER-- MERGER CONSIDERATION." Hybrid and Pacific have never paid cash dividends on their respective shares of Common Stock or Preferred Stock. Pursuant to the Reorganization Agreement, each of Hybrid and Pacific have agreed not to pay cash dividends pending the consummation of the Merger without the written consent of the other. Subject to the completion of the Merger, the Hybrid Board intends to continue a policy of retaining all earnings to finance the expansion of its business. The terms of an outstanding $5.5 Million Debenture prevent Hybrid from paying any cash dividends for so long as the $5.5 Million Debenture remains outstanding. In addition, in October 1997, Hybrid entered into the $4.0 Million Credit Facility, the terms of which prohibit the declaration of dividends. The Pacific Board currently intends to retain all earnings for use in the business of the combined companies and has no present intention to pay cash dividends. 132 DESCRIPTION OF HYBRID CAPITAL STOCK The authorized capital stock of Hybrid consists of 100,000,000 shares of Hybrid Common Stock, $0.001 par value per share, and 5,000,000 shares of Hybrid Preferred Stock, $0.001 par value per share. Based on the Assumed Exchange Ratio of approximately 0.0894714, and on the shares, options and warrants of Hybrid and Pacific outstanding as of April 30, 1998, immediately following the consummation of the Merger there will be outstanding approximately 12,023,518 shares of Hybrid Common Stock, options and warrants to purchase approximately 3,915,018 shares of Hybrid Common Stock and the $5.5 Million Debenture which will be convertible into 851,393 shares of Hybrid Common Stock, assuming the Merger is consummated and Hybrid Common Stock is valued at $6.46 per share at the closing of the Merger. COMMON STOCK Subject to preferences that may apply to shares of Hybrid Preferred Stock outstanding at the time, the holders of outstanding shares of Hybrid Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Hybrid Board of Directors may from time to time determine. Each stockholder is entitled to one vote for each share of Hybrid Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in Hybrid'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 Hybrid Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon a liquidation, dissolution or winding-up of Hybrid, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Hybrid Common Stock and any participating Hybrid Preferred Stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding Hybrid Preferred Stock and payment of other claims of creditors. Each outstanding share of Hybrid Common Stock is, and all shares of Hybrid Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of additional shares of Hybrid 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 Hybrid Preferred Stock with voting or conversion rights could adversely affect the voting power or other rights of the holders of Hybrid Common Stock and may have the effect of delaying, deferring or preventing a change in control of Hybrid. Hybrid has no current plan to issue any shares of Hybrid Preferred Stock. WARRANTS As of April 30, 1998, Hybrid had outstanding exercisable warrants to purchase 1,340,649 shares of Common Stock at a weighted average exercise price of $7.59 per share. Such warrants expire between June 2001 and August 2006. CONVERTIBLE $5.5 MILLION DEBENTURE Hybrid has outstanding a senior secured convertible debenture due 2002 in the principal amount of $5.5 million to BG Services Limited. 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 debenture is 133 convertible, at the option of the holder, at any time, into common stock at $10.71 per share. The debenture contains "full ratchet" antidilution provisions under which the number of shares of the Company's Common Stock into which the debenture will be convertible may be increased if the Company issues any shares (with certain exceptions for employee stock options and the like) prior to October 1998 for consideration less than $10.71 per share. Commencing with October 1998, any such issuance would be subject to certain "weighted average" antidilution provisions. The $5.5 Million Debenture is currently convertible into 513,423 shares of Hybrid Common Stock, assuming a conversion price of approximately $10.71 per share, at the option of the holder at any time. Due to the antidilution provisions of the $5.5 Million Debenture, if the Merger is consummated and closes before October 1998, the $5.5 Million Debenture would be convertible into 851,393 shares of Hybrid Common Stock assuming that Hybrid Common Stock is valued at the closing of the Merger at $6.46 per share (the ten day average prior to the execution of the Reorganization Agreement). The $5.5 Million Debenture is collateralized by substantially all of Hybrid's assets, and as long as the $5.5 Million Debenture is outstanding Hybrid 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. ANTI-TAKEOVER PROVISIONS DELAWARE LAW Section 203 ("SECTION 203") of the of the Delaware General Corporation Law (the "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. Hybrid's certificate of incorporation and the bylaws do not exclude Hybrid from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring Hybrid to negotiate in advance with the Hybrid Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of Hybrid, which could depress the market price of the Hybrid Common Stock and which could deprive the stockholders of opportunities to realize a premium on shares of the Hybrid Common Stock held by them. 134 CHARTER AND BYLAW PROVISIONS Hybrid'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 Hybrid 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 Hybrid Board members each year, with each director serving a three-year term. The Hybrid Board (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Hybrid 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 Hybrid Board, and such removal requires the affirmative vote of a majority of the outstanding voting stock. Hybrid'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 Hybrid may only be called by the Chairman of the Hybrid Board or a majority of the Hybrid Board. REGISTRATION RIGHTS Beginning in May 1998, the holders of 6,164,823 shares of Hybrid Common Stock, the holders of warrants to purchase 1,340,656 shares of Hybrid Common Stock and the holder of the $5.5 Million Debenture currently convertible into 513,423 shares of Hybrid Common Stock (collectively, the "REGISTRABLE SECURITIES") will have certain rights with respect to the registration of those shares under the Securities Act. If Hybrid proposes to register any of its shares of Common Stock under the Securities Act other than in connection with a Hybrid employee benefit plan or certain corporate acquisitions, mergers or reorganizations, the holders of the Registrable Securities may require 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 Hybrid to register all or any portion of their Registrable Securities on Form S-3 when such form becomes available to Hybrid, subject to certain conditions and limitations. Hybrid may be required to effect up to one such registration per year. In addition certain holders of warrants may require Hybrid 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 Hybrid. The registration rights expire in November 2003. In addition, no holder of Registrable Securities shall be entitled to registration rights if an so long as such holder can sell the Registrable Securities in compliance with Rule 144 of the Securities Act. In addition, certain individuals and entities receiving Hybrid Common Stock in the Merger will enter into an Investor Rights Agreement with respect to the shares they are to receive in the Merger. See "PROPOSAL NO. 1: THE MERGER--TERMS OF THE MERGER--INVESTOR RIGHTS AGREEMENTS". TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for Hybrid's Common Stock in Boston EquiServe. COMPARATIVE RIGHTS OF HYBRID STOCKHOLDERS AND PACIFIC SHAREHOLDERS If the Merger is consummated, holders of Pacific Capital Stock will become holders of Hybrid Common Stock and the rights of the former Pacific shareholders will be governed by the DGCL and by the Certificate of Incorporation of Hybrid (the "HYBRID CERTIFICATE OF INCORPORATION" ) and the Bylaws of Hybrid 135 (the "HYBRID BYLAWS"). The rights of Hybrid stockholders under the DGCL and the Hybrid Certificate of Incorporation and Bylaws differ in certain limited respects from the rights of Pacific shareholders under the California Code and the Amended and Restated Articles of Incorporation of Pacific (the "PACIFIC ARTICLES") and the Bylaws of Pacific (the "PACIFIC BYLAWS" ). Certain differences between the rights of Hybrid stockholders and Pacific shareholders are summarized below. This summary is qualified in its entirety by reference to the full text of such documents. For information as to how such documents may be obtained, see "AVAILABLE INFORMATION." SIZE OF THE BOARD OF DIRECTORS Under the California Code, although changes in the number of directors must in general be approved by a majority of the outstanding shares, the board of directors may fix the exact number of directors within a stated range set forth in the articles of incorporation or bylaws, if that stated range has been approved by the shareholders. The DGCL permits the board of directors alone to change the authorized number, or the range, of directors by amendment to the bylaws, unless the directors are not authorized to amend the bylaws or the number of directors is fixed in the certificate of incorporation, in which case a change in the number of directors may be made only by amendment to the certificate of incorporation following approval of such change by the stockholders. The Hybrid Certificate of Incorporation and the Hybrid Bylaws provide, consistent with the DGCL, that the size of the Board of Directors may be changed by amending the Bylaws either with the approval of the Board of Directors acting alone or by Hybrid's stockholders. While the Pacific Bylaws provide for a Board of Directors consisting of between four and seven members, the Hybrid Bylaws specify a five member Board. POWER TO CALL SPECIAL STOCKHOLDERS' MEETINGS Under the California Code, a special meeting of shareholders may be called by the board of directors, the chairman of the board, the president, the holders of shares entitled to cast not less than 10% percent of the votes at such meeting and such additional persons as are authorized by the articles of incorporation or the bylaws. Under the DGCL, a special meeting of stockholders may be called by the board of directors or by any other person authorized to do so in the certificate of incorporation or the bylaws. The Hybrid Certificate of Incorporation and the Hybrid Bylaws do not grant stockholders the right to call a special meeting of stockholders. The Hybrid Certificate of Incorporation and the Hybrid Bylaws authorize only the Board of Directors or the Chairman of the Board to call a special meeting of stockholders. Former Pacific shareholders would thus not retain their right to call a special meeting. REMOVAL OF DIRECTORS; CLASSIFIED BOARD OF DIRECTORS Under the California Code, any director or the entire board of directors may be removed, with or without cause, with the approval of a majority of the outstanding shares entitled to vote; however, no individual director may be removed (unless the entire board is removed) if the number of votes cast against such removal would be sufficient to elect the director under cumulative voting. Under the DGCL, a director of a corporation that does not have a classified board of directors or cumulative voting may be removed with or without cause with the approval of a majority of the outstanding shares entitled to vote. However, a director of a corporation with a classified board of directors may be removed only for cause, unless the certificate of incorporation otherwise provides. The Hybrid Certificate of Incorporation and the Hybrid Bylaws provide for a classified board of directors and provide for the removal of a director by the affirmative vote of at least a majority of all shares of Hybrid. Consequently, members of the Hybrid Board of Directors can be removed for any reason. FILLING VACANCIES ON THE BOARD OF DIRECTORS Under the California Code, any vacancy on the board of directors other than one created by removal of a director may be filled by the board of directors. If the number of directors is less than a quorum, a 136 vacancy may be filled by the unanimous written consent of the directors then in office, by the affirmative vote of a majority of the directors at a meeting held pursuant to notice or waivers of notice or by a sole remaining director. A vacancy created by removal of a director may be filled by the board of directors only if the board is so authorized by a corporation's articles of incorporation or by a bylaw approved by the corporation's shareholders. Under the DGCL, vacancies and newly created directorships may be filled by a majority of the directors then in office, even if less than a quorum, unless otherwise provided in the certificate of incorporation or bylaws, and unless the certificate of incorporation directs that a particular class is to elect such director, in which case any other directors elected by such class, or a sole remaining director, shall fill such vacancy. The Hybrid Bylaws are in accord, and contain no provision for the allocation of directors between classes of stock. DIRECTORS' COMMITTEES Under the Hybrid Bylaws, the Board of Directors may, by resolution passed by a majority of the whole Board, delegate certain limited powers normally held only by the Board in its entirety to a committee comprised of one or more members of the Board. Such committees may exercise any power normally held by the entire Board, but may not adopt an agreement of merger or consolidation under Section 251 or 252 of the DGCL, recommend to the stockholders the sale, lease, or exchange of all or substantially all of the corporation's property and assets, recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amend the Bylaws. Neither can such a committee amend the Certificate of Incorporation, except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the DGCL, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series. The Pacific Bylaws contain provisions for the delegation of authority by the Board of Directors to a committee of members of the Board. DIVIDENDS AND REPURCHASES OF SHARES The California Code dispenses with the concepts of par value of shares as well as statutory definitions of capital, surplus and the like. The concepts of par value, capital and surplus are retained under the DGCL. Under the California Code, a corporation may not make any distribution unless either the corporation's retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution or, immediately after giving effect to such distribution, the corporation's assets (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to 1 1/4 times its liabilities (not including deferred taxes, deferred income and other deferred credits), and the corporation's current assets would be at least equal to its current liabilities (or 1 1/4 times its current liabilities if the average pre-tax and pre-interest expense earnings for the preceding two fiscal years were less than the average interest expense for such years). Such tests are applied to California corporations on a consolidated basis. The DGCL permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In addition, the DGCL generally provides that 137 a corporation may redeem or repurchase its shares only if such redemption or repurchase would not impair the capital of the corporation. STOCKHOLDER VOTING Both the California Code and the DGCL generally require that a majority of the stockholders of acquiring and target corporations approve statutory mergers. The DGCL does not require a stockholder vote of the surviving corporation in a merger (unless the corporation provides otherwise in its certificate of incorporation) if (a) the merger agreement does not amend the existing certificate of incorporation, (b) each share of the surviving corporation outstanding before the merger is an identical outstanding or treasury share after the merger, and (c) the number of shares to be issued by the surviving corporation in the merger does not exceed 20% of the shares outstanding immediately prior to the merger. The California Code contains a similar exception to its voting requirements for reorganizations where shareholders or the corporation itself, or both, immediately prior to the reorganization will own immediately after the reorganization equity securities constituting more than five-sixths of the voting power of the surviving or acquiring corporation or its parent entity. INTERESTED DIRECTOR TRANSACTIONS Under both the California Code and the DGCL, certain contracts or transactions in which one or more of a corporation's directors has an interest are not void or voidable because of such interest provided that certain conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. With certain exceptions, the conditions are similar under the California Code and the DGCL. Under the California Code and the DGCL, (a) either the stockholders or the board of directors must approve any such contract or transaction after full disclosure of the material facts, and in the case of board approval the contract or transaction must also be "just and reasonable" (in California) or "fair" (in Delaware) to the corporation, or (b) the contract or transaction must have been just and reasonable or fair as to the corporation at the time it was approved. In the latter case, the California Code explicitly places the burden of proof on the interested director. Under the California Code, if shareholder approval is sought, the interested director is not entitled to vote his shares at a shareholder meeting with respect to any action regarding such contract or transaction. If board approval is sought, the contract or transaction must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). Under the DGCL, if board approval is sought, the contract or transaction must be approved by a majority of the disinterested directors, even though less than a majority of a quorum. STOCKHOLDER DERIVATIVE SUITS The California Code provides that a shareholder bringing a derivative action on behalf of a corporation need not have been a shareholder at the time of the transaction in question, provided that certain tests are met. Under the DGCL, a stockholder may only bring a derivative action on behalf of the corporation if the stockholder was a stockholder of the corporation at the time of the transaction in question or his or her stock thereafter devolved upon him or her by operation of law. The California Code also provides that the corporation or the defendant in a derivative suit may make a motion to the court for an order requiring the plaintiff shareholder to furnish a security bond. Delaware does not have a similar bonding requirement. APPRAISAL RIGHTS Under both the California Code and the DGCL, a stockholder of a corporation participating in certain major corporate transactions may, under varying circumstances, be entitled to appraisal rights pursuant to which such stockholder may receive cash in the amount of the fair market value of his or her shares in lieu of the consideration he or she would otherwise receive in the transaction. Under the DGCL, such appraisal rights are not available (a) with respect to the sale, lease or exchange of all or substantially 138 all of the assets of a corporation, (b) with respect to a merger or consolidation by a corporation the shares of which are either listed on a national securities exchange, or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or are held of record by more than 2,000 holders if such stockholders receive only shares of the surviving corporation or shares of any other corporation which are either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders, plus cash in lieu of fractional shares, or (c) to stockholders of a corporation surviving a merger if no vote of the stockholders of the surviving corporation is required to approve the merger because the merger agreement does not amend the existing certificate of incorporation, each share of the surviving corporation outstanding prior to the merger is an identical outstanding or treasury share after the merger, and the number of shares to be issued in the merger does not exceed 20% of the shares of the surviving corporation outstanding immediately prior to the merger and if certain other conditions are met. The limitations on the availability of appraisal rights under the California Code are different from those under the DGCL. Shareholders of a California corporation whose shares are listed on a national securities exchange or on a list of over-the-counter margin stocks issued by the Board of Governors of the Federal Reserve System generally do not have appraisal rights unless the holders of at least 5% percent of the class of outstanding shares claim the right or unless the corporation or any law restricts the transfer of such shares. Appraisal rights are unavailable, however, if the shareholders of a corporation or the corporation itself, or both, immediately prior to the reorganization will own immediately after the reorganization equity securities constituting more than five sixths of the voting power of the surviving or acquiring corporation or its parent entity, and if the shares of the surviving corporation have the same rights, preferences, privileges and restrictions as the shares of the disappearing corporation that are surrendered in exchange. "BLANK CHECK" PREFERRED STOCK AND COMMON STOCK RIGHTS The Hybrid Certificate of Incorporation permits the Board of Directors to determine the rights, preferences, privileges and restrictions of authorized but unissued Preferred Stock, commonly referred to as "blank check" Preferred Stock. The issuance of Preferred Stock with extraordinary rights may be used to deter hostile takeover attempts. Although Hybrid's Board of Directors has no present intention of issuing such Preferred Stock, it could do so in the future without stockholder approval. The Pacific Articles also permit its Board of Directors to issue "blank check" Preferred Stock. 139 ADDITIONAL MATTERS FOR CONSIDERATION OF HYBRID STOCKHOLDERS PROPOSAL NO. 2 FOR HYBRID STOCKHOLDERS: ELECTION OF HYBRID DIRECTORS At the Hybrid Annual Meeting, stockholders will elect two (2) Class I directors to hold office from the time of election and qualification until the third annual meeting of stockholders following election and until their respective successors have been elected and qualified or until such directors' earlier resignation or removal. Hybrid's Certificate of Incorporation provides for a classified Board of Directors (the "HYBRID BOARD") composed of five (5) directors. The terms of office of the Hybrid Board are divided into three classes. Class I will expire at the Hybrid Annual Meeting; Class II will expire at the annual meeting of the stockholders of Hybrid to be held in 1999; and Class III will expire at the annual meeting of the stockholders of Hybrid to be held in 2000. Stephen E. Halprin and Douglas M. Leone are designated as Class I directors. Accordingly, two nominees will be elected at the Annual Meeting to be Class I directors of Hybrid. If any nominee for any reason is unable to serve, or for good cause, will not serve as a director, the proxies may be voted for such substitute nominee as the proxy holder may determine. Hybrid is not aware of any nominee who will be unable to or, for good cause, will not serve as a director. DIRECTORS/NOMINEES The names of the nominees, and certain information about them, are set forth below:
DIRECTOR NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE - --------------------------------- --- ----------------------------------------------------------------- ------- Stephen E. Halprin............... 60 Venture Capitalist 1992 Douglas M. Leone................. 40 Venture Capitalist 1995
STEPHEN E. HALPRIN. Mr. Halprin has been a director of Hybrid 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. DOUGLAS M. LEONE. Mr. Leone has been a director of Hybrid 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. 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. Pursuant to the Reorganization Agreement, Hybrid has agreed that in the event that the Reorganization Agreement is adopted and approved and the Merger is approved, upon the Effective Time of the Merger Richard B. Gold and Matthew D. Miller will be appointed to the Hybrid Board as Class I directors and Messrs. Halprin and Leone will resign as directors assuming that they are elected to the Hybrid Board at the Hybrid Annual Meeting. Executive officers are chosen by, and serve at the discretion of, the Hybrid Board. There are no family relationships among any of the directors and executive officers of Hybrid. BOARD OF DIRECTORS' MEETINGS AND COMMITTEES The Hybrid Board met ten times, including telephone conference meetings, during 1997. No director attended fewer than 75% of the aggregate of the total number of meetings of the Hybrid Board (held during the period for which such director was a director) and the total number of meetings held by all committees of the Hybrid Board on which such director served (during the period that such director served). 140 Standing committees of the Hybrid Board include an Audit Committee and a Compensation Committee. The Hybrid Board does not have a nominating committee or a committee performing similar functions. The Audit Committee of the Hybrid Board consists of Mr. Flach and Mr. Halprin. The Audit Committee did not meet during 1997 and has met on several occasions during 1998. The Audit Committee reviews Hybrid's financial statements and accounting practices, makes recommendations to the Hybrid Board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by Hybrid's independent auditors. The Compensation Committee of the Hybrid Board consists of Mr. Flach and Mr. Leone. The Compensation Committee met once during 1997 and has met on several occasions during 1998. The Compensation Committee makes recommendations to the Hybrid Board concerning salaries and incentive compensation for Hybrid's officers and employees and administers Hybrid's employee benefit plans. DIRECTOR COMPENSATION See "SELECTED INFORMATION WITH RESPECT TO HYBRID--DIRECTOR COMPENSATION" for a description of Hybrid director compensation. THE HYBRID BOARD RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINATED DIRECTORS. PROPOSAL NO. 3 FOR HYBRID STOCKHOLDERS: AMENDMENT OF THE 1997 EQUITY INCENTIVE PLAN Stockholders are being asked to approve an amendment to Hybrid's 1997 Equity Incentive Plan (the "INCENTIVE PLAN") to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares, from 2,267,101 shares (which includes 517,101 shares automatically added to the Incentive Plan on January 1, 1998, pursuant to the terms of the Incentive Plan) to 2,767,101 shares. The Hybrid Board believes that the increase in the number of shares reserved for issuance under the Incentive Plan is in the best interests of Hybrid because of the large increase in employees that it is expecting to hire in connection with the acquisition of Pacific. The granting of equity incentives under the Incentive Plan plays an important role in Hybrid's efforts to attract and retain employees of outstanding ability. Competition for skilled engineers and other key employees is intense and the use of significant stock options for retention and motivation of such personnel is pervasive in the high technology industries. The Hybrid Board believes that the additional reserve of shares with respect to which equity incentives may be granted will provide Hybrid with adequate flexibility to ensure that Hybrid can continue to meet those goals and facilitate Hybrid's expansion of its employee base. The Hybrid Board approved the proposed amendment on March 18, 1998, to be effective upon stockholder approval. Below is a summary of the principal provisions of the Incentive Plan, assuming stockholder approval of the amendment. The summary is not necessarily complete, and reference is made to the full text of the Incentive Plan. INCENTIVE PLAN HISTORY The Incentive Plan was adopted by the Hybrid Board in September 1997 and approved by the stockholders of Hybrid in October 1997. The purpose of the Incentive Plan is to offer eligible persons an opportunity to participate in Hybrid's future performance through awards of stock options, restricted stock and stock bonuses. From inception of the Incentive Plan in November 1997 to April 30, 1998, options to purchase an aggregate of 303,438 shares of Hybrid's Common Stock were granted under the Incentive Plan. Of these, 141 options to purchase a total of 213,438 shares were granted to all employees as a group (including all current officers who are non-executive officers. Options to purchase 90,000 shares were granted to executive officers and directors of Hybrid. SHARES SUBJECT TO THE INCENTIVE PLAN The stock subject to issuance under the Incentive Plan consists of shares of Hybrid's authorized but unissued Common Stock. The Board has reserved an aggregate of 2,767,101 shares of Common Stock for issuance under the Incentive Plan (taking into account the amount of shares automatically added to the Incentive Plan on January 1, 1998 and the proposed amendment). In addition, any shares remaining unissued under Hybrid's 1992 Stock Issuance Plan, the Executive Officer Incentive Plan, the 1993 Equity Incentive Plan and the 1996 Equity Incentive Plan (the "PRIOR PLANS") on the effective date of the Incentive Plan, 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 shall be available for distribution under the Incentive Plan. Shares subject to an option granted pursuant to the Incentive Plan that expires or terminates for any reason without being exercised or shares subject to an award granted pursuant to the Incentive Plan that are forfeited or are repurchased by Hybrid at the original issue price or are subject to an award granted pursuant to the Incentive Plan that otherwise terminates without shares being issued, will again become available for grant and issuance pursuant to awards under the Incentive Plan. On the first business day of each fiscal year of Hybrid during the term of the Incentive Plan, the aggregate number of shares reserved and available for issuance pursuant to the Incentive Plan will be increased automatically by a number of shares equal to 5% of the total outstanding shares of Hybrid, unless the Board determines prior to the commencement of any fiscal year that such increase will not occur for such fiscal year. The number of shares subject to issuance under the Incentive Plan is subject to proportional adjustment to reflect stock splits, stock dividends and other similar events. ELIGIBILITY Employees, officers, directors, consultants, independent contractors and advisors of Hybrid (and of any subsidiaries and affiliates) are eligible to receive awards under the Incentive Plan (the "PARTICIPANTS"). No Participant is eligible to receive more than 700,000 shares of Common Stock in any calendar year under the Incentive Plan, other than new employees of Hybrid (including directors and officers who are also new employees) who are eligible to receive up to a maximum of 1,000,000 shares of Common Stock in the calendar year in which they commence their employment with Hybrid. As of April 30, 1998, approximately 100 persons were in the class of persons eligible to participate in the Incentive Plan, no shares had been issued upon exercise of options, 293,780 shares were subject to outstanding options and 500 shares had been issued pursuant to stock bonus awards. As of that date, 2,693,534 shares were available for future grant, after taking into account the proposed amendment to the Incentive Plan and any shares issuable upon exercise of options granted pursuant to the Prior Plans that have expired or become unexercisable without having been exercised in full and that have become available for distribution under the Incentive Plan. The closing price of Hybrid's Common Stock on the Nasdaq National Market was $6.13 per share as of April 29, 1998, the last trading day before the Record Date. ADMINISTRATION The Incentive Plan is administered by the Compensation Committee (the "COMMITTEE"), the members of which are appointed by the Board. The Committee currently consists of James R. Flach and Douglas M. Leone, both of whom are "non-employee directors," as defined in Rule 16b-3 promulgated under the Exchange Act and "outside directors," as defined pursuant to Section 162(m) of the Code. Subject to the terms of the Incentive Plan, the Committee determines the persons who are to receive awards, the number of shares subject to each such award, and the terms and conditions of such awards. 142 The Committee also has the authority to construe and interpret any of the provisions of the Incentive Plan or any awards granted thereunder. STOCK OPTIONS The Incentive Plan permits the granting of options that are intended to qualify either as Incentive Stock Options ("ISOS") or Nonqualified Stock Options ("NQSOS"). ISOs may be granted only to employees (including officers and directors who are also employees) of Hybrid or any parent or subsidiary of Hybrid. The option exercise price for each ISO share must be no less than 100% of the "fair market value" (as defined in the Incentive Plan) of a share of Common Stock at the time the ISO is granted. The per share exercise price of an ISO granted to a 10% stockholder must be no less than 110% of the fair market value of a share of Common Stock at the time the ISO is granted. The total number of shares issued under the Incentive Plan upon exercising ISOs will in no event exceed 2,750,000 shares (subject to adjustment for stock splits and similar events). The option exercise price for each NQSO share must be no less than 85% of the fair market value of a share of Common Stock at the time of grant. The exercise price of options granted under the Incentive Plan may be paid as approved by the Committee at the time of grant: (1) in cash (by check); (2) by cancellation of indebtedness of Hybrid to the Participant; (3) by surrender of shares of Hybrid's Common Stock owned by the Participant for at least six months and having a fair market value on the date of surrender equal to the aggregate exercise price of the option; (4) by tender of a full recourse promissory note: (5) by waiver of compensation due to or accrued by the Participant for services rendered; (6) by a "same-day sale" commitment from the Participant and a National Association of Securities Dealers, Inc. ("NASD") broker; (7) by a "margin" commitment from the Participant and a NASD broker; or (8) by any combination of the foregoing. RESTRICTED STOCK AWARDS The Committee may grant Participants restricted stock awards to purchase stock either in addition to, or in tandem with, other awards under the Incentive Plan, under such terms, conditions and restrictions as the Committee may determine. The purchase price for such awards must be no less than 85% of the fair market value of Hybrid's Common Stock on the date of the award (and in the case of an award granted to a 10% stockholder, the purchase price shall be 100% of fair market value) and can be paid for in any of the forms of consideration listed in items (1) through (5) in "Stock Options" above, as are approved by the Committee at the time of grant. A total of 300,000 shares (subject to adjustment for stock splits and similar events) may be issued as Restricted Stock and Stock Bonus Awards. MERGERS, CONSOLIDATIONS, CHANGE OF CONTROL In the event of a merger, consolidation, dissolution or liquidation of Hybrid, the sale of substantially all of the assets of Hybrid or any other similar corporate transaction, the successor corporation may assume, replace or substitute equivalent awards in exchange for those granted under the Incentive Plan or provide substantially similar consideration, shares or other property as was provided to stockholders of Hybrid (after taking into account provisions of the awards). In the event that the successor corporation does not assume or substitute awards, such awards will expire upon the closing of such transaction at the time and upon the conditions as the Board determines; provided, however, that the Committee may, in its sole discretion, provide that the vesting of any and all awards will accelerate. AMENDMENT OF THE INCENTIVE PLAN The Board may at any time terminate or amend the Incentive Plan, including amending any form of award agreement or instrument to be executed pursuant to the Incentive Plan. However, the Board may not without stockholder approval amend the Incentive Plan in any manner that requires stockholder 143 approval pursuant to the Code or the regulations promulgated thereunder, or pursuant to the Exchange Act or Rule 16b-3 (or its successor) promulgated thereunder. TERM OF THE INCENTIVE PLAN Unless terminated earlier as provided in the Incentive Plan, the Incentive Plan will expire in September 2007, ten years from the date the Incentive Plan was adopted by the Board. FEDERAL INCOME TAX INFORMATION THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE FEDERAL INCOME TAX CONSEQUENCES TO HYBRID AND PARTICIPANTS UNDER THE INCENTIVE PLAN. FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED TO SEEK THE ADVICE OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE INCENTIVE PLAN. INCENTIVE STOCK OPTIONS. A Participant will recognize no income upon grant of an ISO and incur no tax on its exercise (unless the Participant is subject to the alternative minimum tax ("AMT")). If the Participant holds shares acquired upon exercise of an ISO (the "ISO SHARES") for more than one year after the date the option was exercised and for more than two years after the date the option was granted, the Participant generally will realize capital gain or loss (rather than ordinary income or loss) upon disposition of the ISO Shares. This gain or loss will be equal to the difference between the amount realized upon such disposition and the amount paid for the ISO Shares. If the Participant disposes of ISO Shares prior to the expiration of either required holding period (a "disqualifying disposition"), the gain realized upon such disposition, up to the difference between the fair market value of the ISO Shares on the date of exercise (or, if less, the amount realized on a sale of such shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be long-term, mid-term or short-term capital gain, depending upon the amount of time the ISO Shares were held by the Participant. ALTERNATIVE MINIMUM TAX. The difference between the fair market value of the ISO Shares on the date of exercise and the exercise price is an adjustment to income for purposes of AMT. The AMT (imposed to the extent it exceeds the taxpayer's regular tax) is 26% of that portion of an individual taxpayer's alternative minimum taxable income that would otherwise be taxable as ordinary income (28% in the case of alternative minimum taxable income in excess of $175,000). A maximum 20% AMT rate applies to the portion of alternative minimum taxable income that would otherwise be taxable as net capital gain. Alternative minimum taxable income is determined by adjusting regular taxable income for certain items, increasing that income by certain tax preference items (including the difference between the fair market value of the ISO Shares on the date of exercise and the exercise price), and reducing this amount by the applicable exemption amount ($45,000 in case of a joint return, subject to reduction under certain circumstances). If a disqualifying disposition of the ISO Shares occurs in the same calendar year as exercise of the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon a sale of ISO Shares that is not a disqualifying disposition, alternative minimum taxable income is reduced in the year of sale by the excess of the fair market value of the ISO Shares at exercise over the amount paid for the ISO Shares. NONQUALIFIED STOCK OPTIONS. A Participant will not recognize any taxable income at the time an NQSO is granted. However, upon exercise of an NQSO, the Participant must include in income as compensation an amount equal to the difference between the fair market value of the shares on the date of exercise and the Participant's exercise price. The included amount must be treated as ordinary income by 144 the Participant and may be subject to withholding by Hybrid (either by payment in cash or withholding out of the Participant's salary). Upon resale of the shares by the Participant, any subsequent appreciation or depreciation in the value of the shares will be treated as capital gain or loss. RESTRICTED STOCK AND STOCK BONUS AWARDS. Restricted stock and stock bonus awards will generally be subject to tax at the time of receipt, unless there are restrictions that enable the Participant to defer tax. At the time the tax is incurred, the tax treatment will be similar to that discussed above for NQSOs. MAXIMUM TAX RATES. The maximum tax rate applicable to ordinary income is 39.6%. Long-term capital gain will be taxed at a maximum rate of 20%. For this purpose, in order to receive long-term capital gain treatment, the shares must be held for more than eighteen months. Mid-term capital gain will be taxed at a maximum rate of 28%. For this purpose, in order to receive mid-term capital gain treatment, the shares must be held for more than one year but not more than eighteen months. Capital gains may be offset by capital losses and up to $3,000 of capital losses may be offset annually against ordinary income. TAX TREATMENT OF HYBRID. Hybrid generally will be entitled to a deduction in connection with the exercise of an NQSO by a Participant or the receipt of restricted stock or stock bonuses by a Participant to the extent that the Participant recognizes ordinary income and Hybrid withholds tax. Hybrid will be entitled to a deduction in connection with the disposition of ISO Shares only to the extent that the Participant recognizes ordinary income on a disqualifying disposition of the ISO Shares. ERISA. The Incentive Plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") and is not qualified under Section 401(a) of the Code. THE HYBRID BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE 1997 EQUITY INCENTIVE PLAN PROPOSAL NO. 4 FOR HYBRID STOCKHOLDERS: AMENDMENT OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN Stockholders are being asked to approve an amendment to Hybrid's 1997 Employee Stock Purchase Plan (the "STOCK PURCHASE PLAN") to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares, from 225,000 shares to 325,000 shares. The Board believes that the increase in the number of shares reserved for issuance under the Stock Purchase Plan is in the best interests of Hybrid because of the large increase in employees that it is expecting to hire in connection with the acquisition of Pacific. The Stock Purchase Plan plays an important role in Hybrid's efforts to attract and retain employees of outstanding ability. The Board approved the proposed amendment on March 18, 1998, to be effective upon stockholder approval. Below is a summary of the principal provisions of the Stock Purchase Plan, assuming stockholder approval of the amendment. The summary is not necessarily complete, and reference is made to the full text of the Stock Purchase Plan. STOCK PURCHASE PLAN HISTORY The Board adopted the Stock Purchase Plan in September 1997 and it was approved by the stockholders of Hybrid in October 1997. The purpose of the Stock Purchase Plan is to provide employees of Hybrid and its subsidiaries and affiliates designated by the Board as eligible to participate in the Stock Purchase Plan ("PARTICIPATING EMPLOYEES") with a convenient means to acquire an equity interest in Hybrid through payroll deductions and to provide an incentive for continued employment. Hybrid intends that the Stock Purchase Plan will qualify as an "employee stock purchase plan" under Section 423 of the Code. 145 SHARES SUBJECT TO THE STOCK PURCHASE PLAN The stock subject to issuance under the Stock Purchase Plan consists of shares of Hybrid's authorized but unissued Common Stock. An aggregate of 325,000 shares of Common Stock has been reserved by the Board for issuance under the Stock Purchase Plan (taking into account the proposed amendment). This number of shares is subject to proportional adjustment to reflect stock splits, stock dividends and other similar events. ADMINISTRATION The Stock Purchase Plan is administered by the Committee. The interpretation or construction by the Committee of any provisions of the Stock Purchase Plan or of any option granted under it will be final and binding on all Participating Employees. ELIGIBILITY All employees of Hybrid, or any parent or subsidiary, are eligible to participate in an Offering Period (as defined below) under the Stock Purchase Plan, except the following: (a) employees who are not employed by Hybrid five days before the beginning of such Offering Period; (b) employees who are customarily employed for 20 hours or less per week; (c) employees who are customarily employed for five months or less in a calendar year; and (d) employees who own stock or hold options to purchase stock or who, as a result of participation in the Stock Purchase Plan, would own stock or hold options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of Hybrid. As of April 30, 1998, approximately 80 persons were eligible to participate in the Stock Purchase Plan and no shares had been issued pursuant to the Stock Purchase Plan. On April 30, 1998, no shares were issued pursuant to the Stock Purchase Plan. As of that date, 225,000 shares were available for future issuance under the Stock Purchase Plan, not including the proposed amendment to the Stock Purchase Plan. As of April 29, 1998 (the last trading day prior to the Record Date), the closing price of Hybrid's Common Stock on the Nasdaq National Market was $6.13 per share. Participating Employees participate in the Stock Purchase Plan through payroll deductions. A Participating Employee sets the rate of such payroll deductions, which may not be less than 2% nor more than 15% of the Participating Employee's W-2 compensation, including, but not limited to, base salary, wages, commissions, shift premiums and bonuses not to exceed $250,000 before any deductions from the Participating Employee's salary pursuant to Sections 125 or 401(k) of the Code. No Participating Employee is permitted to purchase shares under the Stock Purchase Plan at a rate which, when aggregated with such employee's rights to purchase stock under all similar purchase plans of Hybrid, exceeds $25,000 in fair market value determined as of the Offering Date for each calendar year. OFFERING PERIODS Each offering of Common Stock under the Stock Purchase Plan is for a period of 24 months (the "OFFERING PERIOD"). Offering Periods are planned to commence on February 1 and August 1 of each year and end on January 31 and July 31 of each year, respectively; provided, however, that the initial Offering Period commenced on November 12, 1997 and will expire on July 31, 1999. Each Offering Period shall consist of four six-month purchase periods (individually, a "PURCHASE PERIOD") during which payroll deductions of the Participating Employees are accumulated under the Stock Purchase Plan. The Board has the power to set the beginning of any Offering Period and to change dates or the duration of Offering Periods or Purchase Periods without stockholder approval if such change is announced at least 15 days 146 before the scheduled beginning of the first Offering Period or Purchase Period to be affected. The first day of each Offering Period is the "Offering Date" for such Offering Period and the last business day of each Purchase Period is the "Purchase Date" for such Purchase Period. Participating Employees will participate in the Stock Purchase Plan during each Offering Period through regular payroll deductions as described above. Participating Employees may elect to participate in any Offering Period by enrolling as provided under the terms of the Stock Purchase Plan. Once enrolled, a Participating Employee will automatically participate in each succeeding Offering Period unless the Participating Employee withdraws from the Offering Period or the Stock Purchase Plan is terminated. After the rate of payroll deductions for an Offering Period has been set by a Participating Employee, that rate will continue to be effective for the remainder of the Offering Period (and for all subsequent Offering Periods in which the Participating Employee is automatically enrolled) unless otherwise changed by the Participating Employee. The Participating Employee may increase or lower the rate of payroll deductions for any subsequent Offering Period, but may only lower the rate of payroll deductions for an ongoing Offering Period. No more than one change may be made during a single Offering Period. PURCHASE PRICE The purchase price of shares that may be acquired in any Purchase Period under the Stock Purchase Plan is 85% of the lesser of: (i) the fair market value of the shares on the Offering Date; or (ii) the fair market value of the shares on the Purchase Date. The fair market value of a share of Hybrid's Common Stock is deemed to be the closing price of Hybrid's Common Stock on the Nasdaq National Market on the date of determination as reported in THE WALL STREET JOURNAL, except that the fair market value of a share of Hybrid's Common Stock on the Offering Date of the first Offering Period was the price per share at which shares of Hybrid's Common Stock were offered for sale to the public in Hybrid's initial public offering of shares of its Common Stock pursuant to a registration statement filed with the SEC under the Securities Act. PURCHASE OF STOCK UNDER THE STOCK PURCHASE PLAN The number of whole shares a Participating Employee will be able to purchase in any Purchase Period will be determined by dividing the total payroll amount withheld from the Participating Employee during the Purchase Period pursuant to the Stock Purchase Plan by the purchase price for each share determined as described above. The purchase will take place automatically on the Purchase Date of such Purchase Period. WITHDRAWAL A Participating Employee may withdraw from any Offering Period. Upon withdrawal, the accumulated payroll deductions will be returned to the withdrawn Participating Employee, without interest, provided that the withdrawal occurs at least 15 days before the related Purchase Date. If the withdrawal occurs less than 15 days before such Purchase Date, payroll deductions will continue for the remainder of that Purchase Period. No further payroll deductions for the purchase of shares will be made for the succeeding Offering Period unless the Participating Employee enrolls in the new Offering Period at least 15 days before the Offering Date. AMENDMENT OF THE STOCK PURCHASE PLAN The Board may at any time amend, terminate or extend the term of the Stock Purchase Plan, except that any such termination cannot affect the terms of shares previously granted under the Stock Purchase Plan, nor may any amendment make any change in the terms of shares previously granted which would adversely affect the right of any participant, nor may any amendment be made without stockholder approval if such amendment would: (a) increase the number of shares that may be issued under the Stock 147 Purchase Plan; (b) change the designation of the employees (or class of employees) eligible for participation in the Stock Purchase Plan; or (c) constitute an amendment for which stockholder approval is required in order to comply with Rule 16b-3 (or any successor rule) of the Exchange Act. TERM OF THE STOCK PURCHASE PLAN The Stock Purchase Plan will continue until the earlier to occur of: (i) termination of the Stock Purchase Plan by the Board; (ii) the issuance of all the shares of Common Stock reserved for issuance under the Stock Purchase Plan; or (iii) September 2007, ten years after the date the Stock Purchase Plan was adopted by the Board. FEDERAL INCOME TAX INFORMATION THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE FEDERAL INCOME TAX CONSEQUENCES TO HYBRID AND EMPLOYEES PARTICIPATING IN THE STOCK PURCHASE PLAN. FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPATING EMPLOYEE WILL DEPEND UPON HIS OR HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPATING EMPLOYEE HAS BEEN AND IS ENCOURAGED TO SEEK THE ADVICE OF A QUALIFIED TAX ADVISER REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE STOCK PURCHASE PLAN. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. TAX TREATMENT OF THE PARTICIPATING EMPLOYEE. Participating Employees will not recognize income for federal income tax purposes either upon enrollment in the Stock Purchase Plan or upon the purchase of shares. All tax consequences are deferred until a Participating Employee sells the shares, disposes of the shares by gift or dies. If shares are held for more than one year after the date of purchase and more than two years from the beginning of the applicable Offering Period, or if the Participating Employee dies while owning the shares, the Participating Employee realizes ordinary income on a sale (or a disposition by way of gift or upon death) to the extent of the lesser of: (i) 15% of the fair market value of the shares at the beginning of the Offering Period; or (ii) the actual gain (the amount by which the market value of the shares on the date of sale, gift or death exceeds the purchase price). All additional gain upon the sale of shares is treated as mid-term or long-term capital gain. If the shares are sold and the sale price is less than the purchase price, there is no ordinary income and the Participating Employee has a capital loss for the difference between the sale price and the purchase price. If the shares are sold or are otherwise disposed of including by way of gift (but not death, bequest or inheritance) (in any case, a "DISQUALIFYING DISPOSITION") within either the one-year or the two-year holding periods described above, the Participating Employee realizes ordinary income at the time of sale or other disposition, taxable to the extent that the fair market value of the shares at the date of purchase is greater than the purchase price. This excess will constitute ordinary income (not currently subject to withholding) in the year of the sale or other disposition even if no gain is realized on the sale or if a gratuitous transfer is made. The difference, if any, between the proceeds of sale and the aggregate fair market value of the shares at the date of purchase is a capital gain or loss. Capital gains may be offset by capital losses, and up to $3,000 of capital losses may be used annually against ordinary income. TAX TREATMENT OF HYBRID. Hybrid will be entitled to a deduction in connection with the disposition of shares acquired under the Stock Purchase Plan only to the extent that the Participating Employee recognizes ordinary income on a disqualifying disposition of the shares. Hybrid will treat any transfer of record ownership of shares as a disposition, unless it is notified to the contrary. In order to enable Hybrid 148 to learn of disqualifying dispositions and ascertain the amount of the deductions to which it is entitled, Participating Employees will be required to notify the Company in writing of the date and terms of any disposition of shares purchased under the Stock Purchase Plan. ERISA. The Stock Purchase Plan is not subject to any of the provisions of ERISA nor is it qualified under Section 401(a) of the Code. THE HYBRID BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN NEW PLAN BENEFITS
STOCK PURCHASE INCENTIVE PLAN(1) PLAN(1) ----------------- ------------------- DOLLAR NUMBER OF DOLLAR NUMBER OF NAME AND POSITIONS VALUE SHARES VALUE SHARES - ---------------------------------------- ------ --------- ------ --------- Carl S. Ledbetter....................... $ -- -- $ -- -- Gustavo Ezcurra......................... -- -- -- -- William H. Fry.......................... -- -- -- -- Dan E. Steimle.......................... -- -- -- -- All current executive officers as a group (4 persons)..................... -- -- -- -- All current directors who are not executive officers as a group (4 persons).............................. -- -- -- -- All employees, including all current officers who are not executive officers, as a group.................. -- -- -- --
- ------------------------ (1) The amounts of future option grants under the Incentive Plan and future purchases under the Stock Purchase Plan to (i) the Named Executive Officers; (ii) all current executive officers as a group; (iii) all current directors who are not executive officers as a group; and (iv) all employees, including all officers who are not executive officers, as a group are not determinable because, under the terms of the Incentive Plan, such grants are made in the discretion of the Committee or its designees and under the terms of the Stock Purchase Plan, such purchases are based on participant contributions. Future option exercise prices under the Incentive Plan are not determinable because they are based upon the fair market value of Hybrid's Common Stock on the date of grant, and future purchase prices under the Stock Purchase Plan are not determinable because they are based on the fair market value of Hybrid's Common Stock at the beginning and end of each Purchase Period. PROPOSAL NO. 5 FOR HYBRID STOCKHOLDERS: RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS Hybrid has selected Coopers & Lybrand L.L.P. as its independent accountants to perform the audit of Hybrid's financial statement for the fiscal year ending December 31, 1998, and the stockholders are being asked to ratify such selection. Representatives of Coopers & Lybrand L.L.P. are expected to be present at the Hybrid Annual Meeting, will have the opportunity to make a statement at the Hybrid Annual Meeting if they desire to do so and are expected to be available to respond to appropriate questions. THE HYBRID BOARD RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P. AS HYBRID'S INDEPENDENT ACCOUNTANTS. 149 STOCKHOLDER PROPOSALS Proposals of stockholders of Hybrid intended to be presented at Hybrid's 1999 Annual Meeting of Stockholders must be received by Hybrid at its principal executive offices no later than January 28, 1999 in order to be included in Hybrid's Proxy Statement and form of proxy relating to the meeting. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 of the Securities Exchange Act of 1934, as amended, requires Hybrid's directors and certain of its officers, and persons who own more than 10% of Hybrid's Common Stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulation to furnish Hybrid with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms furnished to Hybrid and written representations from the executive officers and directors, Hybrid believes that all Section 16(a) filing requirements for the year ended December 31, 1997 were met. OTHER BUSINESS The Hybrid Board does not presently intend to bring any other business before the Hybrid Annual Meeting and, so far as is known to the Hybrid Board, no matters are to be brought before the Hybrid Annual Meeting except as specified in the Notice of the Hybrid Annual Meeting. As to any business that may properly come before the Hybrid Annual Meeting, however, it is intended that proxies in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies. EXPERTS The balance sheets of Hybrid Networks, Inc. as of December 31, 1997 and 1996, and the statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, included in this Joint Proxy Statement/Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of that firm as experts in accounting and auditing. The financial statements of Pacific Monolithics, Inc. as of September 30, 1997 and 1996 and for each of the three years in the period ended September 30, 1997 included in this Joint Proxy Statement/ Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS The validity of the Hybrid Common Stock issuable pursuant to the Merger will be passed on by Fenwick & West LLP, Palo Alto, California. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, is acting as counsel for Pacific in connection with certain legal matters relating to the Reorganization Agreement and the transactions contemplated thereby. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANING PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. 150 INDEX TO FINANCIAL STATEMENTS
Hybrid Networks, Inc. Report of Coopers & Lybrand L.L.P., Independent Accountants........................ F-2 Balance Sheets as of December 31, 1997 and 1996.................................... F-3 Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995...... F-4 Statements for Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995............................................................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995...... F-6 Notes to Financial Statements...................................................... F-7 Balance Sheets as of March 31, 1998 and December 31, 1997 (unaudited).............. F-20 Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (unaudited)...................................................................... F-21 Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited)...................................................................... F-22 Notes to Unaudited Financial Statements............................................ F-23 Pacific Monolithics, Inc. Independent Auditors' Report--Deloitte & Touche LLP................................ F-25 Balance Sheets as of September 30, 1997 and 1996 and March 31, 1998 (unaudited).... F-26 Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995 and for the Three Months and Six Months Ended March 31, 1998 and 1997 (unaudited).... F-27 Statements of Shareholders' Equity for the Years Ended September 30, 1997, 1996 and 1995 and for the Six Months Ended March 31, 1998 (unaudited)..................... F-28 Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995 and for the Six Months Ended March 31, 1998 and 1997 (unaudited)..................... F-29 Notes to Financial Statements...................................................... F-30
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, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California January 20, 1998, except for note 16, for which the date is March 19, 1998 F-2 HYBRID NETWORKS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 26,167 $ 6,886 Short-term investments.................................................................. 981 -- Accounts receivable, net of allowance for doubtful accounts of $1,175 in 1997 and none in 1996............................................................................... 8,870 1,348 Inventories............................................................................. 3,368 943 Prepaid expenses and other current assets............................................... 362 125 ---------- ---------- Total current assets.................................................................. 39,748 9,302 Property and equipment, net............................................................... 1,808 1,178 Intangibles and other assets.............................................................. 1,563 59 ---------- ---------- Total assets........................................................................ $ 43,119 $ 10,539 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 2,033 $ 1,424 Accrued liabilities..................................................................... 1,394 712 Current portion of capital lease obligations............................................ 410 222 ---------- ---------- Total current liabilities............................................................. 3,837 2,358 Convertible debenture..................................................................... 5,500 -- Capital lease obligations, less current portion........................................... 618 438 Other liabilities......................................................................... -- 34 ---------- ---------- Total liabilities..................................................................... 9,955 2,830 ---------- ---------- Commitments and contingencies (Note 10) Stockholders' equity: Convertible preferred stock, $.001 par value: Authorized: 5,000 shares in 1997 and 18,000 shares in 1996; Issued and outstanding: no shares in 1997 and 12,069 shares in 1996..................... -- 12 Common stock, $.001 par value: Authorized: 100,000 shares; Issued and outstanding: 10,342 shares in 1997 and 2,520 shares in 1996.................. 10 2 Additional paid-in capital................................................................ 64,086 25,037 Accumulated deficit....................................................................... (30,932) (17,342) ---------- ---------- Total stockholders' equity.............................................................. 33,164 7,709 ---------- ---------- Total liabilities and stockholders' equity............................................ $ 43,119 $ 10,539 ---------- ---------- ---------- ----------
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)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- Net sales........................................................................ $ 14,270 $ 2,962 $ 630 Cost of sales.................................................................... 12,258 3,130 761 ---------- --------- --------- Gross profit (loss).......................................................... 2,012 (168) (131) ---------- --------- --------- Operating expenses: Research and development....................................................... 7,108 5,076 3,862 Sales and marketing............................................................ 4,319 1,786 390 General and administrative..................................................... 3,606 1,714 748 ---------- --------- --------- Total operating expenses..................................................... 15,033 8,576 5,000 ---------- --------- --------- Loss from operations....................................................... (13,021) (8,744) (5,131) Interest income and other expenses, net.......................................... 399 257 166 Interest expense................................................................. (968) (28) (304) ---------- --------- --------- Net loss................................................................... $ (13,590) $ (8,515) $ (5,269) ---------- --------- --------- ---------- --------- --------- Basic and diluted loss per share................................................. $ (3.84) $ (3.36) $ (2.37) ---------- --------- --------- ---------- --------- --------- Shares used in basic and diluted per share calculation........................... 3,541 2,535 2,223 ---------- --------- --------- ---------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-4 HYBRID NETWORKS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK --------------- ---------------- ADDITIONAL ACCUMULATED SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL ------- ------ ------ -------- --------------- ----------- -------- Balances, January 1, 1995..... 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 conversions 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................... -- -- 150 -- 85 -- 85 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..................... -- -- -- -- 250 -- 250 Issuance of warrants in connection with technology license agreement......... -- -- -- -- 1,000 -- 1,000 Issuance of common stock, net of issuance costs of $1,280.................... -- -- 2,836 3 35,642 -- 35,645 Conversion of preferred stock to common stock..... (12,563) (13) 4,653 5 8 -- -- Issuance of common stock upon net exercise of warrants.................. -- -- 176 -- -- -- -- Net loss.................... -- -- -- -- -- (13,590) (13,590) ------- ------ ------ --- --------------- ----------- -------- Balances, December 31, 1997... -- $-- 10,342 $ 10 $64,086 $(30,932) $ 33,164 ------- ------ ------ --- --------------- ----------- -------- ------- ------ ------ --- --------------- ----------- --------
The accompanying notes are an integral part of these financial statements. F-5 HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- Cash flows from operating activities: Net loss...................................................................... $ (13,590) $ (8,515) $ (5,269) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................... 760 322 162 Provision for doubtful accounts............................................. 1,175 -- -- Provision for excess and obsolete inventory................................. 452 126 137 Interest converted to Series E preferred stock.............................. -- -- 402 Common stock issued for technology license.................................. -- -- 141 Convertible Subordinated Note interest related to the issuance of warrants.................................................................. 250 -- -- Common Stock issued for services rendered................................... 72 -- 3 Change in assets and liabilities: Accounts receivable......................................................... (8,697) (1,061) (224) Inventories................................................................. (2,877) (873) (218) Prepaid expenses and other current assets................................... (237) (115) 7 Accounts payable............................................................ 609 1,144 102 Accrued liabilities and other............................................... 648 395 1,418 ---------- --------- --------- Net cash used in operating activities..................................... (21,435) (8,577) (3,339) ---------- --------- --------- Cash flows from investing activities: Purchase of property and equipment............................................ (643) (321) (295) Change in other assets........................................................ (76) (26) (22) Purchase of short-term investments............................................ (981) -- (490) Proceeds from maturity of short-term investments.............................. -- 490 199 ---------- --------- --------- Net cash provided by (used in) investing activities....................... (1,700) 143 (608) ---------- --------- --------- Cash flows from financing activities: Repayment of capital lease obligations........................................ (307) (106) (20) Repayment of convertible subordinated note payable............................ (6,882) -- -- Proceeds from issuance of preferred stock warrants............................ -- -- 18 Proceeds from convertible subordinated note payable........................... 6,882 -- -- Net proceeds from issuance of convertible debenture........................... 5,000 3,160 -- Net proceeds from issuance of preferred stock................................. 2,000 9,378 5,558 Net proceeds from issuance of common stock.................................... 35,730 34 27 Repurchase of common stock.................................................... (7) (9) -- ---------- --------- --------- Net cash provided by financing activities................................. 42,416 12,457 5,583 ---------- --------- --------- Increase in cash and cash equivalents........................................... 19,281 4,023 1,636 Cash and cash equivalents, beginning of period.................................. 6,886 2,863 1,227 ---------- --------- --------- Cash and cash equivalents, end of period........................................ $ 26,167 $ 6,886 $ 2,863 ---------- --------- --------- ---------- --------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Conversion of notes payable into preferred stock.............................. -- $ 3,160 $ 2,000 Conversion of prepaid royalties to Series F preferred stock................... -- -- 1,500 Property and equipment acquired under capital leases.......................... $ 675 472 314 Capitalization of finance costs............................................... 500 -- -- Issuance of warrants in connection with subordinated notes payable............ 250 -- -- Issuance of warrants in connection with technology license agreement.......... 1,000 -- -- Supplemental disclosure of cash flow information: Interest paid................................................................. $ 718 $ 28 $ 5
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, which was incorporated in Delaware on June 6, 1990, is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable 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. 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, capital leases, subordinated debt and other accrued liabilities' approximate fair value due to their short maturities. The Company sells its products primarily to cable system operators, broadband wireless system operators, Internet Service Providers, third party distributors and other companies that provide broadband networking systems or services, principally 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, 1997, one customer represented 21% of accounts receivable and as of December 31, 1996, two customers represented 51% and 10% of accounts receivable, respectively. The Company operates in the intensely competitive and rapidly changing communications industry which has been characterized by rapid technological change, evolving industry standards and federal, state and local regulation which may impede the Company's penetration of certain markets. The Company currently operates with one product line. The Company's future success depends upon its ability to develop, introduce and market new products, its ability to obtain components from key suppliers, obtaining sufficient manufacturing capacity, and the success of the broadband access business. The Company may experience future fluctuations in operating results and declines in selling prices. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid instruments with an original or remaining maturity of three months or less to be cash equivalents. Instruments with a maturity greater than three months at the date of F-7 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, 1997 are in three demand accounts with two major banks. Short-term investments as of December 31, 1997 are classified as available for sale and are carried at cost which approximates fair market value, and consists of corporate commercial paper maturing in April 1998. 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. INTANGIBLES AND OTHER ASSETS Intangibles and other assets include deferred financing costs relating to fees incurred in connection with the issuance of a senior convertible debenture in April 1997 and the value of the transfer of certain technologies relating to a technology support and development agreement signed in November 1997. The deferred financing costs are amortized over the five year life of the debenture (see Note 7) and the value of the technologies will be amortized on a straight line basis over a four year life. Total accumulated amortization as of December 31, 1997 was $20,833. The Company periodically assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over the remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset to a net realizable value. REVENUE RECOGNITION The Company recognizes revenue and accrues for estimated warranty costs upon shipment of products. The Company's third party manufacturer provides a fifteen month warranty period on all cable modems manufactured by them. The warranty period begins on the date the modems are completely assembled. The Company provides a twelve month warranty on all headend equipment sold. 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 F-8 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 11). COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE The Company adopted Financial Accounting Standards Board No. 128 "Earnings Per Share" and accordingly all prior periods have been restated. Basic and diluted loss per share are computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and preferred stock are excluded from the computation of diluted loss per share as their effect is antidilutive. In February 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 98, which addresses the computation of earnings per share in an initial public offering. The Company has determined that no incremental shares should be included in the computation of earnings per share in accordance with the SAB and basic and diluted loss per share has been restated accordingly. Stock Options to purchase 1,926,000 shares of Common Stock at prices ranging from $0.27 to $11.05 per share were outstanding at December 31, 1997, but were not included in the computation of diluted loss per share because they were antidilutive. Warrants to purchase 1,340,656 shares of Common Stock at prices ranging from $0.001 to $10.91 per share were outstanding at December 31, 1997, but were not included in the computation of diluted loss per share because they were antidilutive. The aforementioned stock options and Warrants could potentially dilute earnings per share in the future. RECENT ACCOUNTING PRONOUNCEMENTS 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, -------------------- 1997 1996 --------- --------- Raw materials.............................................................. $ 1,952 $ 526 Work in progress........................................................... 292 267 Finished goods............................................................. 1,124 150 --------- --------- $ 3,368 $ 943 --------- --------- --------- ---------
4. PROPERTY AND EQUIPMENT Property and equipment, including furniture and equipment under capital leases, (cost of $1,461,000 and $786,000 and accumulated amortization of $541,000 and $177,000 as of December 31, 1997 and 1996, respectively) consist of the following (in thousands):
DECEMBER 31, -------------------- 1997 1996 --------- --------- Machinery and equipment................................................... $ 2,780 $ 1,440 Office furniture and fixtures............................................. 164 107 Leasehold improvements.................................................... 110 189 --------- --------- 3,054 1,736 Less accumulated depreciation and amortization............................ (1,246) (558) --------- --------- $ 1,808 $ 1,178 --------- --------- --------- ---------
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 was payable at the earliest of September 30, 1998 or the effective date of an initial public offering of the Company's common stock. In connection with the Convertible Subordinated Note Purchase Agreement, the Company issued warrants to purchase 252,381 shares of its common stock at $10.91 per share. The warrant becomes exercisable at the earliest of 180 days after issuance or the effective date of an initial public stock offering and expires in five years. The amount attributed to the value of the warrants is $250,000 which has been allocated to stockholders' equity and was charged to interest expense upon repayment of the note. At December 31, 1997 no amount was outstanding under the convertible subordinated note payable. 6. SHORT TERM BORROWINGS In October 1997, the Company entered into a credit facility agreement with a bank which provides for borrowings up to a maximum of $4.0 Million. Borrowings under the credit facility, which expires in October 1998, bear interest at the prime rate (8.50% at December 31, 1997) and are collateralized by certain of the Company's assets. The agreement contains restrictive covenants including maintenance of certain financial ratios, limitations of quarterly losses and prohibits the Company from paying any cash dividends. The Company had no outstanding borrowings under this credit facility at December 31, 1997. F-10 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. 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. An arrangement fee of $500,000 was paid by the Company, the arrangement fee has been capitalized and is being amortized over the life of the debenture through operations. The debenture is convertible, at the option of the holder, at any time, into common stock at $10.71 per share. The debenture contains "full ratchet" antidilution provisions under which the number of shares of the Company's Common Stock into which the debenture will be convertible may be increased if the Company issues any shares (with certain exceptions for employee stock options and the like) prior to October 1998 for consideration less than $10.71 per share. Commencing with October 1998, any such issuance would be subject to certain "weighted average" antidilution provisions. The debenture is collateralized by certain of the Company's assets. 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. 8. ACCRUED LIABILITIES Accrued liabilities consist of the following (IN THOUSANDS):
DECEMBER 31, -------------------- 1997 1996 --------- --------- Accrued payroll and related accruals....................................... $ 795 $ 425 Other liabilities.......................................................... 599 287 --------- --------- $ 1,394 $ 712 --------- --------- --------- ---------
9. CAPITAL LEASE OBLIGATIONS Capital leases at December 31, 1997 expire at various dates through March 2001 and bear interest at rates ranging from 7.6% to 10.8%. Future minimum lease payments under all capital leases are as follows (IN THOUSANDS): 1998........................................................ $ 474 1999........................................................ 407 2000........................................................ 244 2001........................................................ 10 --------- 1,135 Less amount representing interest........................... (107) --------- 1,028 Less current portion........................................ (410) --------- $ 618 --------- ---------
F-11 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES: 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. Future minimum lease payments are as follows (IN THOUSANDS): 1998......................................................... $ 362 1999......................................................... 56 2000......................................................... 57 2001......................................................... 57 2002......................................................... 11 --------- $ 543 --------- ---------
Rent expense for 1997, 1996, 1995 was approximately $494,000, $263,000, and $191,000 respectively. The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. While it is not possible to determine the ultimate outcome of these actions at this time, management believes that any liabilities resulting from such proceedings, or claims which are pending or known to be threatened, will not have a material adverse effect on the Company's financial position or results of operations. The Company initiated a civil action for patent infringement against Com21, Inc., and Celestica, Inc. on January 23, 1998 in the U.S. District Court for the Eastern District of Virginia. In response to the Company's action, Com21, Inc. initiated a declaratory judgment action on January 29, 1998 against the Company in the U.S. District Court for the Northern District of California to obtain a declaration of invalidity of the Company's patents and non-infringement of such patents. The action in the Eastern District of Virginia was subsequently transferred to the Northern District of California on February 23, 1998. The litigation is expected to be time consuming and costly, and, although no monetary claim is asserted against the Company, the action, if resolved adversely to the Company, could have a material adverse effect on the Company's business, operating results and financial condition. 11. STOCKHOLDERS' EQUITY 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 and preferred 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 eliminated the existing convertible preferred stock and changed the number of authorized shares of preferred stock to 5,000,000 shares, $0.001 par value, and increased the shares of common stock authorized to 100,000,000 shares. In October 1997, the stockholders of the Company approved the 1- for -2.7 reverse split of the Company's common stock and a corresponding change in the preferred stock conversion ratios. F-12 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY (CONTINUED) INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK In November 1997, the Company filed a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. In connection with the Initial Public Offering, all outstanding shares of Preferred Stock were converted into shares of common stock adjusted for the 1-for-2.7 reverse stock split. 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 has been assessed using the Black-Scholes Model and valued as appropriate for financial reporting purposes. In connection with the issuance of Series G preferred stock in July 1996, and the 1996 equipment lease line, the Company issued warrants to purchase 58,021 and 5,802 shares of common stock, respectively, at $10.34 per share. These warrants are exercisable at any time and expire in July 2001 and August 2006, respectively. The Company has reserved 63,823 shares of common stock for issuance upon exercise of these warrants. 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 167,037 shares of common stock at $4.73 per share. In connection with the issuance of Series D preferred stock May 1995, the Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225 shares was exercised for a net exercise of 99,850 shares a common stock. The remaining warrants are exercisable at any time and expire in June 2001. The Company has reserved 627,405 shares of common stock for issuance upon exercise of these warrants. During 1996, the Company issued warrants, at $.001 per warrant, to purchase 76,245 shares of Common stock at $4.73 per share. In connection with the technology transfer discussed in Note 14 and the 1995 equipment lease line, the Company issued warrants to purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per share. During 1996, a warrant to purchase 169,259 shares was exercised for a net exercise of 91,921 shares of common stock. The remaining warrants are exercisable at any time and expire in June 2001 and August 2005, respectively. The Company has reserved 84,710 shares of common stock for issuance upon exercise of these warrants. In September 1997, the Company issued warrants to purchase 252,381 shares of common stock in connection with their convertible subordinated note payable, at an exercise price of $10.91. In October 1997, the Company issued warrants to purchase 2,659 shares of common stock in connection with obtaining a bank credit facility at an exercise price of $10.91. In November 1997, warrants to purchase 148,617 shares of common stock were exercised for a net exercise of 76,096 shares of common stock. (See Note 5). In November 1997, the Company issued a five year warrant to purchase 458,295 shares of common stock at an exercise price of $10.91 per share, in connection with a technology support and development arrangement. F-13 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS 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. In addition, any shares that, upon the effectiveness of the 1997 plan, were available for the grant of options under earlier plans are rolled over and are available for issuance under the 1997 plan; also, any shares that subsequently became available under the earlier plans, roll over and became available for issuance under the 1997 plan. The 1997 Equity Incentive Plan expires in September 2007. Also in September 1997, the Board of Directors adopted 1997 Directors' Stock Option Plan under which 100,000 shares of common stock have been reserved for issuance. The Directors' Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company and expires in September 2007. In December 1996, the Company adopted the 1996 Equity Incentive Plan and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants, independent contractors and advisors. In June 1997, the Company increased the number of shares reserved for issuance under the 1996 Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in December 2006. In December 1995, the Company adopted the Executive Officer Incentive Plan and reserved 370,370 shares of common stock for issuance to the Company's chief executive officer and other senior executive officers. In 1996 and 1997, the Company increased the number of shares reserved under this plan by 129,630 and 271,111, respectively. 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 2003. 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-14 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY (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, 1995...................... 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 (34) 0.65 ----------- ----- ----------- Balances, December 31, 1996.................... 213 1,479 0.27-1.08 963 0.65 Additional shares reserved................... 2,409 -- -- -- -- Options granted.............................. (862) 862 1.08-11.05 5,332 6.19 Stock bonus awards........................... (13) -- 1.08-5.40 -- -- Stock repurchased............................ 12 -- 0.54 -- -- Options canceled............................. 265 (265) 0.27-1.08 (316) 1.19 Options exercised............................ -- (150) 0.27-1.08 (85) 0.57 ----------- ----- ----------- Balances, December 31, 1997.................... 2,024 1,926 $0.27-$11.05 $ 5,894 $ 3.06 ----------- ----- ----------- ----------- ----- -----------
For the years ended December 31, 1997, 1996 and 1995, the weighted average fair value of options granted was $5.48, $0.81 and $0.42 per share, respectively. F-15 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS As of December 31, 1997, the stock options outstanding were as follows (IN THOUSANDS, EXCEPT PER SHARE DATA):
OPTIONS OUTSTANDING - -------------------------------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISABLE REMAINING WEIGHTED ------------------------------ EXERCISE NUMBER CONTRACTUAL LIFE AVERAGE NUMBER WEIGHED AVERAGE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------- ------------- ----------------- --------------- ------------- --------------- $ 0.27 42 1.45 $ 0.27 37 $ 0.27 0.54 887 3.15 0.54 398 0.54 1.08 258 3.81 1.08 67 1.08 2.16 46 4.23 2.16 11 2.16 2.70 153 4.38 2.70 23 2.70 5.40 195 4.54 5.40 3 5.40 8.78 114 4.66 8.78 -- 8.78 11.04 170 4.71 11.04 -- 11.04 11.05 61 4.80 11.05 -- 11.05 ----- ----- 1,926 $ 3.06 539 $ 0.76 ----- ----- ----- -----
As of December 31, 1996 and 1995, options to purchase 294,000 and 125,000 shares were exercisable at an average weighted exercise price of $0.54 and $0.46 per share, 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 years ended 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share for 1997, 1996, and 1995 would have been increased to the pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Net loss as reported............................................ $ 13,590 $ 8,515 $ 5,269 --------- --------- --------- --------- --------- --------- Net loss--pro forma............................................. $ 13,733 $ 8,548 $ 5,275 --------- --------- --------- --------- --------- --------- Net loss per share--as reported................................. $ (3.84) $ (3.36) $ (2.37) --------- --------- --------- --------- --------- --------- Net loss per share--pro forma................................... $ (3.88) $ (3.37) $ (2.37) --------- --------- --------- --------- --------- ---------
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. F-16 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY (CONTINUED) 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 1997, 1996 and 1995; dividend yield of 0%, volatility of 0% for options issued prior to the Company's Initial Public Offering and 75% thereafter, risk-free interest rates of 5.18% to 7.68% at the date of grant and an expected term of four years. EMPLOYEE STOCK PURCHASE PLAN In September 1997, the Company's Board of Directors approved an Employee Stock Purchase Plan. Under this plan, employees of the Company can purchase Common Stock through payroll deductions. A total of 225,000 shares have been reserved for issuance under this plan. As of December 31, 1997, no shares have been purchased under the Employee Stock Purchase Plan. 12. INCOME TAXES There was no provision for income taxes for the years ended December 31, 1997, 1996 and 1995. The provision for income taxes differs from the amount computed by applying the federal statutory rate to the loss before income taxes as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Federal tax at statutory rate......................................... 35.0% 35.0% 35.0% State taxes, net of federal benefit................................... 5.9 6.2 6.2 Tax credits........................................................... (2.8) (3.7) (2.4) Other................................................................. .5 1.0 .4 Change in valuation allowance......................................... (38.6) (38.5) (39.2) --------- --------- --------- Tax provision......................................................... -- % -- % -- % --------- --------- --------- --------- --------- ---------
Temporary differences which gave rise to significant portions of deferred tax assets are as follows (IN THOUSANDS):
1997 1996 ---------- --------- Net operating loss carryforwards........................................ $ 6,279 $ 4,119 Capitalized research expenditures....................................... 5,669 3,553 Tax credit carryforwards................................................ 1,172 637 Inventory reserves...................................................... 178 103 Other accrued liabilities............................................... 754 104 ---------- --------- Total deferred assets............................................... 14,052 8,516 Valuation allowance..................................................... (14,052) (8,516) ---------- --------- Net deferred assets................................................. $ -- $ -- ---------- --------- ---------- ---------
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. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation F-17 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES (CONTINUED) allowance has been recorded. These factors include the Company's history of losses, recent increases in expense levels, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, the lack of carryback capacity to realize deferred tax assets, and the uncertainty regarding market acceptance of the Company's products. The Company will continue to assess the realizability of the deferred tax assets in future periods. The valuation allowance increased by $5,536,000, and $4,561,000 in 1997 and 1996, respectively. The Company had federal and state net operating loss carryforwards of approximately $16,589,000 and $10,945,000, respectively, as of December 31, 1997 available to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire in 1997 through 2012, if not utilized.
TAX EXPIRATION REPORTING DATES ---------- ----------- Research and development credit..................................... $ 768,000 2007-2012 State research and development credit............................... 404,000
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. 13. 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 1997, 1996, 1995, the Company made no employer contributions. 14. 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 365,517 shares of Series F preferred stock at $4.10 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 262,222 shares of the Company's common stock at $.54 per share. The Company had net sales to two stockholders of $578,000 and $534,000, respectively, for the year ending December 31, 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 in Note 5. F-18 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) As per the terms of the convertible subordinated note payable, the entire $500,000 note was repaid to the executive officer out of the proceeds received from the initial public offering. 15. 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:
1997 1996 1995 ----- ----- ----- A........................................................................ 14% -- -- B........................................................................ -- 21% 52% C........................................................................ -- 41% 28%
The Company's export sales for 1997 and 1995 were less than 10%. In 1996 export sales to Europe and Asia were 7.3% and 2.8% respectively, of net sales. 16. SUBSEQUENT EVENTS In March 1998, the Company announced its intent to acquire Pacific Monolithics, Inc., a privately held Company, for approximately $12.5 million of the Company's common stock. In February 1998, the Company entered into a sublease agreement for approximately 55,000 square feet of office, research and development and manufacturing space in San Jose, CA. The new facility will become the Company's headquarters and principal facility, and will replace the existing facilities leases that expire in May 1998 through September 1998. The sublease provides for initial monthly lease payments of approximately $68,888 and expires in April 2004. F-19 HYBRID NETWORKS, INC. BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------ ASSETS Current assets: Cash and cash equivalents........................................................... $ 7,248 $ 26,167 Short-term investments.............................................................. 12,753 981 Accounts receivable, net of allowance for doubtful accounts of $2,307 in 1998 and $1,175 in 1997.................................................................... 9,846 8,870 Inventories......................................................................... 5,582 3,368 Prepaid expenses and other current assets........................................... 369 362 ----------- ------------ Total current assets.............................................................. 35,798 39,748 Property and equipment, net........................................................... 1,768 1,808 Intangibles and other assets.......................................................... 1,628 1,563 ----------- ------------ Total assets.................................................................... $ 39,194 $ 43,119 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 2,080 $ 2,033 Accrued liabilities................................................................. 1,278 1,394 Current portion of capital lease obligations........................................ 455 410 ----------- ------------ Total current liabilities......................................................... 3,813 3,837 Convertible debenture................................................................. 5,500 5,500 Capital lease obligations, less current portion....................................... 587 618 ----------- ------------ Total liabilities............................................................... 9,900 9,955 Contingencies Stockholders' equity: Convertible preferred stock, $.001 par value: Authorized: 5,000 shares; Issued and outstanding: no shares in 1998 or 1997................................. -- -- Common stock, $.001 par value: Authorized: 100,000 shares; Issued and outstanding: 10,364 shares in 1998 and 10,342 shares in 1997........... 10 10 Additional paid-in capital............................................................ 63,916 64,086 Accumulated deficit................................................................... (34,632) (30,932) ----------- ------------ Total stockholders' equity........................................................ 29,294 33,164 ----------- ------------ Total liabilities and stockholders' equity...................................... $ 39,194 $ 43,119 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of these financial statements. F-20 HYBRID NETWORKS, INC. STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 1998 1997 --------- --------- Net sales................................................................................. $ 3,528 $ 1,852 Cost of sales............................................................................. 2,897 1,974 --------- --------- Gross profit (loss)..................................................................... 631 (122) --------- --------- Operating expenses: Research and development................................................................ 2,042 1,726 Sales and marketing..................................................................... 977 1,274 General and administrative.............................................................. 1,390 1,233 --------- --------- Total operating expenses.............................................................. 4,409 4,233 --------- --------- Loss from operations................................................................ (3,778) (4,355) Interest income and other expenses, net................................................... 302 87 Interest expense.......................................................................... (224) (12) --------- --------- Net loss............................................................................ $ (3,700) $ (4,280) --------- --------- --------- --------- Basic and diluted loss per share.......................................................... $ (0.36) $ (1.67) --------- --------- --------- --------- Shares used in basic and diluted per share calculation.................................... 10,353 2,561 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-21 HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 ---------- ---------- Cash flows from operating activities: Net loss................................................................................ $ (3,700) $ (4,280) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................................................... 304 131 Provision for sales returns........................................................... 800 -- Provision for doubtful accounts....................................................... 450 640 Change in assets and liabilities: Accounts receivable................................................................... (2,226) (234) Inventories........................................................................... (2,214) (757) Prepaid expenses and other current assets............................................. (7) 31 Accounts payable...................................................................... 47 397 Accrued liabilities and other......................................................... (116) 6 ---------- ---------- Net cash used in operating activities............................................... (6,662) (4,066) ---------- ---------- Cash flows from investing activities: Purchase of property and equipment...................................................... (51) (228) Change in other assets.................................................................. (154) (18) Purchase of short-term investments...................................................... (12,753) -- Proceeds from maturity of short-term investments........................................ 981 -- ---------- ---------- Net cash used in investing activities............................................... (11,977) (246) ---------- ---------- Cash flows from financing activities: Repayment of capital lease obligations.................................................. (110) (51) Net proceeds from issuance of preferred stock........................................... -- 2,000 Net proceeds from issuance of common stock.............................................. (170) 30 ---------- ---------- Net cash provided by (used in) financing activities................................. (280) 1,979 ---------- ---------- Decrease in cash and cash equivalents..................................................... (18,919) (2,333) Cash and cash equivalents, beginning of period............................................ 26,167 6,886 ---------- ---------- Cash and cash equivalents, end of period.................................................. $ 7,248 4,553 ---------- ---------- ---------- ---------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Property and equipment acquired under capital leases.................................... $ 124 $ 268 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid........................................................................... $ 224 $ 12
The accompanying notes are an integral part of these financial statements. F-22 HYBRID NETWORKS, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed financial statements of Hybrid Networks, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet as of March 31, 1998, and the statements of operations for the three months ended March 31, 1998 and 1997, and the statement of cash flows for the three month periods ended March 31, 1998 and 1997 are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The December 31, 1997 condensed balance sheet data was derived from audited Financial Statements, but does not include all disclosures required by generally accepted accounting principals. The accompanying financial statements should be read in conjunction with the financial statements as contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Results for any interim period are not necessarily indicative of results for any other interim period or for the entire year. COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE The Company adopted Financial Accounting Standards Board No. 128 "Earnings Per Share" and accordingly all prior periods have been restated. Basic and diluted loss per share are computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and preferred stock are excluded from the computation of diluted loss per share as their effect is antidilutive. In February 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 98, which addresses the computation of earnings per share in an initial public offering. The Company has determined that no incremental shares should be included in the computation of earnings per share in accordance with the SAB and basic and diluted loss per share has been restated accordingly. Stock options and warrants to purchase 3,493,885 shares of common stock at prices ranging from $0.01 to $11.05 per share were outstanding as of March 31, 1998, but were not included in the computation of diluted loss per share because they were antidilutive. The aforementioned stock options and warrants could potentially dilute earnings per share in the future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Such items may include foreign currency translation adjustments, unrealized gains/losses from investing and hedging activities, and other transactions. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement was adopted in the Company's first quarter of 1998, and its effect on the financial statements was not material. F-23 HYBRID NETWORKS, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED) In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is required to be adopted for fiscal years beginning after December 15, 1997. The Company has yet to determine the affect of adoption of this statement. INVENTORIES INVENTORIES COMPRISE THE FOLLOWING:
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------- Raw materials........................................................................... $ 2,467 $ 1,952 Work in progress........................................................................ 469 292 Finished goods.......................................................................... 2,646 1,124 ----------- ------ $ 5,582 $ 3,368 ----------- ------ ----------- ------
CONTINGENCIES The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. While it is not possible to determine the ultimate outcome of these actions at this time, management believes that any liabilities resulting from such proceedings, or claims which are pending or known to be threatened, will not have a material adverse effect on the Company's financial position or results of operations. The Company initiated a civil action for patent infringement against Com21, Inc., and Celestica, Inc. on January 23, 1998 in the U.S. District Court for the Eastern District of Virginia. In response to the Company's action, Com21, Inc. initiated a declaratory judgment action on January 29, 1998 against the Company in the U.S. District Court for the Northern District of California to obtain a declaration of invalidity, unenforceability and non-infringement of the Company's patents and the collection of attorneys fees. The action in the Eastern District of Virginia was subsequently transferred to the Northern District of California on February 23, 1998. The litigation is expected to be time consuming and costly, and, although no monetary claim other than attorneys fees is asserted against the Company, the action, if resolved adversely to the Company, could have a material adverse effect on the Company's business, operating results or financial condition. F-24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Pacific Monolithics, Inc.: We have audited the accompanying balance sheets of Pacific Monolithics, Inc. as of September 30, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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, such financial statements present fairly, in all material respects, the financial position of Pacific Monolithics, Inc. at September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California November 28, 1997 (March 19, 1998 as to Note 10) F-25 PACIFIC MONOLITHICS, INC. BALANCE SHEETS
MARCH 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 ------------- ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and equivalents............................................... $ 162,000 $ 1,506,000 $ 475,000 Restricted short-term investments.................................. -- 425,000 425,000 Accounts receivable (net of allowances for $532,000 at March 1998, $489,000 at September 1997 and $1,419,000 at September 1996)..... 7,119,000 4,908,000 8,150,000 Inventories........................................................ 6,498,000 6,426,000 6,718,000 Prepaid expenses and other assets.................................. 281,000 172,000 163,000 Employee and other receivables..................................... 66,000 284,000 43,000 ------------- ------------- ------------- Total current assets........................................... 14,126,000 13,721,000 15,974,000 Property and equipment--net.......................................... 2,583,000 2,816,000 2,893,000 Deposits and other assets............................................ 110,000 132,000 124,000 ------------- ------------- ------------- Total assets......................................................... $ 16,819,000 $16,669,000 $18,991,000 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit..................................................... $ 4,298,000 $ 1,730,000 $ 2,991,000 Notes payable to shareholders...................................... 1,750,000 1,750,000 1,000,000 Accounts payable................................................... 4,407,000 4,465,000 4,795,000 Accrued liabilities................................................ 1,045,000 946,000 951,000 Provision for losses on contracts.................................. -- -- 134,000 Current portion of long-term obligations........................... 465,000 583,000 624,000 Deferred revenue................................................... 24,000 66,000 71,000 Deferred rent...................................................... 18,000 18,000 18,000 ------------- ------------- ------------- Total current liabilities...................................... 12,007,000 9,558,000 10,584,000 ------------- ------------- ------------- Long-term obligations................................................ 458,000 442,000 383,000 Deferred revenue..................................................... -- -- 30,000 Deferred rent........................................................ 90,000 99,000 118,000 Commitments and contingencies (Note 6) Shareholders' equity Convertible preferred stock--no par value; 12,510,722 shares authorized (aggregate liquidation preference of $14,264,000): Series A, 7,249,269 shares designated; 7,249,269 shares outstanding................................... 4,273,000 4,273,000 4,273,000 Series B, 2,861,453 shares designated; 2,861,453 shares outstanding................................... 4,642,000 4,642,000 4,642,000 Series C, 2,400,000 shares designated; 2,209,959 shares outstanding................................... 5,153,000 5,153,000 5,153,000 Common stock--no par value; 25,000,000 shares authorized; shares outstanding: March 31, 1998, 5,692,668; September 1997, 5,554,046 and September 1996, 4,835,381.................................... 15,591,000 15,577,000 15,381,000 Notes receivable from sale of stock................................ (150,000) (145,000) (50,000) Accumulated deficit................................................ (25,245,000) (22,930,000) (21,523,000) ------------- ------------- ------------- Total shareholders' equity..................................... 4,264,000 6,570,000 7,876,000 ------------- ------------- ------------- Total liabilities and shareholders' equity........................... $ 16,819,000 $16,669,000 $18,991,000 ------------- ------------- ------------- ------------- ------------- -------------
See notes to financial statements. F-26 PACIFIC MONOLITHICS, INC. STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH SIX MONTHS ENDED MARCH 31, 31, YEARS ENDED SEPTEMBER 30, ------------------------ ------------------------ ------------------------------------- 1998 1997 1998 1997 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenue: Product sales................ $ 5,003,000 $ 8,235,000 $11,951,000 $21,270,000 $35,081,000 $28,065,000 $18,867,000 Development contracts and licensing revenue.......... 15,000 115,000 30,000 230,000 288,000 1,076,000 6,058,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues............. 5,018,000 8,350,000 11,981,000 21,500,000 35,369,000 29,141,000 24,925,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenues: Cost of product sales........ 4,140,000 5,938,000 9,686,000 15,467,000 25,824,000 22,078,000 13,891,000 Cost of development contracts.................. -- (34,000) -- 66,000 190,000 1,168,000 2,073,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenues..... 4,140,000 5,904,000 9,686,000 15,533,000 26,014,000 23,246,000 15,964,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit................... 878,000 2,446,000 2,295,000 5,967,000 9,355,000 5,895,000 8,961,000 Operating expenses: Research and development..... 1,059,000 1,319,000 2,021,000 2,639,000 4,824,000 5,421,000 3,169,000 Sales and marketing.......... 633,000 917,000 1,306,000 1,907,000 3,690,000 3,104,000 2,514,000 General and administrative... 453,000 228,000 874,000 966,000 1,649,000 2,839,000 2,434,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses... 2,145,000 2,464,000 4,201,000 5,512,000 10,163,000 11,364,000 8,117,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations.. (1,267,000) (18,000) (1,906,000) 455,000 (808,000) (5,469,000) 844,000 Other income (expense), net: Interest income.............. 6,000 6,000 12,000 11,000 25,000 37,000 28,000 Interest expense............. (201,000) (131,000) (348,000) (259,000) (554,000) (462,000) (400,000) Other........................ (34,000) (26,000) (73,000) (44,000) (70,000) (49,000) 72,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other income (expense), net...................... (229,000) (151,000) (409,000) (292,000) (599,000) (474,000) (300,000) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes........................ (1,496,000) (169,000) (2,315,000) 163,000 (1,407,000) (5,943,000) 544,000 Income taxes................... -- -- -- -- -- -- 3,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net (loss) income.............. $(1,496,000) $ (169,000) $(2,315,000) $ 163,000 $(1,407,000) $(5,943,000) $ 541,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share: Basic........................ $ (.28) $ (.04) $ (.45) $ .04 $ (0.29) $ (1.42) $ 0.15 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted...................... $ (.28) $ (.04) $ (.45) $ .01 $ (0.29) $ (1.42) $ 0.03 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares used in per share calculations: Basic........................ 5,285,000 4,619,000 5,186,000 4,600,000 4,866,000 4,184,000 3,701,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted...................... 5,285,000 4,619,000 5,186,000 19,142,000 4,866,000 4,184,000 15,553,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-27 PACIFIC MONOLITHICS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL --------------------- --------------------- NOTES ACCUMULATED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT EQUITY --------- ---------- --------- ---------- ----------- ------------ ------------- Balances, October 1, 1994......... 7,249,269 $4,277,000 4,131,882 $15,303,000 $ (59,000) ($16,121,000) $ 3,400,000 Issuance of common stock to director........................ 150,000 22,000 22,000 Sales of Series B preferred stock (net of issuance costs of $100,000)....................... 2,861,453 4,642,000 4,642,000 Exercise stock options............ 97,874 5,000 5,000 Common stock repurchased.......... (25,000) (1,000) (1,000) Series A preferred stock legal expenses........................ (4,000) (4,000) Collection of notes receivable.... 6,000 6,000 Interest on notes receivable...... (3,000) (3,000) Net income........................ 541,000 541,000 --------- ---------- --------- ---------- ----------- ------------ ------------- Balances, September 30, 1995...... 10,110,722 8,915,000 4,354,756 15,329,000 (56,000) (15,580,000) 8,608,000 Issuance of Series C preferred stock (net of issuance costs of $33,000)........................ 2,209,959 5,153,000 5,153,000 Exercise of stock options......... 480,625 33,000 33,000 Forgiveness of notes receivable... 7,000 7,000 Interest on notes receivable...... (1,000) (1,000) Common stock warrants issued in connection with notes payable to stockholders.................... 19,000 19,000 Net loss.......................... (5,943,000) (5,943,000) --------- ---------- --------- ---------- ----------- ------------ ------------- Balances, September 30, 1996...... 12,320,681 14,068,000 4,835,381 15,381,000 (50,000) (21,523,000) 7,876,000 Sales of common stock............. 480,000 120,000 (83,000) 37,000 Exercise stock options............ 238,665 32,000 32,000 Interest on notes receivable...... (12,000) (12,000) Common stock warrants issued in connection with notes payable to stockholders.................... 38,000 38,000 Stock options issued to consultants..................... 6,000 6,000 Net loss.......................... (1,407,000) (1,407,000) --------- ---------- --------- ---------- ----------- ------------ ------------- Balances, September 30, 1997...... 12,320,681 14,068,000 5,554,046 15,577,000 (145,000) (22,930,000) 6,570,000 Exercise of stock options*........ 138,622 14,000 14,000 Interest on notes receivable*..... (5,000) (5,000) Net loss*......................... (2,315,000) (2,315,000) --------- ---------- --------- ---------- ----------- ------------ ------------- Balances, March 31, 1998.......... 12,320,681 $14,068,000 5,692,668 $15,591,000 $(150,000) ($25,245,000) $ 4,264,000 --------- ---------- --------- ---------- ----------- ------------ ------------- --------- ---------- --------- ---------- ----------- ------------ -------------
- ------------------------------ * Unaudited See notes to financial statements. F-28 PACIFIC MONOLITHICS, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30, ---------------------- ---------------------------------- 1998 1997 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Cash flows from operating activities: Net income (loss)....................................... $(2,315,000) $ 163,000 $(1,407,000) $(5,943,000) $ 541,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 597,000 591,000 1,234,000 934,000 806,000 Provision for anticipated losses on contracts......... (134,000) (134,000) 134,000 (199,000) (Gain) loss on sale of equipment...................... -- (21,000) 7,000 (13,000) Noncash interest (income) expense--net................ (5,000) (1,000) (13,000) (1,000) (3,000) Noncash compensation expense.......................... -- -- 8,000 -- Bad debt expense...................................... -- (930,000) 761,000 334,000 Fair value of warrants and options issued............. -- 44,000 19,000 -- Changes in operating assets and liabilities: Receivables......................................... (2,211,000) 371,000 3,931,000 (3,840,000) 435,000 Inventories......................................... (72,000) (2,773,000) 292,000 (132,000) (2,124,000) Prepaid expenses and other assets................... 109,000 (104,000) (10,000) 202,000 (243,000) Accounts payable.................................... (58,000) 513,000 (330,000) 2,840,000 (665,000) Accrued liabilities................................. 99,000 200,000 (5,000) 54,000 (48,000) Income taxes payable................................ -- -- -- (2,000) (31,000) Deferred rent....................................... (9,000) (136,000) (19,000) 136,000 -- Deferred revenue.................................... (42,000) 941,000 (35,000) (350,000) (1,085,000) Deposits and other assets........................... -- -- (14,000) (6,000) (81,000) ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities...................................... (3,907,000) (369,000) 2,583,000 (5,179,000) (2,376,000) ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Equipment purchases................................... (125,000) (88,000) (375,000) (1,858,000) (765,000) Proceeds from sale of fixed assets.................... -- -- 27,000 629,000 60,000 Decrease in deposits and other assets................. 22,000 (2,000) -- -- (425,000) Maturity of restricted short term investments......... 425,000 -- -- -- ---------- ---------- ---------- ---------- ---------- Net cash (used in) provided by investing activities...................................... 322,000 (86,000) (348,000) (1,229,000) (1,130,000) ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from shareholder loans....................... -- -- 750,000 1,000,000 -- Repayment of capital lease obligations and notes...... (341,000) (344,000) (763,000) (566,000) (563,000) Repayment of notes payable to shareholder............. -- -- -- (958,000) (469,000) Proceeds from sale of common stock.................... 14,000 41,000 70,000 33,000 28,000 Repurchase of common stock............................ -- -- -- -- (1,000) Collection of notes receivable from sale of stock..... -- -- -- -- 6,000 Proceeds from sales of preferred stock................ -- -- -- 5,153,000 4,637,000 Line of credit borrowings (repayments), net........... 2,568,000 337,000 (1,261,000) 1,091,000 300,000 ---------- ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities...................................... 2,241,000 34,000 (1,204,000) 5,753,000 3,938,000 ---------- ---------- ---------- ---------- ---------- Increase (decrease) in cash and equivalents............. (1,344,000) (421,000) 1,031,000 (655,000) 432,000 Cash and equivalents, beginning of period............... 1,506,000 475,000 475,000 1,130,000 698,000 ---------- ---------- ---------- ---------- ---------- Cash and equivalents, end of period..................... $ 162,000 $ 54,000 $1,506,000 $ 475,000 $1,130,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Supplemental cash flow information: Interest paid......................................... $ 240,000 $ 180,000 $ 434,000 $ 533,000 $ -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income taxes paid..................................... $ -- $ -- $ 1,000 $ 1,000 $ -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Noncash investing and financing activities: Equipment acquired under capital leases............... $ -- $ 709,000 $ 781,000 $ 110,000 $ 992,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Issuance of common stock for notes receivable......... $ -- $ -- $ 83,000 $ -- $ -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to financial statements. F-29 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--Pacific Monolithics, Inc. (the Company) markets wireless cable television subsystem products and other products for wireless communications. 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, liabilities, revenues and expenses as of the dates and for the periods presented. Actual results could differ from those estimates. CASH EQUIVALENTS--Cash equivalents consist of certificates of deposit with a maturity of 90 days or less. RESTRICTED SHORT-TERM INVESTMENTS--Investments consist of certificates of deposit with remaining maturities of less than one year and are carried at cost which approximates market. Such investments are classified as held-to-maturity. INVENTORIES--Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY--Property is stated at cost. Depreciation and amortization are computed using the straight-line method based on estimated useful lives of three to five years or the lease term, if shorter. REVENUE RECOGNITION--Revenues from product sales are recognized upon shipment. Estimated future warranty costs are accrued at the time of the sale. Revenues from cost reimbursement and fixed-price development contracts are recognized using the percentage of completion method of accounting under which revenues are recorded based on the relationship of actual costs incurred to total estimated costs at completion. Estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Losses on contracts are recorded in full as they are identified. Licensing revenue is recognized in accordance with the terms of the licensing agreement. CYPHERPOINT DEVELOPMENT--Operating expenses for the year ended September 30, 1996 include an unusual charge of $2,051,000 associated with a design change of CypherPoint products. INCOME TAXES--The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This statement requires an asset and liability approach for financial accounting and reporting of income taxes and requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities, net operating losses and tax credit carryforwards. CONCENTRATION OF CREDIT RISK--The Company sells its principal products to customers in many different geographic locations. As of September 30, 1997, approximately 60% of receivables were concentrated with three customers, one of whom (30% of receivables) is based in Mexico. To reduce credit risk, the Company performs periodic credit evaluations of its customers' financial condition. Collateral is generally not required. F-30 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FISCAL PERIOD--The Company's fiscal year ends on the Sunday nearest September 30. The Company's fiscal years in the accompanying financial statements have been shown as ending on September 30. Fiscal years 1997, 1996 and 1995 each include 52 weeks. STOCK-BASED AWARDS TO EMPLOYEES--The Company accounts for stock-based awards to employees using the intrinsic value method under Accounting Principles Board Opinion No. 25. The Company adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which requires the disclosure of pro forma net income and earnings per share as if the Company adopted the fair value-based method in measuring compensation expense as of the beginning of fiscal 1997. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE--Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period, excluding shares subject to repurchase. Diluted earnings (loss) per share is computed assuming the conversion of potentially dilutive securities such as convertible preferred stock (using the "if converted" method) and common stock options and warrants (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is antidilutive. UNAUDITED FINANCIAL INFORMATION--The financial information as of March 31, 1998 and 1997 and for the three- and six-month periods then ended are unaudited but include all adjustments that the Company considers necessary for the fair presentation of its financial position as of such dates and the results of operations and cash flows for these periods. Results for the 1998 interim period are not necessarily indicative of results to be expected from the entire fiscal year. 2. TRADE RECEIVABLES Receivables consist of:
SEPTEMBER 30, MARCH 31, --------------------------- 1998 1997 1996 ------------ ------------ ------------- (UNAUDITED) Billed--commercial................................. $ 7,651,000 $ 5,397,000 $ 9,469,000 Less allowance..................................... (532,000) (489,000) (1,419,000) ------------ ------------ ------------- Net billed......................................... 7,119,000 4,908,000 8,050,000 Unbilled--commercial............................... -- -- 100,000 ------------ ------------ ------------- $ 7,119,000 $ 4,908,000 $ 8,150,000 ------------ ------------ ------------- ------------ ------------ -------------
F-31 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 3. INVENTORIES Inventories consist of:
SEPTEMBER 30, MARCH 31, -------------------------- 1998 1997 1996 ------------ ------------ ------------ (UNAUDITED) Raw materials....................................... $ 2,958,000 $ 2,592,000 $ 1,951,000 Work in process..................................... 946,000 1,615,000 3,837,000 Finished goods...................................... 2,594,000 2,219,000 930,000 ------------ ------------ ------------ Total inventories................................... $ 6,498,000 $ 6,426,000 $ 6,718,000 ------------ ------------ ------------ ------------ ------------ ------------
4. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consist of:
SEPTEMBER 30, MARCH 31, ---------------------------- 1998 1997 1996 ------------- ------------- ------------- (UNAUDITED) Machinery and equipment.......................... $ 8,832,000 $ 8,468,000 $ 7,712,000 Furniture and fixtures........................... 233,000 233,000 231,000 Leasehold improvements........................... 64,000 64,000 64,000 Deposits for equipment........................... 259,000 259,000 -- ------------- ------------- ------------- Total property................................... 9,388,000 9,024,000 8,007,000 Accumulated depreciation and amortization........ (6,805,000) (6,208,000) (5,114,000) ------------- ------------- ------------- Property and equipment--net...................... $ 2,583,000 $ 2,816,000 $ 2,893,000 ------------- ------------- ------------- ------------- ------------- -------------
5. ACCRUED LIABILITIES Accrued liabilities consist of:
SEPTEMBER 30, MARCH 31, ---------------------- 1998 1997 1996 ------------ ---------- ---------- (UNAUDITED) Compensation and related benefits...................... $ 638,000 $ 707,000 $ 787,000 Other.................................................. 407,000 239,000 164,000 ------------ ---------- ---------- Total accrued liabilities.............................. $ 1,045,000 $ 946,000 $ 951,000 ------------ ---------- ---------- ------------ ---------- ----------
6. BORROWING AND LEASE ARRANGEMENTS At September 30, 1997, the Company had $1,730,000 outstanding under a $5,000,000 revolving bank line of credit which expires January 31, 1998. Borrowings bear interest at the bank's prime rate (8.5% at September 30, 1997) plus 1.5%, cannot exceed 80% of eligible trade receivables and are collateralized by F-32 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 6. BORROWING AND LEASE ARRANGEMENTS (CONTINUED) receivables, inventories and equipment. The agreement includes covenants regarding profitability, leverage, working capital and minimum net worth. The Company was not in compliance with these established debt covenants at September 30, 1997. On November 17, 1997, the Company entered into a new $8,000,000 revolving line of credit with Coast Business Credit. The term of the line of credit expires in November 2000. Advances on the line of credit are limited to a percentage of certain current assets (i.e., accounts receivables and inventory). The interest rate on the new line is at the bank's reference rate (8.5% at November 17, 1997) plus 2.25%. In connection with this new financing, the line of credit outstanding as of September 30, 1997 was repaid and canceled. As of September 30, 1997, the Company had $1,750,000 of demand notes payable to shareholders which bear interest at 10% per annum. The shareholders' rights to repayment and interest are subordinate to all bank borrowings. In conjunction with obtaining $1,000,000 in notes payable in fiscal year 1996, the Company agreed to issue the shareholders warrants to purchase 50,000 shares of common stock of the Company for $.25 per share for each month that the notes are outstanding up to a maximum of 600,000 shares. During the years ended September 30, 1997 and 1996, the Company issued warrants to purchase 400,000 and 200,000, respectively, shares of common stock to the noteholders. The value of the issued warrants was estimated to be $38,000 and $19,000 in fiscal 1997 and 1996, respectively, which has been included as an addition to shareholders' equity in the respective year. In conjunction with obtaining additional $750,000 in notes payable in September 1997, the Company agreed to issue the shareholders warrants to purchase 37,500 shares of common stock of the Company for $.25 per share for each month that the notes are outstanding up to a maximum of 450,000 shares. During the year ended September 30, 1997, the Company did not issue any of these warrants to noteholders. Long-term obligations consist of the following:
SEPTEMBER 30, MARCH 31, -------------------------- 1998 1997 1996 ----------- ------------ ------------ (UNAUDITED) Capital lease obligations........................... $ 923,000 $ 1,025,000 $ 1,007,000 Current portion..................................... (465,000) (583,000) (624,000) ----------- ------------ ------------ Long-term portion................................... $ 458,000 $ 442,000 $ 383,000 ----------- ------------ ------------ ----------- ------------ ------------
Included in equipment and leasehold improvements is equipment with a net book value of $1,101,000 and $1,006,000 at September 30, 1997 and 1996 (net of accumulated amortization of $1,292,000 and $567,000, respectively), leased under capital leases and purchased through equipment notes. In addition, the Company leases its facilities under a noncancelable operating lease expiring in September 2000. This facilities lease provides for escalating rental payments over the lease period. Rent expense is to be recognized on a straight-line basis over the term of the lease. F-33 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 6. BORROWING AND LEASE ARRANGEMENTS (CONTINUED) Cash paid for interest related to capital leases in fiscal 1997, 1996 and 1995 was $138,000, $139,000 and $196,000, respectively. Future minimum annual payments under operating and capital lease obligations and equipment notes as of September 30, 1997 are as follows:
CAPITAL YEAR ENDING OPERATING LEASES AND SEPTEMBER 30, LEASES NOTES - ------------------------------------------------------------------ ------------ ------------ 1998............................................................ $ 945,000 $ 654,000 1999............................................................ 954,000 320,000 2000............................................................ 873,000 171,000 2001............................................................ 49,000 -- ------------ ------------ Total............................................................. $ 2,821,000 1,145,000 ------------ ------------ Amount representing interest for capital leases................... (120,000) ------------ Present value of minimum lease payments and equipment notes....... 1,025,000 Less current portion.............................................. (583,000) ------------ Long-term portion................................................. $ 442,000 ------------ ------------
Rent expense was $331,000, $331,000, $657,000, $689,000 and $293,000 for the six months ended March 31, 1998 and 1997 (unaudited) and for the years ended September 30, 1997, 1996 and 1995, respectively. 7. SHAREHOLDERS' EQUITY At March 31, 1998, the Company has reserved shares of common stock for issuance as follows: Conversion of Series A preferred stock................................. 7,249,269 Conversion of Series B preferred stock................................. 2,861,453 Conversion of Series C preferred stock................................. 2,209,959 Warrants................................ 1,075,000 Stock option plan....................... 4,530,749 ------------- Total 17,926,430 ------------- -------------
CONVERTIBLE PREFERRED STOCK Significant terms of the Series A, B and C convertible preferred stock are as follows: - Each share is convertible at the option of the holder at any time into one share of common stock (subject to adjustments for events of dilution) and has the same voting rights as the number of F-34 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 7. SHAREHOLDERS' EQUITY (CONTINUED) shares of common stock into which it is convertible. Shares will automatically be converted upon a public offering of common stock meeting specified criteria. - Dividend declarations are at the discretion of the Board of Directors and are noncumulative. Annual dividends per share of $.03 for Series A, $.0825 for Series B, and $.1175 for Series C may be paid; however, no dividends shall be paid to common shareholders in any year unless the preferred shareholders have received their full dividend per share. No dividends have been declared. - In the event of liquidation, dissolution or winding up of the Company, the preferred shareholders shall receive a preference amount of $.60 per share for Series A, $1.65 per share for Series B, and $2.35 per share for Series C preferred stock prior to any distribution to the common shareholders. Any remaining assets will be shared by common shareholders on a pro rata basis. RESTRICTED COMMON STOCK Certain directors and employees purchased stock with cash or full recourse notes. The related shares of common stock continue to vest in accordance with the terms of the stock purchase agreement. The related notes bear interest at 8% and are due on various dates during fiscal years 1998 and 2002. At March 1998, 366,000 outstanding shares of such stock were subject to repurchase. In addition, the Company has a right of first refusal on any sale of common stock with the terms specified by the purchase agreement. These rights expire upon the Company's initial public offering, or upon merger or consolidation with another company subject to specified criteria. WARRANTS As of September 30, 1997, the Company has outstanding warrants to purchase 600,000 shares of common stock in conjunction with certain notes payable at $.25 per share which expire in 2001. The fair value of these warrants issued in the years ended September 30, 1997 and 1996 was recorded as interest expense as the warrants were issued. The Company also has outstanding warrants to purchase 25,000 shares of common stock at $2.40 per share which expire in 2001 and were issued in connection with an expired bank line of credit. F-35 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 7. SHAREHOLDERS' EQUITY (CONTINUED) EMPLOYEE STOCK PLANS Under the Company's 1986 and 1996 Stock Option Plans, incentive and nonstatutory options to purchase 6,500,000 shares of common stock may be granted to employees, officers, directors, independent contractors and consultants to the Company. Incentive stock options may not be granted at less than fair market value (as determined by the Board of Directors) at the date of grant. Terms for exercising options are determined by the Board of Directors and options generally vest over four years and expire at the earlier of ten years from date of grant or upon termination of employment. The Company has a right of first refusal to repurchase shares issued under the plan. Under the 1996 stock option plan, nonqualified options totaling 64,250 at $.25 per share were granted to consultants during fiscal year 1997, which resulted in compensation of $6,000. The options were fully vested. Option activity under the two plans is as follows:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE ---------- --------------- Outstanding, October 1, 1994...................................... 2,425,383 $ 0.06 Granted........................................................... 707,500 0.18 Exercised......................................................... (97,874) 0.05 Canceled.......................................................... (613,335) 0.08 ---------- Outstanding, September 30, 1995................................... 2,421,674 0.08 Granted........................................................... 937,323 0.25 Exercised......................................................... (480,625) 0.07 Canceled.......................................................... (251,127) 0.16 ---------- Outstanding, September 30, 1996 (1,143,002 exercisable at a weighted average price of $.08)................................. 2,627,245 0.14 Granted........................................................... 985,750 .25 Exercised......................................................... (668,665) 0.14 Canceled.......................................................... (335,073) 0.20 ---------- Outstanding, September 30, 1997 (1,705,709 exercisable at a weighted average price of $.12)................................. 2,609,257 0.16 Granted........................................................... 136,000 0.25 Exercised......................................................... (138,622) 0.19 Canceled.......................................................... (68,133) 0.19 ---------- Outstanding, March 31, 1998 (1,735,614 exercisable at a weighted average price of $.13).......................................... 2,538,502 0.16 ---------- ----------
F-36 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 7. SHAREHOLDERS' EQUITY (CONTINUED) Additional information regarding options outstanding as of September 30, 1997 is as follows:
OPTIONS OUTSTANDING ----------------------------------------- OPTIONS EXERCISABLE WEIGHTED ----------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICES - ----------- ----------- --------------- ----------- ---------- ----------- $.05 - .10 1,269,198 6.28 $ .06 1,160,298 $ .06 .25 1,761,673 8.90 .25 601,631 .25 - ----------- ----------- --- --- ---------- --- $.05 - .25 3,030,871 7.80 $ .17 1,761,929 $ .12 - ----------- ----------- --- --- ---------- --- - ----------- ----------- --- --- ---------- ---
The weighted average fair value at the date of grant for options granted during the years ended September 30, 1997, 1996 and 1995 was $.03, $.05 and $.05, respectively. At September 30, 1997, 2,058,500 shares were available for future grants under the option plans. ADDITIONAL STOCK PLAN INFORMATION As discussed in Note 1, the Company continues to follow the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations; accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements with an option exercise price equal to the fair market value of common stock at the date of grant. Compensation expense has been recognized for stock options in the period granted to consultants in accordance with APB No. 25. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), requires disclosure of pro forma net loss had the Company adopted the fair value method as of the beginning of fiscal 1997. Under SFAS 123, the fair value of stock-based awards to employees are calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 1.6 to 3.9 years; stock volatility, 0%; risk free interest rate, approximately 10% in fiscal 1997; and no dividend payments during the expected term. Forfeitures are recognized as they occur. If the computed fair value of the fiscal 1997 awards had been amortized to expense over the vesting period of the awards, the effect upon pro forma net loss would have been insignificant. 8. INCOME TAXES No federal income taxes were provided for the six months ended March 31, 1998 or for the years ended September 30, 1997 or 1996 due to Pacific Monolithic, Inc.'s net losses. The provision for income F-37 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 8. INCOME TAXES (CONTINUED) taxes differs from the amount computed by applying the federal statutory income tax rate to the loss before income taxes as follows:
SIX MONTHS YEARS ENDED ENDED SEPTEMBER 30, MARCH 31, ------------------------------- 1998 1997 1996 1995 ------------- --------- --------- --------- (UNAUDITED) Taxes computed at federal statutory rate................ 35.0% 35.0% 35.0% 35.0% State income taxes, net of federal effect............... 6.1 6.1 6.1 6.1 Research tax credits and other permanent differences.... 0.2 1.5 0.7 1.5 Change in valuation allowance........................... (41.3) (42.6) (41.8) (42.6) ----- --------- --------- --------- Total provision......................................... --% --% --% --% ----- --------- --------- --------- ----- --------- --------- ---------
The tax effects of temporary differences that give rise to deferred taxes were as follows:
SEPTEMBER 30, MARCH 31, ---------------------------- 1998 1997 1996 ------------- ------------- ------------- (UNAUDITED) Deferred tax assets: Expenses not currently deductible for tax purposes..................................... $ 549,000 $ 570,000 $ 1,720,000 Tax net operating loss and credit carryforwards................................ 7,714,000 6,666,000 6,448,000 Research and development expenses capitalized for tax purposes............................. 1,456,000 1,584,000 197,000 ------------- ------------- ------------- Total deferred tax assets........................ 9,719,000 8,820,000 8,365,000 Valuation allowance on deferred tax assets....... (9,719,000) (8,820,000) (8,365,000) ------------- ------------- ------------- Net deferred income taxes........................ $ -- $ -- $ -- ------------- ------------- ------------- ------------- ------------- -------------
At March 31, 1998, net operating loss carryforwards of approximately $19,717,000 and $4,877,000 were available to offset future federal and state taxable income, respectively. These carryforwards expire beginning in 2002 and 2000. At March 31, 1998, research and development credit carryforwards of $284,000 and $151,000 were available to offset future federal and state taxable income, respectively. These carryforwards expire beginning in 2009 for federal purposes. The extent to which federal and state carryforwards can be used in any one year to offset future taxable income may be significantly limited because of changes in ownership within any three-year period as provided by the Tax Reform Act of 1986. Such limitations could result in the expiration of carryforwards prior to their utilization. F-38 PACIFIC MONOLITHICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 8. INCOME TAXES (CONTINUED) As a result of the Company's history of recent operating losses, management believes that recognition of the deferred tax assets is considered less likely than not. Accordingly, the Company has recorded a valuation allowance against its net deferred tax assets. 9. MAJOR CUSTOMERS, SEGMENT INFORMATION, AND RELATED PARTIES One customer accounted for 30%, 36%, 17% of revenues for the years ended September 30, 1997, 1996 and 1995, respectively, and 28% and 49% for the three months and six months ended March 31, 1997, respectively. Another customer accounted for 21% of revenues for the year ended September 30, 1997, 12% and 19% of revenues for the six months ended March 31, 1998 and 1997, respectively, and 23% for the three months ended March 31, 1997. Another customer accounted for 12% of revenues for each of the years ended September 30, 1996 and 1995. In addition, one customer accounted for 19% of revenues for the year ended September 30, 1995 and 36% and 31% of revenues for the three months and six months ended March 31, 1998, respectively. Two customers accounted for 14% and 10% of revenues for the six months ended March 31, 1998. One customer accounted for 12% of revenue for the three months ended March 31, 1997. There were no other customers in the fiscal years ended September 30, 1997, 1996 or 1995 or for the three months and six months ended March 31, 1998 and 1997 who accounted for over 10% of revenues for the respective years. The Company operates in one industry segment. All revenues are denominated in U.S. dollars and revenues from product exports were as follows:
YEARS ENDED SEPTEMBER 30, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- United States................................... $ 24,607,000 $ 20,834,000 $ 15,780,000 Central America................................. 4,434,000 1,223,000 4,810,000 South America................................... 2,677,000 2,847,000 1,137,000 South Pacific/Asia.............................. 3,222,000 3,616,000 3,104,000 Other........................................... 429,000 621,000 94,000 ------------- ------------- ------------- Total revenues.............................. $ 35,369,000 $ 29,141,000 $ 24,925,000 ------------- ------------- ------------- ------------- ------------- -------------
10. AGREEMENT AND PLAN OF REORGANIZATION WITH HYBRID NETWORKS, INC. On March 19, 1998, the Company signed an Agreement and Plan of Reorganization with Hybrid Networks, Inc. (the Agreement). The Agreement contains an Agreement of Merger under which all outstanding shares of convertible preferred stock and common stock of the Company will be converted into the common stock of Hybrid Networks, Inc. based upon the conversion ratio defined in such Agreement. The Agreement also contains a provision for the conversion of the options and warrants of Hybrid Networks, Inc. The Agreement is subject to the approval of the shareholders of the Company and of Hybrid Networks, Inc. * * * * * F-39 APPENDIX A-1 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG HYBRID NETWORKS, INC., PACIFIC MONOLITHICS, INC. AND HN ACQUISITION CORP. MARCH 19, 1998 TABLE OF CONTENTS
PAGE --------- 1. PLAN OF REORGANIZATION............................................................................ A-1-1 1.1 The Merger................................................................................ A-1-1 1.2 Fractional Shares......................................................................... A-1-2 1.3 Escrow Agreement.......................................................................... A-1-3 1.4 Effects of the Merger..................................................................... A-1-3 1.5 Further Assurances........................................................................ A-1-4 1.6 Registration on Form S-4.................................................................. A-1-4 1.7 Tax-Free Reorganization................................................................... A-1-4 1.8 Pooling of Interests...................................................................... A-1-5 2. REPRESENTATIONS AND WARRANTIES OF PACIFIC......................................................... A-1-5 2.1 Organization and Good Standing............................................................ A-1-5 2.2 Power, Authorization and Validity......................................................... A-1-5 2.3 Capitalization............................................................................ A-1-6 2.4 Subsidiaries.............................................................................. A-1-6 2.5 No Violation of Existing Agreements....................................................... A-1-6 2.6 Litigation................................................................................ A-1-6 2.7 Pacific Financial Statements.............................................................. A-1-7 2.8 Taxes..................................................................................... A-1-7 2.9 Title to Properties....................................................................... A-1-7 2.10 Absence of Certain Changes................................................................ A-1-8 2.11 Agreements and Commitments................................................................ A-1-9 2.12 Intellectual Property..................................................................... A-1-10 2.13 Compliance with Laws...................................................................... A-1-10 2.14 Certain Transactions and Agreements....................................................... A-1-10 2.15 Employees................................................................................. A-1-11 2.16 Corporate Documents....................................................................... A-1-12 2.17 No Brokers................................................................................ A-1-12 2.18 Disclosure................................................................................ A-1-12 2.19 Books and Records......................................................................... A-1-13 2.20 Insurance................................................................................. A-1-13 2.21 Environmental Matters..................................................................... A-1-13 2.22 Government Contracts...................................................................... A-1-14 2.23 Information Supplied...................................................................... A-1-14 2.24 Board Approval............................................................................ A-1-14 2.25 Pooling of Interests...................................................................... A-1-14 3. REPRESENTATIONS AND WARRANTIES OF HYBRID AND NEWCO................................................ A-1-14 3.1 Organization and Good Standing............................................................ A-1-14 3.2 Power, Authorization and Validity......................................................... A-1-15 3.3 No Violation of Existing Agreements or Laws............................................... A-1-15 3.4 SEC Documents............................................................................. A-1-15 3.5 Authorized/Outstanding Capital Stock...................................................... A-1-16 3.6 No Material Change........................................................................ A-1-16 3.7 Pooling of Interests...................................................................... A-1-16 3.8 Litigation................................................................................ A-1-16 3.9 Board Approval............................................................................ A-1-16
A-1-i
PAGE --------- 4. PACIFIC PRECLOSING COVENANTS...................................................................... A-1-16 4.1 Advice of Changes......................................................................... A-1-16 4.2 Maintenance of Business................................................................... A-1-16 4.3 Conduct of Business....................................................................... A-1-17 4.4 Certain Agreements........................................................................ A-1-18 4.5 Shareholder Approval...................................................................... A-1-18 4.6 Employment and Noncompetition Agreements.................................................. A-1-18 4.7 Prospectus/Proxy Statement................................................................ A-1-18 4.8 Regulatory Approvals...................................................................... A-1-19 4.9 Necessary Consents........................................................................ A-1-19 4.10 Litigation................................................................................ A-1-19 4.11 No Other Negotiations..................................................................... A-1-19 4.12 Access to Information..................................................................... A-1-19 4.13 Satisfaction of Conditions Precedent...................................................... A-1-19 4.14 Blue Sky Laws............................................................................. A-1-19 4.15 Notification of Employee Problems......................................................... A-1-20 4.16 Pacific Affiliates Agreement.............................................................. A-1-20 4.17 Principal Shareholder Representation Letters.............................................. A-1-20 4.18 Tax Opinion............................................................................... A-1-20 4.19 Pacific Dissenting Shares................................................................. A-1-20 4.20 Pooling Accounting........................................................................ A-1-20 5. HYBRID PRECLOSING COVENANTS....................................................................... A-1-20 5.1 Advice of Changes......................................................................... A-1-20 5.2 Satisfaction of Conditions Precedent...................................................... A-1-20 5.3 Regulatory Approvals...................................................................... A-1-20 5.4 Hybrid Affiliates Agreements.............................................................. A-1-20 5.5 Tax Opinions.............................................................................. A-1-21 5.6 NMS Listing............................................................................... A-1-21 5.7 Voting Agreements......................................................................... A-1-21 5.8 Maintenance of Business................................................................... A-1-21 5.9 Stockholder Approval...................................................................... A-1-21 5.10 Prospectus/Proxy Statement................................................................ A-1-21 5.11 Necessary Consents........................................................................ A-1-21 5.12 Blue Sky Laws............................................................................. A-1-21 5.13 Pooling Accounting........................................................................ A-1-21 5.14 Filing of Form S-8........................................................................ A-1-22 6. CLOSING MATTERS................................................................................... A-1-22 6.1 The Closing............................................................................... A-1-22 6.2 Exchange of Certificates.................................................................. A-1-22 6.3 Assumption of Options and Warrants........................................................ A-1-23 7. CONDITIONS TO OBLIGATIONS OF PACIFIC.............................................................. A-1-23 7.1 Accuracy of Representations and Warranties................................................ A-1-23 7.2 Covenants................................................................................. A-1-23 7.3 Compliance with Law....................................................................... A-1-23 7.4 Government Consents....................................................................... A-1-23 7.5 Documents................................................................................. A-1-24 7.6 Form S-4.................................................................................. A-1-24
A-1-ii
PAGE --------- 7.7 Opinion of Hybrid's Counsel............................................................... A-1-24 7.8 Investor Rights Agreement................................................................. A-1-24 7.9 Shareholder and Stockholder Approval...................................................... A-1-24 7.10 Employment and Noncompetition Agreements.................................................. A-1-24 7.11 Board Seats............................................................................... A-1-24 8. CONDITIONS TO OBLIGATIONS OF HYBRID............................................................... A-1-24 8.1 Accuracy of Representations and Warranties................................................ A-1-24 8.2 Covenants................................................................................. A-1-25 8.3 Compliance with Law....................................................................... A-1-25 8.4 Government Consents....................................................................... A-1-25 8.5 Documents................................................................................. A-1-25 8.6 Form S-4.................................................................................. A-1-25 8.7 Opinion of Pacific's Counsel.............................................................. A-1-25 8.8 Requisite Approvals; Dissenting Shares.................................................... A-1-25 8.9 No Litigation............................................................................. A-1-25 8.10 Pooling Opinion........................................................................... A-1-25 8.11 Escrow.................................................................................... A-1-25 8.12 Employment and Noncompetition Agreements.................................................. A-1-25 8.13 Pacific Affiliates Agreement.............................................................. A-1-26 9. TERMINATION OF AGREEMENT.......................................................................... A-1-26 9.1 Termination............................................................................... A-1-26 9.2 Extension of Final Date in Event of Injunction............................................ A-1-26 9.3 Termination Payment....................................................................... A-1-26 9.4 Certain Continuing Obligations............................................................ A-1-27 SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS................... 10. A-1-27 10.1 Survival of Representations............................................................... A-1-27 10.2 Pacific Agreement to Indemnify............................................................ A-1-28 11. MISCELLANEOUS..................................................................................... A-1-29 11.1 Governing Law; Dispute Resolution......................................................... A-1-29 11.2 Assignment; Binding Upon Successors and Assigns........................................... A-1-30 11.3 Severability.............................................................................. A-1-30 11.4 Counterparts.............................................................................. A-1-30 11.5 Other Remedies............................................................................ A-1-30 11.6 Amendment and Waivers..................................................................... A-1-30 11.7 No Waiver................................................................................. A-1-30 11.8 Expenses.................................................................................. A-1-30 11.9 Notices................................................................................... A-1-31 11.10 Construction of Agreement................................................................. A-1-31 11.11 No Joint Venture.......................................................................... A-1-31 11.12 Further Assurances........................................................................ A-1-32 11.13 Absence of Third Party Beneficiary Rights................................................. A-1-32 11.14 Public Announcement....................................................................... A-1-32 11.15 Confidentiality........................................................................... A-1-32 11.16 Time is of the Essence.................................................................... A-1-32 11.17 Entire Agreement.......................................................................... A-1-33
A-1-iii
EXHIBITS: - ------------ Exhibit A Form of Agreement of Merger Exhibit B Form of Escrow Agreement Exhibits C Forms of Officer Certificates and D Exhibit E Form of Pacific Intellectual Property Agreement Exhibit F Parties to Sign Pacific Affiliate Agreement and Pacific Voting Agreement Exhibit G Form of Employment Agreement Exhibit H Form of Noncompetition Agreement Exhibit I Form of Pacific Affiliate Agreement Exhibit J Form of Hybrid Affiliate Agreement Exhibit K Parties to Sign Hybrid Affiliate Agreement and Voting Agreement Exhibit L Form of Hybrid Voting Agreement Exhibit M Form of Fenwick & West LLP Opinion Exhibit N Form of Investor Rights Agreement Exhibit O Form of Opinion of Wilson Sonsini Goodrich & Rosati Professional Corporation Exhibit P List of Consents Exhibit Q Form of Pacific Voting Agreement
A-1-iv AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is entered into as of March 19, 1998, by and among Hybrid Networks, Inc., a Delaware corporation ("HYBRID"), Pacific Monolithics, Inc., a California corporation ("PACIFIC"), and HN Acquisition Corp., a Delaware corporation that is a wholly-owned subsidiary of Hybrid ("NEWCO"). RECITALS A. The parties intend that, subject to the terms and conditions hereinafter set forth, Newco will merge with and into Pacific in a reverse triangular merger (the "MERGER"), with Pacific to be the surviving corporation of the Merger, all pursuant to the terms and conditions of this Agreement and an Agreement of Merger substantially in the form of EXHIBIT A (the "AGREEMENT OF MERGER") and the applicable provisions of the laws of Delaware and California. Upon the effectiveness of the Merger, all the outstanding Common Stock and Preferred Stock of Pacific will be converted into Common Stock of Hybrid, in the manner and on the basis determined herein and as provided in the Agreement of Merger. B. The Merger is intended to be treated as a "pooling of interests" for accounting purposes and a tax-free reorganization pursuant to the provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "CODE"), by virtue of the provisions of Section 368(a)(2)(E) of the Code. NOW, THEREFORE, the parties hereto agree as follows: 1. PLAN OF REORGANIZATION 1.1 THE MERGER. The Agreement of Merger will be filed with the Secretaries of State of the States of Delaware and California as soon as practicable after the Closing (as defined in Section 6.1 below). The effective time of the Merger as specified in the Agreement of Merger (the "EFFECTIVE TIME") will occur upon the filing of the Agreement of Merger with the California Secretary of State, or on such other date as the parties hereto may mutually agree upon. Subject to the terms and conditions of this Agreement and the Agreement of Merger, Newco will be merged with and into Pacific (or, at Hybrid's option, Pacific will be merged with and into Hybrid in a straight in merger or with and into Newco in a forward-triangular merger) in a statutory merger pursuant to the Agreement of Merger and in accordance with applicable provisions of Delaware and California laws as follows: 1.1.1 CONVERSION OF PACIFIC SHARES. Each share of Pacific Common Stock, no par value (the "PACIFIC COMMON STOCK"), and each share of Pacific Preferred Stock, no par value (the "PACIFIC PREFERRED STOCK", and, together with the Pacific Common Stock, the "PACIFIC CAPITAL STOCK"), that is issued and outstanding immediately prior to the Effective Time, other than shares, if any, for which dissenters rights have been or will be perfected in compliance with applicable law, will, by virtue of the Merger and at the Effective Time, and without further action on the part of any holder thereof, be converted into the Applicable Number (determined in accordance with Section 1.1.3 hereof) of fully paid and nonassessable shares of Hybrid Common Stock, $0.001 par value ("HYBRID COMMON STOCK"). 1.1.2 CONVERSION AND ASSUMPTION OF OPTIONS AND WARRANTS. Each option or warrant to purchase shares of Pacific Capital Stock that is outstanding immediately prior to the Effective Time (a "PACIFIC OPTION" or a "PACIFIC WARRANT," as the case may be) will, by virtue of the Merger at the Effective Time and without further action on the part of any holder thereof, be converted and assumed by Hybrid into an option or warrant (a "HYBRID OPTION" or "HYBRID WARRANT," as the case may be) to purchase that number of shares of Hybrid Common Stock which equals the Applicable Number (as defined below) multiplied by the number of shares of Pacific Capital Stock purchasable immediately prior to the Effective Time under the Pacific Option or Pacific Warrant, rounded down to the nearest whole share. The exercise price per share of Hybrid Common Stock purchasable under each such Hybrid Option or Hybrid Warrant will be equal to A-1-1 the exercise price of the Pacific Option or Pacific Warrant (per share of Pacific Capital Stock) divided by the Applicable Number, rounded up to the nearest whole cent. All of the other terms of each Hybrid Option or Hybrid Warrant will be the same in all material respects as the corresponding Pacific Option or Pacific Warrant that is being replaced and converted. 1.1.3 DEFINITIONS. Unless there is an adjustment to the shares to be issued in the Merger pursuant to Section 1.1.4 below, the "APPLICABLE NUMBER" shall equal (i) the total number of shares of Pacific Capital Stock outstanding at the Effective Time plus the total number of shares of Pacific Capital Stock issuable upon exercise of all Pacific Options and Pacific Warrants outstanding at the Effective Time divided into (ii) the total number of shares of Hybrid Common Stock obtained by dividing (A) $12,500,000 by (B) the "CLOSING PRICE." The "CLOSING PRICE" shall equal the average of the closing sale prices of one share of Hybrid Common Stock reported in the WALL STREET JOURNAL, on the basis of information provided by the Nasdaq Stock Market for each of the ten trading days ending two (2) trading days preceding the Closing Date; provided, however, that in no event shall the Closing Price be greater than $8.40 or less than $5.17. 1.1.4 ADJUSTMENTS FOR CAPITAL CHANGES. If prior to the Merger, Hybrid or Pacific recapitalizes either through a split-up of its outstanding shares into a greater number, or through a combination of its outstanding shares into a lesser number, or reorganizes, reclassifies or otherwise changes its outstanding shares into the same or a different number of shares of other classes (other than through a split-up or combination of shares provided for in the previous clause), or declares a dividend on its outstanding shares payable in shares or securities convertible into shares, the calculation of the Applicable Number governing the conversion of Pacific Capital Stock will be adjusted appropriately. 1.1.5 CONVERSION OF NEWCO SHARES. Each share of Newco Common Stock, $0.001 par value ("NEWCO COMMON STOCK"), that is issued and outstanding immediately prior to the Effective Time will, by virtue of the Merger and without further action on the part of the sole stockholder of Newco, be converted into and become one (1) share of Pacific Common Stock that is issued and outstanding immediately after the Effective Time, and the shares of Pacific Common Stock into which the shares of Newco Common Stock are so converted shall be the only shares of Pacific capital stock that are issued and outstanding immediately after the Effective Time. 1.1.6 DISSENTING SHARES. Holders of shares of Pacific Capital Stock which are outstanding on the date of the determination of the Pacific shareholders entitled to vote on the Merger and which were not voted in favor of the Merger (the "ELIGIBLE DISSENTING SHARES"), will be entitled to exercise dissenters' rights, pursuant to Sections 1300 through 1304 of the California Corporations Code, with respect to such Eligible Dissenting Shares, provided that such holders meet the requirements of those sections with respect to such shares. (Any Eligible Dissenting Shares as to which such dissenters' rights are duly exercised are referred to hereinafter as "PACIFIC DISSENTING SHARES.") 1.1.7 STRAIGHT IN OR FORWARD-TRIANGULAR MERGER. The parties agree that, upon Hybrid's request, they will amend these documents to cause Pacific to merge with and into Hybrid or Newco. 1.2 FRACTIONAL SHARES. No fractional shares of Hybrid Common Stock will be issued in connection with the Merger, but in lieu thereof, the holder of any shares of Pacific Capital Stock who would otherwise be entitled to receive a fraction of a share of Hybrid Common Stock will receive from Hybrid, promptly after the Effective Time, an amount of cash equal to the Closing Price multiplied by the fraction of a share of Hybrid Common Stock to which such holder would otherwise be entitled. Holders of Pacific Options or Pacific Warrants that would otherwise be converted into Hybrid Options or Hybrid Warrants to purchase a fraction of a share of Hybrid Common Stock will receive from Hybrid, promptly at the time of any exercise of such Pacific Option or Pacific Warrant, an amount of A-1-2 cash equal to the Closing Price multiplied by the fraction of a share of Pacific Capital Stock to which such holder would otherwise be entitled upon exercise of the Pacific Option, less the exercise price per fractional share of the Pacific Option. 1.3 ESCROW AGREEMENT. Pursuant to an Escrow Agreement to be entered into on or before the Closing Date in substantially the form of EXHIBIT B (the "ESCROW AGREEMENT"), among Hybrid, Alan Dishlip as representative for the holders of outstanding shares of Pacific Capital Stock immediately before the Effective Time who are entitled to receive shares of Hybrid Common Stock issued upon the Merger and who do not exercise dissenters rights, and State Street Bank and Trust Company, as Escrow Agent, Hybrid will withhold from the shares of Hybrid Common Stock that would otherwise be delivered to such holders (the "PACIFIC HOLDERS"), 10% of the total number of shares of Hybrid Common Stock issued to them in the Merger. Promptly after the Closing Date, Hybrid will deposit or cause to be deposited in escrow pursuant to the Escrow Agreement certificates representing the shares thus withheld. The shares of Hybrid Common Stock represented by the certificates deposited in escrow as provided above in this Section 1.3 (the "ESCROW SHARES") will be held as collateral for the indemnification obligations of the Pacific Holders under section 10.2 below and pursuant to the Escrow Agreement pending their release from escrow pursuant to the Escrow Agreement. In the event that the Merger is approved by the Pacific shareholders, as provided herein, the Pacific shareholders shall, without any further act of any Pacific shareholder, be deemed to have consented to and approved (i) the use of the Escrow Shares as collateral for the Pacific Holder's indemnification obligations under Section 10.2 in the manner set forth in the Escrow Agreement, (ii) the appointment of Alan Dishlip as the representative of the Pacific Holders (the "REPRESENTATIVE") under the Escrow Agreement and as the attorney-in-fact and agent for and on behalf of each Pacific Holder (other than holders of Dissenting Shares) and the taking by the Representative of any and all actions and the making of any decisions required or permitted to be taken by the Representative under the Escrow Agreement (including, without limitation, the exercise of the power to: (a) authorize delivery to Hybrid of Escrow Shares in satisfaction of claims by Hybrid; (b) agree to, negotiate, enter into settlements and compromises of and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims; (c) resolve any claim made by Indemnified Persons pursuant to Section 10.2; and (d) take all actions necessary in the judgment of the Representative for the accomplishment of the foregoing) and (iii) to all of the other terms, conditions and limitations in the Escrow Agreement. The Representative shall not be liable for any act done or omitted hereunder as Representative while acting in good faith and in the exercise of reasonable judgment. The Pacific Holders on whose behalf the Escrow Shares were contributed to the escrow shall severally indemnify the Representative and hold the Representative harmless against any loss, liability or expense incurred without negligence or bad faith on the part of the Representative and arising out of or in connection with the acceptance or administration of the Representative's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Representative. A decision, act, consent or instruction of the Representative shall constitute a decision of all the shareholders for whom a portion of the Escrow Shares otherwise issuable to them are deposited in the escrow and shall be final, binding and conclusive upon each of such shareholders, and the Escrow Agent and Hybrid may rely upon any such decision, act, consent or instruction of the Representative as being the decision, act, consent or instruction of each such shareholder of the Company. The Escrow Agent and Hybrid are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Representative. 1.4 EFFECTS OF THE MERGER. At the Effective Time: (a) the separate existence of Newco will cease and Newco will be merged with and into Pacific and Pacific will be the surviving corporation pursuant to the terms of the Agreement of Merger; (b) the Articles of Incorporation of Pacific will be amended in substantially the form attached to the Agreement of Merger as Exhibit A thereto and the Bylaws of A-1-3 Pacific will continue unchanged as the Bylaws of the surviving corporation; (c) each share of Pacific Capital Stock outstanding immediately prior to the Effective Time will be converted as provided in this Article 1; (d) each share of Newco Common Stock outstanding immediately prior to the Effective Time will be converted into one (1) outstanding share of Pacific Common Stock; (e) Richard B. Gold and Matt Miller will be appointed to the Board of Directors of Hybrid as Class I directors, with the current Class I directors resigning effective as of the Effective Time and Richard B. Gold will be appointed the President and Chief Operating Officer of Hybrid and the remaining directors and executive officers of Hybrid otherwise remaining unchanged and the sole director of Newco immediately prior to the Effective Time will become the sole director of the surviving corporation and the officers of Newco immediately prior to the Effective Time will become the officers of the surviving corporation; and (f) the Merger will, at and after the Effective Time, have all of the effects provided by applicable law. 1.5 FURTHER ASSURANCES. Pacific agrees that if, at any time after the Effective Time, Hybrid considers or is advised that any further deeds, assignments or assurances are reasonably necessary or desirable to vest, perfect or confirm in Hybrid title to any property or rights of Pacific as provided herein, Hybrid and any of its officers are hereby authorized by Pacific to execute and deliver all such proper deeds, assignments and assurances and do all other things necessary or desirable to vest, perfect or confirm title to such property or rights in Hybrid and otherwise to carry out the purposes of this Agreement, in the name of Pacific or otherwise. 1.6 REGISTRATION ON FORM S-4. The Hybrid Common Stock to be issued in the Merger shall be registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), on a Form S-4 Registration Statement to be filed by Hybrid (the "FORM S-4"). As promptly as practicable after the date of this Agreement, Hybrid shall prepare and file with the United States Securities and Exchange Commission (the "SEC") a prospectus/proxy statement (the "PROSPECTUS/PROXY STATEMENT") together with the Form S-4 and any other documents required by the Securities Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), in connection with the Merger. Each of Hybrid and Pacific will notify the other promptly upon the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff or any other government officials for amendments or supplements to the Form S-4 or the Prospectus/Proxy Statement or for additional information and will promptly supply the other with copies of all correspondence between such party or any of its representatives, on the one hand, and the SEC, or its staff or any other government officials, on the other hand, with respect to the Form S-4, the Prospectus/Proxy Statement or the Merger, as the case may be. Hybrid and Pacific shall use all reasonable efforts to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing and/or to resolve any stop orders or proceedings initiated by the SEC with respect to the Merger. Hybrid shall also take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of the Hybrid Common Stock in the Merger. Pacific shall furnish to Hybrid all information concerning Pacific and the security holders of Pacific as may be reasonably requested in connection with any action contemplated by this Section 1.6. 1.7 TAX-FREE REORGANIZATION. The parties intend to adopt this Agreement as a tax-free plan of reorganization and to consummate the Merger in accordance with the provisions of Section 368(a)(1)(A) of the Code, by virtue of the provisions of Section 368(a)(2)(E) of the Code. For purposes of this Section 1.7, Hybrid and Pacific agree to report the transactions contemplated in this Agreement in a manner consistent with the reorganization treatment they intend and will not take any position inconsistent therewith in any tax return, refund claim, litigation or otherwise unless required to do so by any governmental authority. The shares of Hybrid Common Stock issued in the Merger will be issued solely in exchange for the issued and outstanding shares of Pacific Capital Stock pursuant to this Agreement, and no other transaction other than the Merger represents, provides for or is intended to be an adjustment to the consideration paid for the Pacific Capital Stock. Except for A-1-4 cash paid in lieu of fractional shares, no consideration that could constitute "OTHER PROPERTY" within the meaning of Section 356 of the Code will be paid by Hybrid for shares of Pacific Capital Stock in the Merger. In addition, Hybrid represents that it presently intends, and that at the Effective Time it will intend, to continue Pacific's historic business or use a significant portion of Pacific's business assets in a business. At the Closing (as defined in Section 6.1 hereof), officers of Pacific and officers of Hybrid will execute and deliver officers' certificates in the forms of Exhibits C and D, respectively, and the representations and other statements set forth therein are incorporated in this Agreement by this reference to the same extent as if Pacific or Hybrid, respectively, had made such statements herein. 1.8 POOLING OF INTERESTS. The parties intend that the Merger be treated as a "POOLING OF INTERESTS" for accounting purposes. 2. REPRESENTATIONS AND WARRANTIES OF PACIFIC Pacific hereby represents and warrants that, except as set forth in the Pacific disclosure letter (the "PACIFIC DISCLOSURE LETTER") delivered by Pacific to Hybrid herewith, including items in the Pacific Disclosure Letter referred to as "ITEMS" below: 2.1 ORGANIZATION AND GOOD STANDING. Pacific is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has the corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted and as proposed to be conducted and is qualified as a foreign corporation in each jurisdiction listed on ITEM 2.1. Pacific is qualified as a foreign corporation in each jurisdiction in which a failure to be so qualified could reasonably be likely to have a Material Adverse Effect (as defined below) on its present or expected operations or financial condition. Pacific does not own or lease any real property, has no employees and does not maintain a place of business in any foreign country or in any state of the United States other than California, except as listed on ITEM 2.1. When used in connection with Pacific, the term "Material Adverse Effect" means any change, event or effect that is or reasonably likely to be materially adverse to the business (including, but not limited to the development, sales and marketing of Pacific's Downconverter and CypherPoint line of products), assets (including intangible assets), liabilities, financial condition or results of operations of Pacific; provided, however, that a Material Adverse Effect shall not include any adverse effect following the date of this Agreement on the business, financial condition or results of operations of Pacific, that is directly attributable to adverse reaction to the Merger contemplated by this Agreement or the announcement of the Merger or that is consistent with an economic downturn in the industry in which Pacific operates or a national economic downturn. 2.2 POWER, AUTHORIZATION AND VALIDITY. 2.2.1 Pacific has the corporate right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and all agreements to which Pacific is or will be a party that are required to be executed pursuant to this Agreement (the "PACIFIC ANCILLARY AGREEMENTS"). This Agreement and the Pacific Ancillary Agreements have been duly and validly approved by the Pacific Board of Directors and, as required by applicable law and subject to approval by the shareholders of Pacific, will be duly and validly approved by the shareholders of Pacific prior to the Effective Date. 2.2.2 No filing, authorization or approval, governmental or otherwise, is necessary to enable Pacific to enter into, and to perform its obligations under, this Agreement and the Pacific Ancillary Agreements, except for (a) the filing of the Agreement of Merger with the Secretaries of State of the States of Delaware and California, the filing of such officers' certificates and other documents as are required to effectuate the Merger under Delaware and California law and the filing of appropriate documents with the relevant authorities of the states other than California in which Pacific is qualified to do business, if any, (b) such filings as may be required to comply with A-1-5 federal and state securities laws, (c) the approval of this Agreement and the Agreement of Merger by the shareholders of Pacific and (d) consents required under contracts disclosed in ITEM 2.5 as exceptions to the representation made in the last sentence of Section 2.5 below. 2.2.3 This Agreement and the Pacific Ancillary Agreements are, or when executed and delivered by Pacific and the other parties thereto will be, valid and binding obligations of Pacific enforceable against Pacific and the Pacific affiliates (as applicable) in accordance with their respective terms, except as to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law governing specific performance, injunctive relief and other equitable remedies; provided, however, that the Pacific Ancillary Agreements will not be effective until the earlier of the Effective Time or the date provided for therein. 2.3 CAPITALIZATION. (a) AUTHORIZED/OUTSTANDING CAPITAL STOCK. The authorized capital stock of Pacific consists of 25,000,000 shares of Pacific Common Stock, no par value, and 12,510,722 shares of Pacific Preferred Stock, no par value, of which the following series and amounts are authorized Series A--7,249,269; Series B--2,861,453; and Series C--2,400,000. 5,653,857 shares of Pacific Common Stock are issued and outstanding as of this date. 12,320,681 shares of Pacific Preferred Stock are issued and outstanding in the following series and amounts: Series A--7,249,269; Series B--2,861,453; and Series C-- 2,209,959. All issued and outstanding shares of Pacific Common Stock and Pacific Preferred Stock, which are listed by holder on ITEM 2.3, have been duly authorized and validly issued, are fully paid and nonassessable, are not subject to any right of rescission and have been offered, issued, sold and delivered by Pacific in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of applicable federal and state securities laws. (b) OPTIONS/RIGHTS. Except as set forth in ITEM 2.3, there are no stock appreciation rights, options, warrants, conversion privileges or preemptive or other rights or agreements outstanding to purchase or otherwise acquire any of Pacific's authorized but unissued capital stock; there are no options, warrants, conversion privileges or preemptive or other rights or agreements to which Pacific is a party involving the purchase or other acquisition of any shares of Pacific Capital Stock; there is no liability for dividends accrued but unpaid; and there are no voting agreements, registration rights, rights of first refusal or other restrictions (other than normal restrictions on transfer under applicable federal and state securities laws) applicable to any of Pacific's outstanding securities. 2.4 SUBSIDIARIES. Pacific does not have any subsidiaries or any equity interest, direct or indirect, in any corporation, partnership, joint venture or other business entity. 2.5 NO VIOLATION OF EXISTING AGREEMENTS. Except as set forth in ITEM 2.5, neither the execution and delivery of this Agreement or any Pacific Ancillary Agreement, nor the consummation of the transactions provided for herein or therein, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of (a) any provision of the Articles of Incorporation or Bylaws of Pacific, as currently in effect, (b) any instrument or contract to which Pacific is a party or by which Pacific is bound, except where such conflict, termination, breach, impairment or violation would not have a Material Adverse Effect or (c) any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to Pacific or its assets or properties. The consummation of the Merger and succession by Hybrid to all rights, licenses, franchises, leases and agreements of Pacific in and of themselves will not require the consent of any third party and will not have a Material Adverse Effect other than as set forth in ITEM 2.5. 2.6 LITIGATION. Except as set forth in ITEM 2.6, there is no action, proceeding or investigation pending or, to the best of Pacific's knowledge (as defined below), threatened against Pacific before any court or administrative agency that, if determined adversely to Pacific, is likely to have a Material A-1-6 Adverse Effect or in which the adverse party or parties seek to recover in excess of $50,000 against Pacific. There is no basis for any person, firm, corporation or entity to assert a claim against Pacific or Hybrid as successor in interest to Pacific based upon: (a) ownership or rights to ownership of any shares of Pacific Capital Stock or other securities, (b) any rights as a Pacific securities holder, including, without limitation, any option or other right to acquire any Pacific securities, any preemptive rights or any rights to notice or to vote or (c) any rights under any agreement between Pacific and any Pacific securities holder or former Pacific securities holder in such holder's capacity as such. There is no action, suit, proceeding, claim, arbitration or investigation pending or as to which Pacific has received any notice of assertion against Pacific, which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement. As used in this Agreement, "TO THE BEST OF PACIFIC'S KNOWLEDGE" or "TO PACIFIC'S KNOWLEDGE" shall mean to the actual knowledge of Pacific's directors and executive officers after reasonable inquiry. 2.7 PACIFIC FINANCIAL STATEMENTS. Pacific has delivered to Hybrid in Item 2.7 Pacific's unaudited balance sheet as of September 30, 1997 and unaudited balance sheet as of February 28, 1998 (the "BALANCE SHEET DATE") and Pacific's unaudited income statements for the years ended September 30, 1996 and 1997 and unaudited income statement for the period from October 1, 1997 through February 28, 1998 (collectively, the "PACIFIC FINANCIAL STATEMENTS"). The Pacific Financial Statements, in all material respects, (a) are in accordance with the books and records of Pacific, (b) fairly and accurately represent the financial condition of Pacific at the respective dates specified therein and the results of operations for the respective periods specified therein and (c) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. Pacific will deliver the audit September 30, 1997 Pacific Financial Statements to Hybrid as soon as possible after the date of this Agreement. Except as set forth in Item 2.7, Pacific has no material debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that is not reflected, reserved against or disclosed in the Pacific Financial Statements, except for those that may have been incurred after the Balance Sheet Date in the ordinary course of Pacific's business. 2.8 TAXES. Pacific has filed all federal, state, local and foreign tax and material information returns required to be filed prior to the date hereof, has paid all taxes required to be paid in respect of all periods prior to the date hereof for which returns have been filed, has made all necessary estimated tax payments, and has no liability for taxes in excess of the amount so paid, except to the extent adequate reserves have been established in the Pacific Financial Statements. True, correct and complete copies of all such tax and information returns have been provided or made available by Pacific to Hybrid. Pacific is not delinquent in the payment of any tax or in the filing of any tax returns, and no deficiencies for any tax have been threatened, claimed, proposed or assessed which have not been settled or paid. Except as set forth in ITEM 2.8, no tax return of Pacific has ever been audited by the Internal Revenue Service or any state taxing agency or authority. For the purposes of this Section 2.8, the terms "TAX" and "TAXES" include all federal, state, local and foreign income, gains, franchise, excise, property, sales, use, employment, license, payroll, occupation, recording, value added or transfer taxes, governmental charges, fees, levies or assessments (whether payable directly or by withholding), and, with respect to such taxes, any estimated tax, interest and penalties or additions to tax and interest on such penalties and additions to tax. 2.9 TITLE TO PROPERTIES. Except as set forth in ITEM 2.9, Pacific has good and marketable title to all of its assets as shown on the balance sheet as of the Balance Sheet Date included in the Pacific Financial Statements, free and clear of all liens, charges or encumbrances (other than for taxes not yet due and payable and Permitted Liens as defined below), other than such assets (i) that were sold by Pacific in the ordinary course of business since the Balance Sheet Date or (ii) which are subject to capitalized leases. "PERMITTED LIENS" means any lien, mortgage, encumbrance or restriction which is reflected in the Pacific Financial Statements and is not in excess of $50,000 and which does not A-1-7 materially detract from the value or materially interfere with the use, as currently utilized, of the properties subject thereto or affected thereby or otherwise materially impair the business operations being conducted thereon. Except as set forth in ITEM 2.9, there are no UCC financing statements of record with the State of California naming Pacific as debtor and Pacific owns no property in any other state. The machinery and equipment included in such assets are in all material respects in good condition and repair, normal wear and tear excepted, and all leases of real or personal property to which Pacific is a party are fully effective and afford Pacific peaceful and undisturbed possession of the subject matter of the lease, except to the extent that failure to have such peaceful and undisturbed possession would have a Material Adverse Effect. Pacific, to its knowledge, is not in violation of any zoning, building, safety or environmental ordinance, regulation or requirement or other law or regulation applicable to the operation of owned or leased properties, and Pacific has not received any notice of such violation with which it has not complied or had waived, except to the extent such violation would not have a Material Adverse Effect. 2.10 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, Pacific has carried on its business in the ordinary course substantially in accordance with the procedures and practices in effect on the Balance Sheet Date, and except as set forth in ITEM 2.10, since the Balance Sheet Date there has not been with respect to Pacific: (a) any change in the financial condition, properties, assets, liabilities, business, results of operations or prospects of Pacific, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, have had or is reasonably likely to have a Material Adverse Effect; (b) any contingent liability incurred by Pacific as guarantor or surety with respect to the obligations of others; (c) any mortgage, encumbrance or lien placed on any of the properties of Pacific; (d) any material obligation or liability incurred by Pacific other than in the ordinary course of business; (e) any purchase or sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any of the properties or assets of Pacific other than in the ordinary course of business; (f) any damage, destruction or loss, whether or not covered by insurance, would have or is reasonably likely to have a Material Adverse Effect; (g) any declaration, setting aside or payment of any dividend on, or the making of any other distribution in respect of, the capital stock of Pacific, any split, stock dividend, combination or recapitalization of the capital stock of Pacific or any direct or indirect redemption, purchase or other acquisition by Pacific of the capital stock of Pacific; (h) any significant labor dispute or material claim of unfair labor practices, any material change in the compensation payable or to become payable to any of Pacific's officers, employees or agents, or any material bonus payment or arrangement made to or with any of such officers, employees or agents; (i) any change with respect to the management, supervisory, development or other key personnel of Pacific (the management, supervisory, development and other key personnel of Pacific are listed on ITEM 2.10 hereof); (j) any payment or discharge of a material lien or liability thereof, which lien or liability was not either (i) shown on the balance sheet as of the Balance Sheet Date included in the Pacific A-1-8 Financial Statements or (ii) incurred in the ordinary course of business after the Balance Sheet Date; or (k) any obligation or liability incurred by Pacific to any of its officers, directors, shareholders or affiliates, or any loans or advances made to any of its officers, directors, shareholders or affiliates, except normal compensation and expense allowances payable to officers. 2.11 AGREEMENTS AND COMMITMENTS. Except as set forth in ITEM 2.11 delivered by Pacific to Hybrid herewith, or as listed in ITEM 2.12, ITEM 2.15.3 or ITEM 2.15.6 as required by Section 2.12, Section 2.15.3 or Section 2.15.6, as the case may be, Pacific is not a party or subject to any oral or written executory agreement, obligation or commitment that is material to Pacific, its financial condition, business or prospects or which is described below and is not terminable within 60 days without cost or penalty to Pacific, including but not limited to the following: (a) Any contract, commitment, letter agreement, quotation or purchase order providing for payments by or to Pacific in an aggregate amount of (i) $50,000 or more in the ordinary course of business or (ii) $25,000 or more not in the ordinary course of business; (b) Any license agreement under which Pacific is licensor (except for any nonexclusive software license granted by Pacific to end-user customers where the form of the license, excluding standard immaterial deviations, has been provided to Hybrid's counsel); or under which Pacific is licensee (except for standard "shrink wrap" licenses for off-the-shelf software products); (c) Any agreement by Pacific to encumber, transfer or sell rights in or with respect to any Pacific Intellectual Property (as defined in Section 2.12 hereof); (d) Any agreement for the sale or lease of real or personal property involving more than $50,000 per year; (e) Any material dealer, distributor, sales representative, original equipment manufacturer, value added remarketer or other agreement for the distribution of Pacific's products; (f) Any material franchise agreement or financing statement; (g) Any stock redemption or purchase agreement; (h) Any joint venture contract or arrangement or any other agreement that involves a sharing of profits with other persons or the payment of royalties to any other person; (i) Any instrument evidencing indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee or otherwise, except for trade indebtedness or any advance to any employee of Pacific incurred or made in the ordinary course of business, and except as disclosed in the Pacific Financial Statements; or (j) Any contract containing covenants purporting to limit Pacific's freedom to compete in any line of business in any geographic area. All agreements, obligations and commitments listed in ITEM 2.11, ITEM 2.12, ITEM 2.15.3 or ITEM 2.15.6 as required by Section 2.11, Section 2.12, Section 2.15.3 or Section 2.15.6, as the case may be, are valid and in full force and effect, and except as expressly noted, a true and complete copy of each has been delivered to Hybrid or Hybrid's counsel. Except as noted on ITEM 2.11, neither Pacific nor, to the knowledge of Pacific, any other party is in breach of or default under any material term of any such agreement, obligation or commitment. Pacific is not a party to any contract or arrangement that it reasonably expects will have a Material Adverse Effect. Pacific has no liability for renegotiation of government contracts or subcontracts which are material to Pacific, its financial condition, business or prospects. A-1-9 2.12 INTELLECTUAL PROPERTY. Pacific owns all right, title and interest in, or has the right to use, all patent applications, patents, trademark applications, trademarks, service marks, trade names, mask works, copyright applications, copyrights, trade secrets, know-how, technology and other intellectual property and proprietary rights used in or reasonably necessary to the conduct of its business as presently conducted, using such intellectual property and proprietary rights ("PACIFIC INTELLECTUAL PROPERTY"), except where the absence of such would not have a Material Adverse Effect. Pacific has taken reasonable measures to protect all material Pacific Intellectual Property, and, except as set forth on ITEM 2.12, Pacific is not aware of any infringement of any Pacific Intellectual Property by any third party. Set forth on ITEM 2.12 delivered to Hybrid herewith is a true and complete list of all copyright, mask work and trademark registrations and applications and all patents and patent applications for Pacific Intellectual Property owned by Pacific. Pacific is not aware of any material loss, cancellation, termination or expiration of any such registration or patent except as set forth on ITEM 2.12, considering Pacific Intellectual Property. Pacific has delivered to Hybrid copies of agreements entered into with its present and former employees and consultants with respect to assignments of copyright and other intellectual property rights; and except as set forth on ITEM 2.12, all present employees have entered into such agreements. Copies of all forms of nondisclosure or confidentiality agreements utilized to protect the Pacific Intellectual Property have been provided to Hybrid. To Pacific's knowledge, the business of Pacific as conducted as of the date hereof does not, and will not cause Pacific to, infringe or violate any of the patents, trademarks, service marks, trade names, mask works, copyrights, trade secrets, proprietary rights or other intellectual property of any other person, and Pacific has not received any written or oral claim or notice of infringement or potential infringement of the intellectual property of any other person which is reasonably likely to have a Material Adverse Effect. Except as set forth on Item 2.12, or as a result of U.S. Export Control laws, Pacific has the unrestricted, worldwide right to reproduce, manufacture, sell, license and distribute all of its products (such products being set forth in ITEM 2.12), as it currently does so, and the right to use all of its registered user lists, and is not using any confidential information or trade secrets of any former employer of any past or present employees. 2.13 COMPLIANCE WITH LAWS. Pacific has complied, or prior to the Closing Date (as defined in Section 6.1 hereof) will have complied, and is or will be at the Closing Date (as defined in Section 6.1 hereof) in full compliance, in all respects material to Pacific, with all applicable laws, ordinances, regulations and rules, and all orders, writs, injunctions, awards, judgments and decrees, applicable to Pacific or to the assets, properties and business of Pacific, including, without limitation: (a) all applicable federal and state securities laws and regulations, (b) all applicable federal, state and local laws, ordinances and regulations, and all orders, writs, injunctions, awards, judgments and decrees, pertaining to (i) the sale, licensing, leasing, ownership or management of Pacific's owned, leased or licensed real or personal property, products or technical data, (ii) employment or employment practices, terms and conditions of employment, or wages and hours or (iii) safety, health, fire prevention, environmental protection (including toxic waste disposal and related matters described in Section 2.21 hereof), building standards, zoning or other similar matters, (c) the Export Administration Act and regulations promulgated thereunder or other laws, regulations, rules, orders, writs, injunctions, judgments or decrees applicable to the export or re-export of controlled commodities or technical data or (d) the Immigration Reform and Control Act, except as the noncompliance with (a) through (d) of this Section 2.13 would not as to any individual event of noncompliance, result in a Material Adverse Effect. Pacific has received all permits and approvals from, and has made all filings with, third parties, including government agencies and authorities, that are necessary to the conduct of its business as presently conducted. 2.14 CERTAIN TRANSACTIONS AND AGREEMENTS. No person who is an officer or director of Pacific has any direct or indirect ownership interest (excluding interests as a general partner or limited partner of an investment fund or personal holdings in mutual funds) in or any employment or consulting agreement with any firm or corporation that competes with Pacific or Hybrid (except with A-1-10 respect to any interest in less than 3% of the outstanding voting shares of any corporation whose stock is publicly traded). Except as set forth in ITEM 2.14, no person who is an officer or director of Pacific, is directly or indirectly interested in any contract or informal arrangement with Pacific, including, but not limited to, any loan arrangements, except for compensation for services as an officer (listed in ITEM 2.15.3), director or employee of Pacific and except for the normal rights of a shareholder, warrantholder or optionholder. Except as set forth in ITEM 2.14, none of such officers or directors or family members has any interest in any property, real or personal, tangible or intangible, including, without limitation, inventions, patents, copyrights, trademarks, trade names or trade secrets, used in the business of Pacific, except for the normal rights of a shareholder. 2.15 EMPLOYEES. 2.15.1 Except as set forth in ITEM 2.15.1, (i) Pacific has no material employment contract or material consulting agreement currently in effect that is not terminable at will without material penalty or payment of compensation by Pacific (other than agreements with the sole purpose of providing for the confidentiality of proprietary information or assignment of inventions) and (ii) all employees and consultants of Pacific have executed Pacific's standard form of assignments of copyright and other intellectual property rights to Pacific. 2.15.2 Pacific (a) has never been and is not now subject to a union organizing effort, (b) is not subject to any collective bargaining agreement with respect to any of its employees, (c) is not subject to any other material contract, written or oral, with any trade or labor union, employees' association or similar organization and (d) has no material current labor dispute. Pacific has good labor relations, and Pacific has no knowledge of any facts indicating that the consummation of the transactions provided for herein (other than the contemplated reductions in force associated therewith) will have a Material Adverse Effect on its labor relations, and has no knowledge that any of its key development or other employees (each of whom is listed on Item 2.15.2) intends to leave its employ. 2.15.3 ITEM 2.15.3 delivered by Pacific to Hybrid herewith contains a list of all material employment and consulting agreements, material pension, retirement, disability, medical, dental or other health plans, material life insurance or other death benefit plans, material profit sharing, deferred compensation agreements, stock, option, bonus or other incentive plans, material vacation, sick, holiday or other paid leave plans, and material severance plans or other similar material employee benefit plans maintained by Pacific (the "EMPLOYEE PLANS"), including without limitation all "employee benefit plans" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Pacific has delivered or made available copies or descriptions of all the Employee Plans to Hybrid and Hybrid's counsel. Except as set forth in ITEM 2.15.3, each of the Employee Plans, and its operation and administration, is, in all material respects, in compliance with each of the respective Employee Plans' terms and with all applicable, federal, state, local and other governmental laws and ordinances, orders, rules and regulations, including the requirements of ERISA and the Code. Except as set forth in ITEM 2.15.3, all such Employee Plans that are "employee pension benefit plans" (as defined in Section 3(2) of ERISA) which are intended to qualify under Section 401(a) of the Code have received favorable determination opinion, notification or advisory letters with respect to such plans that consider the Tax Reform Act of 1986 or have remaining a period of time under applicable Treasury regulations or IRS pronouncements in which to apply for such a letter and make any amendments necessary to obtain a favorable determination as to the qualified states of each such Employee Plan. In addition, Pacific has never been a participant in any "prohibited transaction," within the meaning of Section 406 of ERISA with respect to any employee pension benefit plan (as defined in Section 3(2) of ERISA) which Pacific sponsors as employer or in which Pacific participates as an employer, which was not otherwise exempt pursuant to Section 408 of ERISA (including, but not limited to, any individual exemption granted under A-1-11 Section 408(a) of ERISA), or which could result in an excise tax under the Code. The group health plans, as defined in Section 4980B(g) of the Code, that benefit employees of Pacific are in material compliance with the continuation coverage requirements of subsection 4980B of the Code. There are no material outstanding violations of Section 4980B of the Code with respect to any Employee Plan, covered employees or qualified beneficiaries. Except as set forth in Item 2.15.3, no employee of Pacific and no person subject to any Pacific health plan has made medical claims through such health plan during the twelve months preceding the date hereof for more than $50,000 or more, in the aggregate. 2.15.4 To Pacific's knowledge, no employee of Pacific is in violation of any material term of any employment contract, patent or trade secret disclosure agreement or noncompetition agreement or any other contract or agreement, or any restrictive covenant, relating to the right of any such employee to be employed by Pacific or to use trade secrets or proprietary information of others, and, to Pacific's knowledge, the employment of any employee of Pacific does not subject Pacific to any liability to any third party. 2.15.5 Except as set forth in ITEM 2.15.5, Pacific is not a party to any (a) agreement with any executive officer or other key employee of Pacific (i) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving Pacific in the nature of any of the transactions contemplated by this Agreement and the Agreement of Merger, (ii) providing any term of employment or compensation guarantee or (iii) providing material benefits or other benefits after the termination of employment of such employee regardless of the reason for such termination of employment, or (b) material agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be materially increased, or the vesting of benefits of which will be materially accelerated, by the occurrence of any of the transactions contemplated by this Agreement and the Agreement of Merger. Pacific is not obligated to make any excess parachute payment, as defined in Section 280G(b)(1) of the Code as a result of the transactions contemplated by this Agreement and the Agreement of Merger. 2.15.6 A list of all employees, officers and consultants of Pacific and their current compensation and benefits as of the date of this Agreement is set forth on ITEM 2.15.6. 2.15.7 All material contributions due from Pacific with respect to any of the Employee Plans have been made or accrued on Pacific's financial statements, and no further material contributions will be due or will have accrued thereunder as of the Closing Date. 2.16 CORPORATE DOCUMENTS. Pacific has made available to Hybrid for examination all documents and information listed in ITEMS 2.1 through 2.21 or other exhibits called for by this Agreement which have been reasonably requested by Hybrid's legal counsel, including, without limitation, the following: (a) copies of Pacific's Articles of Incorporation and Bylaws as currently in effect; (b) Pacific's minute book containing all records of all proceedings, consents, actions and meetings of Pacific's directors and shareholders; (c) Pacific's stock ledger, journal and other records reflecting all stock issuances and transfers; and (d) all permits, orders and consents issued by any regulatory agency with respect to Pacific, or any securities of Pacific, and all applications for such permits, orders and consents. 2.17 NO BROKERS. Except as listed on ITEM 2.17, Pacific is not obligated for the payment of fees or expenses of any investment banker, broker or finder in connection with the origin, negotiation or execution of this Agreement or the Agreement of Merger or in connection with any transaction provided for herein or therein. 2.18 DISCLOSURE. This Agreement, its exhibits and schedules, and any of the certificates or documents to be delivered by Pacific to Hybrid under this Agreement, taken together, do not contain A-1-12 any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which such statements were made, not misleading. 2.19 BOOKS AND RECORDS. The books, records and accounts of Pacific (a) are in all material respects true and complete, (b) have been maintained in accordance with reasonable business practices on a basis consistent with prior years, (c) are stated in reasonable detail and accurately and fairly reflect the transactions and dispositions of the assets of Pacific and (d) accurately and fairly reflect the basis for the Pacific Financial Statements. 2.20 INSURANCE. Pacific maintains (as listed on Item 2.20) and at all times during the prior three years has maintained fire and casualty, workers compensation, general liability, business interruption and product liability insurance which it believes to be reasonably prudent for similarly sized and similarly situated business. 2.21 ENVIRONMENTAL MATTERS. 2.21.1 To the knowledge of Pacific, during the period that Pacific has leased or owned its properties or leased, owned or operated any facilities, there have been no disposals, releases or threatened releases of Hazardous Materials (as defined below) on, from or under any such properties or facilities. Pacific has no knowledge of any presence, disposals, releases or threatened releases of Hazardous Materials on, from or under any of such properties or facilities, which may have occurred prior to Pacific having taken possession of any of such properties or facilities. For purposes of this Agreement, the terms "DISPOSAL," "RELEASE," and "THREATENED RELEASE" have the definitions assigned thereto by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 ET SEQ., as amended ("CERCLA"). For the purposes of this Section 2.22, "HAZARDOUS MATERIALS" mean any hazardous or toxic substance, material or waste which is or becomes prior to the Closing Date (as defined in Section 6.1 hereof) regulated under, or defined as a "hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous material," "toxic substance" or "hazardous chemical" under (i) CERCLA; (ii) the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 ET SEQ.; (iii) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET SEQ.; (iv) the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.; (v) the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 ET SEQ.; (vi) regulations promulgated under any of the above statutes; or (vii) any other applicable federal, state or local statute, ordinance, rule or regulation that has a scope or purpose similar to those identified above. 2.21.2 None of the properties or facilities currently leased or owned by Pacific or any properties or facilities previously occupied by Pacific is in violation of any federal, state or local law, ordinance, regulation or order relating to industrial hygiene or to the environmental conditions on, under or about such properties or facilities, including, but not limited to, soil and ground water condition. 2.21.3 Except as set forth in ITEM 2.21, during Pacific's occupancy of any properties or facilities owned or leased at any time by Pacific, neither Pacific, nor to Pacific's knowledge, any third party, has used, generated, manufactured or stored on, under or about such properties and facilities or transported to or from such properties and facilities any Hazardous Materials. 2.21.4 To the knowledge of Pacific, during the time that Pacific has owned or leased the properties and facilities currently occupied by it or any properties and facilities previously occupied by Pacific, there has been no litigation, proceeding or administrative action brought or threatened against Pacific, or any settlement reached by Pacific with, any party or parties alleging the presence, disposal, release or threatened release of any Hazardous Materials on, from or under any of such properties or facilities. A-1-13 2.21.5 To the knowledge of Pacific, during Pacific's occupancy of any properties or facilities owned or leased at any time by Pacific, no Hazardous Materials have been transported from such premises to any site or facility now listed or proposed for listing on the National Priorities List, at 40 C.F.R. Part 300, or any list with a similar scope or purpose published by any state authority. 2.22 GOVERNMENT CONTRACTS. All representations, certifications and disclosures made by Pacific to any Government Contract Party (as defined below) have been in all material respects current, complete and accurate at the times they were made. There have been no acts, omissions or noncompliance with regard to any applicable public contracting statute, regulation or contract requirement (whether express or incorporated by reference) relating to any of Pacific's contracts with any Government Contract Party (as defined below) in either case that have led to or is reasonably likely to lead to, either before or after the Closing Date (as defined in Section 6.1 hereof), (a) any material claim or dispute involving Pacific and/or Hybrid as successor in interest to Pacific and any Government Contract Party or (b) any suspension, debarment or contract termination, or proceeding related thereto. There has been no act or omission that relates to the marketing, licensing or selling to any Government Contract Party (as defined below) of any of Pacific technical data and products and that has led to or is reasonably likely to lead to, either before or after the Closing Date (as defined in Section 6.1 hereof), any material cloud on any of Pacific's rights in and to its technical data and products. All of Pacific's development of technical data and products was developed exclusively at private expense. For purposes of this Section 2.22, the term "GOVERNMENT CONTRACT PARTY" means any independent or executive agency, division, subdivision, audit group or procuring office of the federal government, including any prime contractor of the federal government and any higher level subcontractor of a prime contractor of the federal government, and including any employees or agents thereof, in each case acting in such capacity. 2.23 INFORMATION SUPPLIED. None of the information supplied or to be supplied by Pacific in writing for inclusion in the Form S-4 and the Prospectus/Proxy Statement, at the date such information is supplied and at the time of the vote of the Hybrid stockholders related to the Merger and the Pacific Shareholder Vote (as defined in Section 4.5), contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading or will, in the case of the Form S-4, at the time the Form S-4 becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they are made, not misleading. 2.24 BOARD APPROVAL. The Board of Directors of Pacific has, as of the date of this Agreement, determined (i) that the Merger is fair to, and in the best interests of Pacific and its shareholders, and (ii) to recommend that the shareholders of Pacific approve and adopt this Agreement and approve the Merger. 2.25 POOLING OF INTERESTS. To Pacific's knowledge, based on consultation with its independent accountants, neither Pacific nor any of its directors, officers or shareholders has taken any action which would interfere with Pacific's or Hybrid's ability to account for the Merger as a pooling of interests. 3. REPRESENTATIONS AND WARRANTIES OF HYBRID AND NEWCO Each of Hybrid and Newco, where applicable, hereby represents and warrants, that, except as set forth on the Hybrid disclosure letter delivered to Pacific herewith: 3.1 ORGANIZATION AND GOOD STANDING. Each of Hybrid and Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the A-1-14 corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted and as proposed to be conducted. 3.2 POWER, AUTHORIZATION AND VALIDITY. 3.2.1 Each of Hybrid and Newco has the corporate right, power, legal capacity and authority to enter into and perform its obligations under this Agreement, and all agreements to which Hybrid is or will be a party that are required to be executed pursuant to this Agreement (the "HYBRID ANCILLARY AGREEMENTS"). The execution, delivery and performance of this Agreement and the Hybrid Ancillary Agreements have been duly and validly approved and authorized by Hybrid's Board of Directors and Newco's Board of Directors and as required by applicable law and subject to any required approval by the stockholders of Hybrid, such stockholder approval will be duly and validly obtained prior to the Effective Time. 3.2.2 No filing, authorization or approval, governmental or otherwise, is necessary to enable Hybrid to enter into, and to perform its obligations under, this Agreement and the Hybrid Ancillary Agreements, except for (a) the filing of the Agreement of Merger with the Secretaries of State of the States of Delaware and California, the filing of such officers' certificates and other documents as are required to effectuate the Merger under Delaware and California law and the filing of appropriate documents with the relevant authorities of other states in which Hybrid is qualified to do business, if any, (b) such post-closing filings as may be required to comply with federal and state securities laws and (c) the approval of this Agreement and the Agreement of Merger by the stockholders of Hybrid. 3.2.3 This Agreement and the Hybrid Ancillary Agreements are, or when executed and delivered by Hybrid and Newco (as applicable) and the other parties thereto will be, valid and binding obligations of Hybrid and Newco, enforceable against Hybrid and Newco in accordance with their respective terms, except as to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally, and (b) rules of law governing specific performance, injunctive relief and other equitable remedies; provided, however, that the Agreement of Merger and the Hybrid Ancillary Agreements will not be effective until the earlier of the Effective Time or the date provided for therein. 3.3 NO VIOLATION OF EXISTING AGREEMENTS OR LAWS. Neither the execution nor delivery of this Agreement or any Hybrid Ancillary Agreement, nor the consummation of the transactions contemplated hereby or thereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of (a) any provision of the Certificate of Incorporation or Bylaws of Hybrid, as currently in effect, or (b) any contract that is material to Hybrid's business or (c) any federal, state, local or foreign judgment, writ, decree, order, statute or regulation applicable to and that would have a Material Adverse Effect (as defined below) on Hybrid or its assets or properties. When used in connection with Hybrid, the term "MATERIAL ADVERSE EFFECT" means, for purposes of this Agreement any change, event or effect that is or is reasonably likely to be materially adverse to the business, assets (including intangible assets),, liabilities, financial condition or results of operations of Hybrid except that a decline in Hybrid's stock price and its failure to meet its own or analysts' financial expectations for the quarter ended March 31, 1998 as described in Hybrid's press release dated March 12, 1998 shall not be deemed to be a Material Adverse Effect. 3.4 SEC DOCUMENTS. Hybrid has furnished Pacific with its registration statement on Form S-1 and the final prospectus dated November 12, 1997 related to its initial public offering of Common Stock (the "FINAL PROSPECTUS"), and all other reports or documents required to be filed by Hybrid pursuant to Section 13(a) or 15(d) of the 1934 Act since the filing of its Final Prospectus (the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents were prepared in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Documents. The Hybrid SEC Documents, A-1-15 this Agreement, the exhibits and schedules hereto, and any certificates or documents to be delivered to Pacific pursuant to this Agreement, when taken together, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which such statements were made, not misleading. 3.5 AUTHORIZED/OUTSTANDING CAPITAL STOCK. The authorized capital stock of Hybrid consists of 100,000,000 shares of Hybrid Common Stock, $0.001 par value per share, of which 10,353,580 shares were issued and outstanding as of February 27, 1998, and 5,000,000 shares of preferred stock, $0.001 par value per share, of which no shares are issued and outstanding. The authorized capital stock of Newco consists of 1,000 shares of Common Stock, $0.001 par value, of which 1,000 shares are issued and outstanding and held by Hybrid. 3.6 NO MATERIAL CHANGE. Since the issuance of Hybrid's press release related to its financial results on March 12, 1998, there has not been with respect to Hybrid any change in the financial condition, properties, assets, liabilities, business, results of operations or prospects of Hybrid, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, have had or is likely to have a Material Adverse Effect. 3.7 POOLING OF INTERESTS. To Hybrid's knowledge, based on consultation with its independent accountants, neither Hybrid nor any of its directors, officers or stockholders has taken any action which would interfere with Hybrid's ability to account for the Merger as a pooling of interests. 3.8 LITIGATION. There is no action, suit, proceeding, claim, arbitration or investigation pending or as to which Hybrid has received any notice of assertion against Hybrid, which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement. 3.9 BOARD APPROVAL. The Board of Directors of Hybrid has, as of the date of this Agreement, determined (i) that the Merger is fair to, and in the best interests of Pacific and its stockholders, and (ii) to recommend that the stockholders of Hybrid approve and adopt this Agreement and approve the Merger. 4. PACIFIC PRECLOSING COVENANTS During the period from the date of this Agreement until the Effective Time, Pacific covenants to and agrees with Hybrid as follows: 4.1 ADVICE OF CHANGES. Pacific will promptly advise Hybrid in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Pacific contained in this Agreement, if made on or as of the date of such event or the Closing Date (as defined in Section 6.1 hereof), untrue or inaccurate in any material respect and (b) the occurrence of any Material Adverse Effect. To ensure compliance with this Section 4.1, Pacific shall deliver to Hybrid within fifteen (15) days after the end of each monthly accounting period ending after the date of this Agreement and before the Closing Date, an unaudited balance sheet and statement of operations, which financial statements shall be prepared in the ordinary course of business, in accordance with Pacific's books and records and generally accepted accounting principles and shall fairly present the financial position of Pacific as of their respective dates and the results of Pacific's operations for the periods then ended. 4.2 MAINTENANCE OF BUSINESS. Pacific will use reasonable efforts to carry on and preserve its business and its relationships with customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. If Pacific becomes aware of a material deterioration in the relationship with any material customer, supplier or key employee, it will promptly bring such A-1-16 information to the attention of Hybrid in writing and, if requested by Hybrid, will exert all reasonable efforts to restore the relationship. 4.3 CONDUCT OF BUSINESS. Except as provided otherwise herein or as approved or recommended by Hybrid, Pacific will not, without the prior written consent of the President of Hybrid, not to be unreasonably withheld: (a) borrow any money in excess of an aggregate of $50,000 (not including any amounts borrowed from Hybrid); (b) enter into any transaction or make any commitment involving an expense of Pacific or capital expenditure by Pacific in excess of $50,000 that is not in the ordinary course of business; (c) encumber or permit to be encumbered any of its assets except (i) in the ordinary course of its business consistent with past practice or (ii) encumbrances which are not in excess of $50,000; (d) dispose of any of its material assets except (i) in the ordinary course of business consistent with past practice or (ii) assets which are not in excess of $50,000; (e) enter into any material lease or contract for the purchase or sale of any property, real or personal, tangible or intangible, or enter into any agreement of the types described in Section 2.11, except in the ordinary course of business consistent with past practice; (f) fail to maintain its equipment and other assets in good working condition and repair according to the standards it has maintained to the date of this Agreement, subject only to ordinary wear and tear; (g) pay any bonus, royalty, increased salary (except for annual increases in the ordinary course of business consistent with past practice and disclosed to Hybrid in writing) or special remuneration to any officer, employee or consultant (except pursuant to existing arrangements heretofore disclosed in writing to Hybrid) or enter into any new employment or consulting agreement with any such person, or enter into any new agreement or plan of the type described in Section 2.15.3; (h) change accounting methods; (i) declare, set aside or pay any cash or stock dividend or other distribution in respect of capital stock, or redeem or otherwise acquire any of its capital stock, except for options granted to new hires for an aggregate of 50,000 shares of Pacific Common Stock; (j) amend or terminate any contract, agreement or license to which it is a party, except those amended or terminated in the ordinary course of business consistent with past practice or which are not material in amount or effect; (k) lend any amount to any person or entity, other than advances for travel and expenses which are incurred in the ordinary course of business consistent with past practice, not material in amount, which travel and expenses shall be reasonably documented by receipts for the claimed amounts consistent with past practice; (l) guarantee or act as a surety for any obligation except for the endorsement of checks and other negotiable instruments in the ordinary course of business, consistent with past practice or which are not material in amount; (m) waive or release any material right or claim except in the ordinary course of business, consistent with past practice; A-1-17 (n) issue or sell any shares of its capital stock of any class or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, stock appreciation rights or other commitments to issue shares of capital stock, or accelerate the vesting of any outstanding option or other security, except for (i) the conversion of Pacific Preferred Stock or the exercise of Pacific Options or Pacific Warrants or (ii) the issuance of stock options under Pacific's stock option plans as provided in Section 4.3(i); (o) split or combine the outstanding shares of its capital stock of any class or enter into any recapitalization affecting the number of outstanding shares of its capital stock of any class or affecting any other of its securities; (p) except for the Merger, merge, consolidate or reorganize with, or acquire any entity; (q) amend its Articles of Incorporation or Bylaws; (r) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have been delivered to Hybrid for its review prior to filing; (s) license any of Pacific's technology or any of Pacific's Intellectual Property, except in the ordinary course of business consistent with past practice; (t) change any insurance coverage or issue any certificates of insurance; (u) terminate the employment of any key employee listed in Item 2.10(i); or (v) agree to do any of the things described in the preceding clauses 4.3(a) through 4.3(u). 4.4 CERTAIN AGREEMENTS. Pacific will use reasonable efforts to cause all present employees and consultants of Pacific who have not previously executed Pacific's forms of assignments of copyright and other intellectual property rights to Pacific to execute such forms, copies of which are attached hereto as EXHIBIT E. 4.5 SHAREHOLDER APPROVAL. At the earliest practicable date after the effectiveness of the Form S-4, Pacific will duly call and hold a special shareholder meeting, whereby this Agreement, the Agreement of Merger and related matters will be submitted for the consideration and approval of Pacific's shareholders (the "PACIFIC SHAREHOLDER VOTE"), which approval will be recommended by Pacific's Board of Directors and management. Such meeting will be called, held and conducted, and any proxies will be solicited, in compliance with applicable law. Concurrently with execution of this Agreement, Pacific will cause the parties listed on EXHIBIT F to sign agreements in the form of EXHIBIT Q hereto that among other things bind such shareholders to vote in favor of the Merger. 4.6 EMPLOYMENT AND NONCOMPETITION AGREEMENTS. Richard B Gold shall execute and deliver, and Pacific will use reasonable efforts to cause Mike Morganstern and Allen Podell to execute and deliver to Hybrid employment agreements (the "EMPLOYMENT AGREEMENTS") and noncompetition agreements (the "NONCOMPETITION AGREEMENTS") in the form attached as EXHIBIT G, with respect to Richard B. Gold, and Exhibit H in a form to be negotiated in good faith by Pacific and Hybrid, with respect to Messrs. Morganstern and Podell, which agreements will become effective upon the Effective Time of the Merger. 4.7 PROSPECTUS/PROXY STATEMENT. Pacific will send to its shareholders in a timely manner, for the purpose of the Pacific Shareholder Vote, the Agreement of Merger and related matters and the Prospectus/Proxy Statement in the form filed by Hybrid with the SEC pursuant to Rule 424 under the Securities Act. Pacific will promptly provide all information relating to its business or operations necessary for inclusion in the Prospectus/Proxy Statement to satisfy the parties' respective obligations under applicable state and federal securities laws. Pacific will be solely responsible for any statement, information or omission in the Prospectus/Proxy Statement relating to Pacific or its affiliates and A-1-18 based upon written information furnished by Pacific. Pacific will not provide or publish to its shareholders any material concerning Pacific or its affiliates that violates the Securities Act, the Exchange Act or any applicable state securities laws with respect to the transactions provided for herein. 4.8 REGULATORY APPROVALS. Pacific will execute and file, or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which Hybrid may reasonably request, in connection with the consummation of the transactions provided for in this Agreement. Pacific will use reasonable efforts to obtain or assist Hybrid in obtaining all such authorizations, approvals and consents. 4.9 NECESSARY CONSENTS. Pacific will use reasonable efforts to obtain such written consents and take such other actions as may be necessary or appropriate for Pacific, in addition to those set forth in Section 4.8, to facilitate and allow the consummation of the transactions provided for herein and to facilitate and allow Hybrid to carry on Pacific's business after the Closing Date (as defined in Section 6.1 hereof). 4.10 LITIGATION. Pacific will notify Hybrid in writing promptly after learning of any action, suit, proceeding or investigation by or before any court, board or governmental agency, initiated by or against Pacific or threatened against it. 4.11 NO OTHER NEGOTIATIONS. From the date hereof until the termination of this Agreement (provided such termination is not in breach of this Agreement) or the consummation of the Merger, Pacific will not, and will not authorize any officer, director, employee or affiliate of Pacific, or any other person, on its behalf, directly or indirectly, to (a) solicit, facilitate, discuss or encourage any offer, inquiry or proposal received from any party other than Hybrid, concerning the possible disposition of all or any substantial portion of Pacific's business, assets or capital stock by merger, sale or any other means or to otherwise solicit, facilitate, discuss or encourage any such disposition (other than the Merger), or (b) provide any confidential information to or negotiate with any third party other than Hybrid in connection with any offer, inquiry or proposal concerning any such disposition. Pacific will immediately notify Hybrid of any such offer, inquiry or proposal. 4.12 ACCESS TO INFORMATION. Until the Closing Date (as defined in Section 6.1 hereof) Pacific will provide Hybrid and its agents with reasonable access to the files, books, records and offices of Pacific, including, without limitation, any and all information relating to Pacific taxes, commitments, contracts, leases, licenses, real, personal and intangible property, and financial condition. Pacific will cause its accountants to cooperate with Hybrid and its agents in making available all financial information reasonably requested, including without limitation the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants and will deliver the audited September 30, 1997 Pacific Financial Statements to Hybrid as soon as practicable after the date of this Agreement. 4.13 SATISFACTION OF CONDITIONS PRECEDENT. Pacific will use reasonable efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Section 8, and Pacific will use reasonable efforts to cause the transactions provided for in this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions provided for herein. 4.14 BLUE SKY LAWS. Pacific shall use reasonable efforts to assist Hybrid to the extent necessary to comply with the securities and Blue Sky laws of all jurisdictions applicable in connection with the Merger. A-1-19 4.15 NOTIFICATION OF EMPLOYEE PROBLEMS. Pacific will promptly notify Hybrid if any of Pacific's officers becomes aware that any of the key employees listed in ITEM 2.15.2 intends to leave its employ. 4.16 PACIFIC AFFILIATES AGREEMENT. To ensure that the issuance of Hybrid Common Stock in the Merger complies with the Securities Act and that the Merger will be accounted for as a "POOLING OF INTERESTS," concurrently with the execution of this Agreement, Pacific will use reasonable efforts to deliver to Hybrid, a written agreement from each of its affiliates (as listed on EXHIBIT F) (the "PACIFIC AFFILIATES AGREEMENT") in substantially the form of EXHIBIT I. 4.17 PRINCIPAL SHAREHOLDER REPRESENTATION LETTERS. To ensure that the Merger will qualify as a "TAX-FREE" reorganization for federal income tax purposes, Pacific will cause each shareholder who beneficially owns more than 10% of the capital stock of Pacific (the "PRINCIPAL SHAREHOLDER") to execute, at or before the Closing, the Pacific Affiliates Agreement in the form of EXHIBIT I. 4.18 TAX OPINION. Pacific shall use reasonable efforts to obtain a written opinion from its counsel, Wilson Sonsini Goodrich & Rosati Professional Corporation, in form and substance reasonably satisfactory to it, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. Pacific agrees to make reasonable representations as requested by such counsel for the purpose of rendering such opinion. 4.19 PACIFIC DISSENTING SHARES. As promptly as practicable after the date of the Pacific Shareholder Vote and prior to the Closing Date, Pacific shall furnish Hybrid with the name and, to the extent of Pacific's knowledge, the address of each holder of Eligible Dissenting Shares. 4.20 POOLING ACCOUNTING. Pacific shall use reasonable efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests. Pacific shall use reasonable efforts to cause its affiliates not to take any action that would adversely affect the ability of Hybrid to account for the business combination to be effected by the Merger as a pooling of interests. 5. HYBRID PRECLOSING COVENANTS During the period from the date of this Agreement until the Effective Time, Hybrid covenants to and agrees with Pacific as follows: 5.1 ADVICE OF CHANGES. Hybrid will promptly advise Pacific in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Hybrid contained in this Agreement, if made on or as of the date of such event or the Closing Date (as defined in Section 6.1 hereof), untrue or inaccurate in any material respect and (b) the occurrence of any Material Adverse Effect. 5.2 SATISFACTION OF CONDITIONS PRECEDENT. Hybrid will use all reasonable efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Section 7, and Hybrid will use all reasonable efforts to cause the transactions provided for in this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions provided for herein. 5.3 REGULATORY APPROVALS. Hybrid will execute and file, or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which Pacific may reasonably request, in connection with the consummation of the transactions provided for in this Agreement. Hybrid will use all reasonable efforts to obtain all such authorizations, approvals and consents. 5.4 HYBRID AFFILIATES AGREEMENTS. To ensure that the Merger will be accounted for as a "POOLING OF INTERESTS," concurrently with the execution of this Agreement, Hybrid will use reasonable efforts to A-1-20 deliver to Pacific a written agreement from each of its affiliates (the "HYBRID AFFILIATES AGREEMENT") in substantially the form of EXHIBIT J. 5.5 TAX OPINIONS. Hybrid shall use reasonable efforts to obtain a written opinion from its counsel, Fenwick & West LLP, in form and substance reasonably satisfactory to it to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and such opinions shall not have been withdrawn. Hybrid agrees to make reasonable representations as requested by such counsel for the purpose of rendering such opinion. 5.6 NMS LISTING. Hybrid agrees to authorize for listing on the Nasdaq National Market the Hybrid Common Stock issuable, and those required to be reserved for issuance, in connection with the Merger, upon official notice of issuance. 5.7 VOTING AGREEMENTS. Hybrid will use reasonable efforts to deliver to Pacific a written agreement from each of the entities listed on EXHIBIT K (the "VOTING AGREEMENT") in substantially the form of EXHIBIT L providing that such persons will vote in favor of the Merger. 5.8 MAINTENANCE OF BUSINESS. Hybrid will use reasonable efforts to carry on and preserve its business and its relationships with customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. Promptly following the public dissemination of information related to a material deterioration in the relationship with any material customer, supplier or key employee, or material litigation related to the business operations of Hybrid, Hybrid will supply Pacific with a copy of such public dissemination. 5.9 STOCKHOLDER APPROVAL. If required by law or the Nasdaq Stock Market, at the earliest practicable date after the effectiveness of the Form S-4, Hybrid will duly call and hold a stockholder meeting (the "HYBRID STOCKHOLDER VOTE"), whereby this Agreement, the Agreement of Merger and related matters will be submitted for the consideration and approval of Hybrid's stockholders, which approval will be recommended by Pacific's Board of Directors and management. Such meeting will be called, held and conducted, and any proxies will be solicited, in compliance with applicable law. 5.10 PROSPECTUS/PROXY STATEMENT. Hybrid will send to its stockholders in a timely manner, for the purpose of the Hybrid Stockholder Vote, the Agreement of Merger and related matters and the Prospectus/Proxy Statement in the form filed by Hybrid with the SEC pursuant to Rule 424 under the Securities Act. Hybrid will use reasonable efforts to have the Form S-4 declared effective by the SEC. Hybrid will promptly provide all information relating to its business or operations necessary for inclusion in the Prospectus/Proxy Statement to satisfy the parties' respective obligations under applicable state and federal securities laws. Hybrid will be solely responsible for any statement, information or omission in the Prospectus/Proxy Statement relating to Hybrid or its affiliates and based upon written information furnished by Hybrid. Hybrid will not provide or publish to its shareholders any material concerning Hybrid or its affiliates that violates the Securities Act, the Exchange Act or any applicable state securities laws with respect to the transactions provided for herein. 5.11 NECESSARY CONSENTS. Hybrid will use reasonable efforts to obtain such written consents and take such other actions as may be necessary or appropriate for Hybrid to facilitate and allow the consummation of the transactions provided for herein. 5.12 BLUE SKY LAWS. Hybrid shall use reasonable efforts to comply with the securities and Blue Sky laws of all jurisdictions applicable in connection with the Merger. 5.13 POOLING ACCOUNTING. Hybrid shall use reasonable efforts to cause the business combination to be effected by the Merger to be accounted for as a pooling of interests. Hybrid shall use reasonable efforts to cause its affiliates not to take any action that would adversely affect the ability of Hybrid to account for the business combination to be effected by the Merger as a pooling of interests. A-1-21 5.14 FILING OF FORM S-8. As soon as practicable after the Closing Date, Hybrid will use reasonable efforts to file a Form S-8 with the SEC to register the shares underlying the Pacific Options being assumed by Hybrid in the Merger. 6. CLOSING MATTERS 6.1 THE CLOSING. Subject to termination of this Agreement as provided in Section 9 below, the closing of the transactions provided for herein (the "CLOSING") will take place at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306 at 10:00 a.m., Pacific Time on or before May 31, 1998, or, if all conditions to Closing have not been satisfied or waived by such date, such other place, time and date as Pacific and Hybrid may mutually select (the "CLOSING DATE"). The parties agree to use their best efforts to satisfy all conditions to closing on or before May 31, 1998. Prior to or concurrently with the Closing, the Agreement of Merger and such officers' certificates or other documents as may be required to effectuate the Merger will be filed in the office of the California Secretary of State and the Agreement of Merger and such certificates of approval or other documents as may be required to effectuate the Merger will be filed in the office of the Delaware Secretary of State. Accordingly, the Merger will become effective at the Effective Time. 6.2 EXCHANGE OF CERTIFICATES. 6.2.1 As of the Effective Time, all shares of Pacific Capital Stock that are outstanding immediately prior thereto will, by virtue of the Merger and without further action, cease to exist, and all such shares will be converted into the right to receive from Hybrid the number of shares of Hybrid Common Stock determined as set forth in Section 1.1, subject to Section 1.2 and 1.3 hereof. 6.2.2 At and after the Effective Time, each certificate representing outstanding shares of Pacific Capital Stock will represent the number of shares of Hybrid Common Stock into which such shares of Pacific Capital Stock have been converted, and such shares of Hybrid Common Stock will be deemed registered in the name of the holder of such certificate. As soon as practicable after the Effective Time, each holder of shares of Pacific Capital Stock will surrender (a) the certificates for such shares (the "PACIFIC CERTIFICATES") to Hybrid for cancellation or (b) an affidavit of lost certificate (or nonissued) and a bond in form reasonably satisfactory to Hybrid (a "BOND"). Promptly following the Effective Time and receipt of the Pacific Certificates and/or the Bonds, Hybrid will cause its transfer agent to mail to each holder of record of Pacific Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Pacific Certificates shall pass, only upon delivery of the Pacific Certificates to the transfer agent and shall be in such form and have such other provisions as Hybrid and Pacific may reasonably specify) and (ii) instructions for use in effecting the surrender of the Pacific Certificates in exchange for certificate representing Hybrid Common Stock. Upon surrender of a Pacific Certificate for cancellation to the transfer agent, together with a duly executed letter of transmittal and such other documents as may be reasonably required by the transfer agent, the transfer agent will issue to such surrendering holder certificate(s) for the number of shares of Hybrid Common Stock to which such holder is entitled pursuant to Section 1.1, subject to Section 1.2 hereof, less the shares of Hybrid Common Stock deposited into escrow pursuant to Section 1.3 hereof, and Hybrid will distribute any cash payable under Section 1.2. 6.2.3 All shares of Hybrid Common Stock (and, if applicable, cash in lieu of fractional shares) delivered upon the surrender of Pacific Certificates in accordance with the terms hereof will be delivered to the registered holder or placed in escrow with the Escrow Agent, as applicable. After the Effective Time, there will be no further registration of transfers of the shares of Pacific Capital Stock on the stock transfer books of Pacific. If, after the Effective Time, Pacific Certificates are presented for transfer or for any other reason, they will be canceled and exchanged and certificates therefor will be delivered or placed in escrow as provided in this A-1-22 Section 6.2. Notwithstanding anything herein to the contrary, except to the extent waived by Hybrid, any Pacific Certificate that is not properly submitted to Hybrid for exchange and cancellation within three years after the Effective Time shall no longer evidence ownership of or any right to receive shares of Hybrid Common Stock and all rights of the holder of such Pacific Certificate, with respect to the shares previously evidenced by such Pacific Certificate, shall cease. 6.2.4 Until Pacific Certificates representing Pacific Capital Stock outstanding prior to the Merger are surrendered pursuant to Section 6.2.2 above, such certificates will be deemed, for all purposes, to evidence ownership of (a) the number of shares of Hybrid Common Stock into which the shares of Pacific Capital Stock will have been converted, subject to the obligation to place a portion thereof in escrow as required hereby, and (b) if applicable, cash in lieu of fractional shares. 6.3 ASSUMPTION OF OPTIONS AND WARRANTS. Promptly after the Effective Time, Hybrid will notify in writing each holder of a Pacific Option or Pacific Warrant of the assumption of such Pacific Option or Pacific Warrant by Hybrid, and the number of shares of Hybrid Common Stock that are then subject to such option or warrant and the exercise price of such option or warrant, as determined pursuant to Sections 1.1 and 1.2 hereof. 7. CONDITIONS TO OBLIGATIONS OF PACIFIC Pacific's obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Closing, of each of the following conditions (any one or more of which may be waived by Pacific, but only in a writing signed on behalf of Pacific by its President or Chief Financial Officer): 7.1 (a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Hybrid contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement. The representations and warranties of Hybrid hereunder shall be deemed not to be true and correct in all material respects on the date of this Agreement only if the aggregate amount of losses or damages reasonably related to, arising out of or expected to arise out of any breach of such representations and warranties (without regard to any limitations for materiality that are contained in the individual representations and warranties) are reasonably expected to have a Material Adverse Effect on Hybrid. In addition, the representations and warranties of Hybrid contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date except for changes contemplated by this Agreement and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect as if made on and as of the Closing Date, except in such cases where the failure to be so true and correct would not have a Material Adverse Effect on Hybrid. Pacific shall have received a certificate with respect to the foregoing signed on behalf of Hybrid by the Chief Executive Officer and the Chief Financial Officer of Hybrid. (b) MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to Hybrid shall have occurred since the date of this Agreement. 7.2 COVENANTS. Hybrid shall have performed and complied in all material respects with all of its covenants contained in Section 5 on or before the Closing Date, and Pacific shall have received a certificate to such effect executed on behalf of Hybrid by its President or Chief Financial Officer. 7.3 COMPLIANCE WITH LAW. There shall be no order, decree, or ruling by any court or governmental agency or threat thereof, or any other fact or circumstance, which would prohibit or render illegal the transactions contemplated by this Agreement. 7.4 GOVERNMENT CONSENTS. There shall have been obtained at or prior to the Closing Date such permits or authorizations, and there shall have been taken such other actions, as may be required to consummate the Merger by any regulatory authority having jurisdiction over the parties and the A-1-23 actions herein proposed to be taken, including but not limited to satisfaction of all requirements under applicable federal and state securities laws. 7.5 DOCUMENTS. Pacific shall have received all written consents, assignments, waivers, authorizations or other certificates reasonably deemed necessary by Pacific's legal counsel to consummate the transactions provided for herein. 7.6 FORM S-4. The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order and the Prospectus/Proxy Statement shall on the Closing Date not be subject to any proceedings commenced or threatened by the SEC unless withdrawn. 7.7 OPINION OF HYBRID'S COUNSEL. Pacific shall have received from Fenwick & West LLP, counsel to Hybrid, an opinion substantially in the form of EXHIBIT M. 7.8 INVESTOR RIGHTS AGREEMENT. Certain Pacific Holders will have received registration rights under an Investor Rights Agreement in the form attached as EXHIBIT N, executed and delivered by Hybrid. 7.9 SHAREHOLDER AND STOCKHOLDER APPROVAL. The principal terms of this Agreement and the Agreement of Merger shall have been approved and adopted by the Pacific shareholders, as required by applicable law and Pacific's Articles of Incorporation and Bylaws, and by the Hybrid stockholders, as required by applicable law and Hybrid's Certificate of Incorporation and Bylaws. 7.10 EMPLOYMENT AND NONCOMPETITION AGREEMENTS. Hybrid shall have executed and delivered the Employment Agreements and the Noncompetition Agreements. 7.11 BOARD SEATS. Richard B. Gold and Matt Miller shall have been appointed to the Board of Directors of Hybrid and Hybrid shall have executed its standard form of indemnity agreement with Messrs. Gold and Miller as Hybrid directors. 8. CONDITIONS TO OBLIGATIONS OF HYBRID The obligations of Hybrid hereunder are subject to the fulfillment or satisfaction on, and as of the Closing, of each of the following conditions (any one or more of which may be waived by Hybrid, but only in a writing signed on behalf of Hybrid by its President or Chief Financial Officer): 8.1 (a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Pacific contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement. The representations and warranties of Pacific hereunder shall be deemed not to be true and correct in all material respects on the date of this Agreement only if the aggregate amount of losses or damages reasonably related to, arising out of or expected to arise out of any breach of such representations and warranties (without regard to any limitations for materiality that are contained in the individual representations and warranties) are reasonably expected to have a Material Adverse Effect on Pacific. In addition, the representations and warranties of Pacific contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date except for changes contemplated by this Agreement and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect as if made on and as of the Closing Date, except in such cases where the failure to be so true and correct would not have a Material Adverse Effect on Pacific. Hybrid shall have received a certificate with respect to the foregoing signed on behalf of Pacific by the Chief Executive Officer and the Chief Financial Officer of Pacific. (b) MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to Pacific shall have occurred since the date of this Agreement. A-1-24 8.2 COVENANTS. Pacific shall have performed and complied in all material respects with all of its covenants contained in Section 4 on or before the Closing and Hybrid shall have received a certificate to such effect signed on behalf of Pacific by its President and Chief Financial Officer. 8.3 COMPLIANCE WITH LAW. There shall be no order, decree, or ruling by any court or governmental agency or threat thereof, or any other fact or circumstance, which would prohibit or render illegal the transactions provided for in this Agreement. 8.4 GOVERNMENT CONSENTS. There shall have been obtained at or prior to the Closing Date such permits or authorizations and there shall have been taken such other action, as may be required to consummate the Merger by any regulatory authority having jurisdiction over the parties and the actions herein proposed to be taken, including but not limited to satisfaction of all requirements under applicable federal and state securities laws. 8.5 DOCUMENTS. Hybrid shall have received all written consents, assignments, waivers, authorizations or other certificates reasonably deemed necessary by Hybrid's legal counsel, as listed on Exhibit P, to provide for the continuation in full force and effect of any and all material contracts and leases of Pacific. 8.6 FORM S-4. The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order and the prospectus/Proxy Statement shall on the Closing not be subject to any proceedings commenced or threatened by the SEC unless withdrawn. 8.7 OPINION OF PACIFIC'S COUNSEL. Hybrid shall have received from Wilson Sonsini Goodrich & Rosati Professional Corporation, counsel to Pacific, an opinion substantially in the form of EXHIBIT O. 8.8 REQUISITE APPROVALS; DISSENTING SHARES. The principal terms of this Agreement and the Agreement of Merger shall have been approved and adopted by the Pacific shareholders, as required by applicable law and Pacific's Articles of Incorporation and Bylaws, and by the Hybrid stockholders, as required by applicable law and Hybrid's Certificate of Incorporation and Bylaws. Pacific shall comply with the California Corporations Code with respect to any Pacific dissenting shares. No more than five percent (5%) of Pacific's Capital Stock shall be Eligible Dissenting Shares. 8.9 NO LITIGATION. No litigation or proceeding shall be pending which will have the probable effect of enjoining or preventing the consummation of any of the transactions provided for in this Agreement. No litigation or proceeding shall be pending which could reasonably be expected to have a Material Adverse Effect that has not been previously disclosed to Hybrid herein. 8.10 POOLING OPINION. Hybrid shall have received from Coopers & Lybrand L.L.P. an opinion, in form and substance satisfactory to Hybrid, that the Merger will be treated as a "pooling of interests" for accounting purposes; provided that the failure of Coopers & Lybrand L.L.P. to deliver such opinion shall not constitute a failure of this condition if Coopers & Lybrand L.L.P. shall refuse to issue such an opinion because of actions taken by Hybrid (unless with Pacific's consent) between the signing of this Agreement and the Closing Date. 8.11 ESCROW. Hybrid shall have received the Escrow Agreement, substantially in the form attached hereto as Exhibit B, executed by the Representative of the Pacific Holders, which agreement provides for the escrow of the Escrow Shares on the terms and conditions of the Escrow Agreement. 8.12 EMPLOYMENT AND NONCOMPETITION AGREEMENTS. Richard B. Gold, Mike Morganstern and Allen Podell will have executed and delivered to Hybrid the Employment Agreements, which agreements will become effective upon the Effective Time of the Merger. Richard B. Gold, Mike Morganstern and Allen Podell will have executed and delivered to Hybrid the Noncompetition Agreements, which agreements will become effective upon the Effective Time of the Merger. A-1-25 8.13 PACIFIC AFFILIATES AGREEMENT. Each of the affiliates of Pacific will have executed and delivered to Hybrid the Pacific Affiliates Agreement in the form of Exhibit I. 9. TERMINATION OF AGREEMENT 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the shareholders of Pacific: (a) by the mutual written consent of Hybrid and Pacific; (b) Unless otherwise specifically provided herein or agreed in writing by Hybrid and Pacific, upon notice by either party, this Agreement will be terminated if all the conditions to Closing have not been satisfied or waived on or before July 31, 1998 (the "FINAL DATE") other than as a result of a breach of this Agreement by the terminating party, or a breach by any of the affiliates of the terminating party of the Affiliate Agreements. (c) by Pacific, if there has been a breach by Hybrid of any representation, warranty, covenant or agreement set forth in this Agreement on the part of Hybrid, or if any representation of Hybrid will have become untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect on Hybrid and which Hybrid fails to cure within a reasonable time, not to exceed thirty (30) days, after written notice thereof (except that no cure period will be provided for a breach by Hybrid which by its nature cannot be cured); (d) by Hybrid, if there has been a breach by Pacific of any representation, warranty, covenant or agreement set forth in this Agreement on the part of Pacific, or if any representation of Pacific will have become untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect on Pacific and which Pacific fails to cure within a reasonable time not to exceed thirty (30) days after written notice thereof (except that no cure period will be provided for a breach by Pacific which by its nature cannot be cured); (e) by either party if the required approvals of the shareholders of Pacific or the stockholders of Hybrid will not have been obtained by reason of the failure to obtain the required vote; or (f) by either party, if a permanent injunction or other order by any Federal or state court which would make illegal or otherwise restrain or prohibit the consummation of the Merger will have been issued and will have become final and nonappealable. Any termination of this Agreement under this Section 9.1 will be effective by the delivery of written notice of the terminating party to the other party hereto. 9.2 EXTENSION OF FINAL DATE IN EVENT OF INJUNCTION. Notwithstanding the foregoing, if a temporary, preliminary or permanent injunction or other order by any federal or state court which would prohibit or otherwise restrain consummation of the Merger will have been issued and will remain in effect on the Final Date, and such injunction will not have become final and nonappealable, either party, by giving the other written notice thereof on or prior to such date, may extend the time for consummation of the Merger up to and including the earlier of the date such injunction will become final and non-appealable or 45 days after the Final Date, so long as such party will, at its own expense, use reasonable efforts to have such injunction dissolved. 9.3 TERMINATION PAYMENT. 9.3.1 In the event that this Agreement is terminated pursuant to Section 9.1(d) above solely because (a) Pacific fails to satisfy Section 8.8 because more than 5% of Pacific's Capital Stock constitutes Eligible Dissenting Shares; or (b) Pacific fails to satisfy Section 8.10 because of actions taken by Pacific after the date of this Agreement, then Pacific shall pay to Hybrid, within 15 days after the date of such termination, a termination payment of $375,000 plus expenses incurred in connection with the Merger, including attorneys fees. In the event that this Agreement is A-1-26 terminated pursuant to 9.1(c) above solely because Hybrid fails to receive a pooling opinion from Coopers & Lybrand L.L.P. because of actions taken by Hybrid after the date of this Agreement, then Hybrid shall pay to Pacific, within 15 days after the date of such termination, a termination payment of $375,000 plus expenses incurred in connection with the Merger, including attorneys fees. Any payment made pursuant to this Section 9.3.1 shall hereinafter be designated a "TERMINATION PAYMENT." Neither party shall be obligated to make a Termination Payment if this Agreement is terminated for any other reason. 9.3.2 If this Agreement is terminated under circumstances that a party believes entitles it ("THE RECEIVING PARTY") to receive the Termination Payment and the other party (the "TERMINATING PARTY") indicates that it does not intend to pay the Receiving Party the Termination Payment, then such party, by written notice delivered to the Terminating Party, will have the right to submit the issue of whether the Receiving Party is entitled to receive the Termination Payment to arbitration under Section 11.1 hereof. In such event, each of Pacific and Hybrid will either agree on a mutually acceptable arbitrator within ten business days of the Terminating Party's receipt of the Receiving Party's notice, or if agreement has not been reached by that date, each party will deliver to the other by that date the name of their designated arbitrator. If any party fails to deliver the name of such designated arbitrator to the other, then the arbitrator selected by the party that complied with the terms of this Section 9.3.3 will be the sole arbitrator of the dispute. If Hybrid and Pacific deliver the name of their designated arbitrator to each other as required hereunder, such designated arbitrators will, within ten business days after being so designated, appoint a third, mutually acceptable arbitrator. The arbitrator (if one arbitrator is selected hereunder) or a majority of the arbitrators (if three arbitrators are selected hereunder) will, within the next thirty days solicit such information from Hybrid and Pacific such that it or they, as appropriate, can render their judgment within ten days thereafter as to whether or not the Termination Payment is due hereunder. 9.4 CERTAIN CONTINUING OBLIGATIONS. Following any termination of this Agreement pursuant to this Section 9, the parties hereto will continue to perform their respective obligations under Sections 9 and 11 but will not be required to continue to perform their other covenants under this Agreement. 10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS 10.1 SURVIVAL OF REPRESENTATIONS. 10.1.1 REPRESENTATIONS OF PACIFIC. All representations, warranties and covenants of Pacific contained in this Agreement will remain operative and in full force and effect after the Closing, regardless of any investigation made by or on behalf of the parties to this Agreement; PROVIDED, HOWEVER, that (a) no claim for violations of representations and warranties contained in Section 2.7 shall be made unless Hybrid gives written notice to Pacific no later than the date of issuance of Hybrid's press release regarding its audited financial results for the fiscal year ending December 31, 1998. (b) no claim for violations of representations and warranties other than those contained in Section 2.7 shall be made unless Hybrid gives written notice to Pacific on or prior to twelve months after the Closing; and The applicable date after which claims are barred under Section 10.1.1(a) or (b) shall be referred to as the "APPLICABLE EXPIRATION DATE." Except for the obligations of Pacific under Sections 9 and 11, the representations, warranties and covenants of Pacific contained in this Agreement will terminate as of the termination of this Agreement in A-1-27 accordance with its terms. Any judgment or settlement of a claim against Pacific for a breach of its obligations hereunder brought after the Effective Time will be settled in Hybrid Common Stock, valued at the Closing Price. 10.1.2 REPRESENTATIONS OF HYBRID. Except for Hybrid's obligations pursuant to Sections 9 and 11, Hybrid's representations, warranties and covenants contained in this Agreement will terminate as of the termination of this Agreement in accordance with its terms or, if the Closing occurs, such representations, warranties and covenants will terminate upon the Closing. 10.2 PACIFIC AGREEMENT TO INDEMNIFY. 10.2.1 GENERAL INDEMNIFICATION BY PACIFIC HOLDERS. Subject to the limitations set forth in this Section 10.2, the Pacific Holders will indemnify and hold harmless Hybrid and its respective officers, directors, agents and employees, and each person, if any, who controls or may control Hybrid within the meaning of the Securities Act (hereinafter in this Section 10.2 referred to individually as an "INDEMNIFIED PERSON" and collectively as "INDEMNIFIED PERSONS") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees (collectively, "DAMAGES"): (a) Arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties or covenants given or made by Pacific in this Agreement or any certificate, document or instrument delivered by or on behalf of Pacific or by one of the Pacific Holders pursuant hereto; or (b) Resulting from any failure of any Pacific Holders to have good, valid and marketable title to the issued and outstanding Pacific capital stock held by such shareholders, free and clear of all liens, claims, pledges, options, adverse claims, assessments or charges of any nature whatsoever, or to have full right, capacity and authority to vote such Pacific capital stock in favor of the Merger and the other transactions contemplated by the Agreement of Merger. 10.2.2 LIMITATIONS. Except as provided under Section 10.2.3, this Section 10.2 sets forth the sole and exclusive remedies of the Indemnified Persons for misrepresentation or breach of or default in connection with any of the representations, warranties or covenants given by or on behalf of Pacific or by one of the Pacific Shareholders pursuant hereto. The Pacific Holders shall not incur liability under Section 10.2.1 beyond the Escrow Shares and the Indemnified Persons shall exercise their remedies only with respect to the Escrow Shares and any other assets deposited in escrow pursuant to the Escrow Agreement. The Pacific Holders shall settle any claims for indemnification by returning to Hybrid shares of Hybrid Common Stock valued at the Closing Price. The indemnification provided for in Section 10.2.1 will not apply unless and until the aggregate Damages for which one or more Indemnified Persons seeks indemnification under Section 10.2 exceeds $100,000, in which event the indemnification provided for in Section 10.2 will include all Damages. 10.2.3 EXCEPTIONS TO LIMITATIONS. None of the provisions of this Section 10 or of the Escrow Agreement shall in any manner limit the liability or indemnification obligations of the Pacific Holders with respect to (i) claims of intentional misrepresentation or fraud and (ii) any criminal matters. 10.2.4 SURVIVAL OF CLAIMS. Notwithstanding anything to the contrary, if, prior to the expiration of a particular representation or warranty, an Indemnified Person makes a claim for indemnification under either this Agreement or the Escrow Agreement with respect to a misrepresentation or breach of such representation or warranty, then the Indemnified Person's rights to indemnification under this Section 10.2 for such claim shall survive any expiration of such representation or warranty. A-1-28 10.2.5 INDEMNIFICATION PROCEDURES. Alan Dishlip, who shall act as representative (the "REPRESENTATIVE") of the Pacific Holders for purposes of the Escrow Agreement and the indemnifications provisions of this Section 10.2, is duly authorized to be such Representative and may bind the Pacific Holders. Promptly after the receipt by Hybrid of notice or discovery of any claim, damage, legal action or proceeding (a "CLAIM") giving rise to indemnification rights under this Agreement, Hybrid will give the Representative and the Escrow Agent written notice of such Claim in accordance with Section 3 of the Escrow Agreement. Hybrid may assert a Claim at any time prior to the Applicable Expiration Date. 11. MISCELLANEOUS 11.1 GOVERNING LAW; DISPUTE RESOLUTION. The internal laws of the State of California (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Any dispute hereunder ("DISPUTE") shall be settled by arbitration in Santa Clara County, California, and, except as herein specifically stated, in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA RULES") then in effect. However, in all events, these arbitration provisions shall govern over any conflicting rules which may now or hereafter be contained in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the subject matter thereof. The arbitrator shall have the authority to grant any equitable and legal remedies that would be available in any judicial proceeding instituted to resolve a Dispute. 11.1.1 COMPENSATION OF ARBITRATOR. Any such arbitration will be conducted before a single arbitrator who will be compensated for his or her services at a rate to be determined by the parties or by the American Arbitration Association, but based upon reasonable hourly or daily consulting rates for the arbitrator in the event the parties are not able to agree upon his or her rate of compensation. 11.1.2 SELECTION OF ARBITRATOR. The American Arbitration Association will have the authority to select an arbitrator from a list of arbitrators who are lawyers familiar with California contract law; provided, however, that such lawyers cannot work for a firm then performing services for either party, that each party will have the opportunity to make such reasonable objection to any of the arbitrators listed as such party may wish and that the American Arbitration Association will select the arbitrator from the list of arbitrators as to whom neither party makes any such objection. In the event that the foregoing procedure is not followed, each party will choose one person from the list of arbitrators provided by the American Arbitration Association (provided that such person does not have a conflict of interest), and the two persons so selected will select from the list provided by the American Arbitration Association the person who will act as the arbitrator. 11.1.3 PAYMENT OF COSTS. Hybrid and Pacific after the Closing will bear the expense of deposits and advances required by the arbitrator in equal proportions, but either party may advance such amounts, subject to recovery as an addition or offset to any award. The arbitrator will award to the prevailing party, as determined by the arbitrator, all costs, fees and expenses related to the arbitration, including reasonable fees and expenses of attorneys, accountants and other professionals incurred by the prevailing party. 11.1.4 BURDEN OF PROOF. For any Dispute submitted to arbitration, the burden of proof will be as it would be if the claim were litigated in a judicial proceeding. 11.1.5 AWARD. Upon the conclusion of any arbitration proceedings hereunder, the arbitrator will render findings of fact and conclusions of law and a written opinion setting forth the basis A-1-29 and reasons for any decision reached and will deliver such documents to each party to this Agreement along with a signed copy of the award. 11.1.6 TERMS OF ARBITRATION. The arbitrator chosen in accordance with these provisions will not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement. 11.1.7 EXCLUSIVE REMEDY. Except as specifically otherwise provided in this Agreement, arbitration will be the sole and exclusive remedy of the parties for any Dispute arising out of this Agreement. 11.2 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.3 SEVERABILITY. If any provision of this Agreement, or the application thereof, is for any reason held to any extent to be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 11.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be an original as regards any party whose name appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, bear the signatures of both parties reflected hereon as signatories. 11.5 OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 11.6 AMENDMENT AND WAIVERS. This Agreement may be amended by the parties hereto at any time before approval of the Pacific Holders. Any term or provision 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 by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. 11.7 NO WAIVER. The failure of any party to enforce any of the provisions hereof will not be construed to be a waiver of the right of such party thereafter to enforce such provisions. The waiver by any party of the right to enforce any of the provisions hereof on any occasion will not be construed to be a waiver of the right of such party to enforce such provision on any other occasion. 11.8 EXPENSES. Each party will bear its respective expenses and fees of its own accountants, attorneys, investment bankers and other professionals incurred with respect to this Agreement and the transactions contemplated hereby. If the Merger is consummated, Hybrid will pay at the Closing the reasonable accounting and attorneys' fees and expenses and other fees and expenses incurred by Pacific in connection with the Merger. Pacific estimates that Merger expenses will be approximately $175,000 for fees and expenses of lawyers, accountants and other professionals, other than UBS Securities. Unless any fees or expenses incurred by Pacific in excess of the applicable amount set forth above are paid by the Pacific Holders on or before the Closing, Hybrid will pay such excess fees or expenses, but in which event Hybrid will be entitled to be reimbursed by the Pacific Holders for such A-1-30 payment and, if not so reimbursed, Hybrid will be entitled to treat the amount of payment as Damages recoverable under Section 10.2 and as an Uncontested Claim under the Escrow Agreement. 11.9 NOTICES. Any notice or other communication required or permitted to be given under this Agreement will be in writing, will be delivered personally or by mail or express delivery, postage prepaid, and will be deemed given upon actual delivery or, if mailed by registered or certified mail, on the third business day following deposit in the mails, addressed as follows: (i) If to Hybrid: Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95104 Attention: Carl S. Ledbetter, Chief Executive Officer with a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attention: Edwin N. Lowe, Esq. Phone: (650) 494-0600 Fax: (650) 494-1417 (ii) If to Pacific: Pacific Monolithics, Inc. 1308 Moffett Park Drive Sunnyvale, CA 94089 Attention: Richard B. Gold, Chief Executive Officer with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Rd Palo Alto, CA 94304 Attention: James N. Strawbridge, Esq. Phone: (650) 493-9300 Fax: (650) 493-6811 or to such other address as the party in question may have furnished to the other party by written notice given in accordance with this Section 11.9. 11.10 CONSTRUCTION OF AGREEMENT. The language hereof will not be construed for or against either party. A reference to an article, section or exhibit will mean an article or section in, or an exhibit to, this Agreement, unless otherwise explicitly set forth. The titles and headings in this Agreement are for reference purposes only and will not in any manner limit the construction of this Agreement. For the purposes of such construction, this Agreement will be considered as a whole. 11.11 NO JOINT VENTURE. Nothing contained in this Agreement will be deemed or construed as creating a joint venture or partnership between the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party will have the power to control the activities and operations of any other, and the parties' status is, and at all times, will continue to be, that of independent contractors with respect to each other. No party will have any power or authority to bind or commit any other. No party will hold itself out as having any authority or relationship in contravention of this Section. A-1-31 11.12 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other party and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by the other party to evidence and reflect the transactions provided for herein and to carry into effect the intent of this Agreement. 11.13 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, partner or employee of any party hereto or any other person or entity, unless specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. 11.14 PUBLIC ANNOUNCEMENT. Hybrid and Pacific will issue a press release approved by both parties announcing the Merger as soon as practicable following the execution of this Agreement. Hybrid may issue such press releases, and make such other disclosures regarding the Merger, as it determines to be required or appropriate under applicable securities laws or Nasdaq Stock Market rules after reasonable consultation, where possible, with Pacific. Pacific will not make any other public announcement or disclosure of the transactions contemplated by this Agreement. Pacific will take all reasonable precautions to prevent any trading in the securities of Hybrid by officers, directors, employees and agents of Pacific, (a) having knowledge of any material information regarding Hybrid provided hereunder until the information in question has been publicly disclosed or (b) to the extent that such trading would adversely affect the treatment of the Merger as a "pooling of interests" for accounting purposes. 11.15 CONFIDENTIALITY. Except as expressly authorized by Hybrid in writing, Pacific will not directly or indirectly divulge to any person or entity or use any Hybrid Confidential Information, except as required for the performance of its duties under this Agreement. Except as expressly authorized by Pacific in writing, Hybrid will not directly or indirectly divulge to any person or entity or use any Pacific Confidential Information, except as required for the performance of its duties under this Agreement. As used herein, "HYBRID CONFIDENTIAL INFORMATION" consists of (a) any information designated by Hybrid as confidential whether developed by Hybrid or disclosed to Hybrid by a third party, (b) the source code to any Hybrid software and any trade secrets relating to any of the foregoing, and (c) any information relating to Hybrid's product plans, product designs, product costs, product prices, product names, finances, marketing plans, business opportunities, personnel, research development or know-how. As used herein, "PACIFIC CONFIDENTIAL INFORMATION" consists of (x) any information designated by Pacific as confidential whether developed by Pacific or disclosed to Pacific by a third party, (y) the source code to any Pacific software and any trade secrets related to any of the foregoing, and (z) any information relating to Pacific product plans, product designs, product costs, product prices, product names, finances, marketing plans, business opportunities, personnel, research, development or know-how. "Hybrid Confidential Information" and "Pacific Confidential Information" also include the terms and conditions of this Agreement, except as disclosed in accordance with Section 11.14 above. The foregoing restriction will apply to information about a party whether or not it was obtained from such party's employees, acquired or developed by the other party during such other party's performance under this Agreement, or otherwise learned. The foregoing restrictions will not apply to information that (i) has become publicly known through no wrongful act of the receiving party, (ii) has been rightfully received from a third party authorized by the party which is the owner, creator or compiler to make such disclosure without restriction, (iii) has been approved or released by written authorization of the party which is the owner, creator or compiler, or (iv) is being or has therefore been disclosed pursuant to a valid court order after a reasonable attempt has been made to notify the party which is the owner, creator or compiler. 11.16 TIME IS OF THE ESSENCE. The parties hereto acknowledge and agree that time is of the essence in connection with the execution, delivery and performance of this Agreement, and that they will each utilize reasonable efforts to satisfy all the conditions to Closing on or before May 31, 1998. A-1-32 11.17 ENTIRE AGREEMENT. This Agreement and the exhibits hereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance or usage of trade inconsistent with any of the terms hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HYBRID NETWORKS, INC. PACIFIC MONOLITHICS, INC. /s/ CARL S. LEDBETTER /s/ RICHARD B. GOLD ----------------------------------- ----------------------------------- Carl S. Ledbetter, PRESIDENT AND Richard B. Gold, PRESIDENT AND CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER By: By: HN ACQUISITION CORP. /s/ DANIEL E. STEIMLE ----------------------------------- Daniel E. Steimle PRESIDENT AND SECRETARY By:
SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION A-1-33 APPENDIX A-2 AGREEMENT OF MERGER OF HN ACQUISITION CORP. WITH AND INTO PACIFIC MONOLITHICS, INC. This Agreement of Merger ("AGREEMENT") is entered into as of , 1998 by and between HN Acquisition Corp., a Delaware corporation ("NEWCO") (nonsurvivor) that is a wholly-owned subsidiary of Hybrid Networks, Inc., a Delaware corporation ("Hybrid"), and Pacific Monolithics, Inc., a California corporation ("PACIFIC") (survivor). 1. EFFECTIVE TIME OF MERGER. Pursuant to the California Corporations Code and the Law of the State of Delaware, Newco will be merged with and into Pacific in a reverse triangular merger (the "MERGER"), with Pacific to be the surviving corporation of the Merger. The Merger will be effective (the "EFFECTIVE TIME") on , 1998, the date on which a copy of this Agreement and all required officers' certificates and other appropriate documents are filed with the Secretary of State of California. 2. CONVERSION OF SECURITIES. (a) CONVERSION OF PACIFIC SHARES. At the Effective Time, each share of Pacific Common Stock, no par value ("PACIFIC COMMON STOCK") and each share of Pacific Preferred Stock, no par value ("PACIFIC PREFERRED STOCK", and together with the Pacific Common Stock, the "PACIFIC CAPITAL STOCK"), issued and outstanding immediately prior to the Effective Time other than shares, if any, for which dissenters rights have been or will be perfected in compliance with applicable law, will, by virtue of the Merger and without further action on the part of any holder thereof, be converted into (the "APPLICABLE NUMBER") shares of fully paid and nonassessable shares of Hybrid Common Stock, $0.001 par value ("HYBRID COMMON STOCK"). No fractional shares of Hybrid Common Stock will be issued in connection with the Merger, but in lieu thereof, Hybrid will pay an amount of cash equal to $ (the "CLOSING PRICE") multiplied by the fraction of a share of Hybrid Common Stock to which such holder would otherwise be entitled. (b) CONVERSION AND ASSUMPTION OF OPTIONS AND WARRANTS. Each option or warrant to purchase shares of Pacific Capital Stock that is outstanding immediately prior to the Effective Time (a "PACIFIC OPTION" or a "PACIFIC WARRANT," as the case may be) will, by virtue of the Merger at the Effective Time and without further action on the part of any holder thereof, be converted and assumed by Hybrid into an option or warrant (a "HYBRID OPTION" or "HYBRID WARRANT," as the case may be) to purchase that number of shares of Hybrid Common Stock which equals the Applicable Number multiplied by the number of shares of Pacific Capital Stock purchasable immediately prior to the Effective Time under the Pacific Option or Pacific Warrant, rounded down to the nearest whole share. The exercise price per share of Hybrid Common Stock purchasable under each such Hybrid Option or Hybrid Warrant will be equal to the exercise price of the Pacific Option or Pacific Warrant (per share of Pacific Common Stock) divided by the Applicable Number, rounded up to the nearest whole cent. All of the other terms of each Hybrid Option or Hybrid Warrant will be the same in all material respects as the corresponding Pacific Option or Pacific Warrant that is being replaced and converted. (c) ESCROW SHARES. Pursuant to the Escrow Agreement, at the closing of the Merger, Hybrid or its exchange agent will (i) deduct, pro rata, from the shares of Hybrid Common Stock that would otherwise be delivered to former holders of Pacific Capital Stock (the "SHAREHOLDERS") that number of shares representing ten percent (10%) of the total number of shares of Hybrid Common Stock issued to them in the Merger, and (ii) deliver on behalf of the Shareholders, certificates representing the shares thus withheld to State Street Bank and Trust Company, as escrow agent (the "ESCROW AGENT"). The shares of Hybrid Common Stock withheld pursuant to this Section 2(c) at the closing of the A-2-1 Merger (the "ESCROW SHARES") will be held in escrow pursuant to a separate Escrow Agreement to secure the indemnification obligations of the Shareholders. (d) SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES. Each certificate which immediately before the Effective Time evidenced shares of Pacific Capital Stock will, from and after the Effective Time until such certificate is surrendered to Hybrid or its transfer agent, be deemed, for all corporate purposes, to evidence the right to receive the consideration described above (subject to the terms and conditions of the Escrow Agreement); provided, however, that until such certificate is so surrendered by a Shareholder, no dividend or other distribution payable to such Shareholder after the Effective Time will be paid in respect of the shares of Hybrid Common Stock represented by such certificate. Upon surrender, all dividends and distributions, if any, therefore declared and accrued but unpaid in respect of such shares, will be paid. The Shareholders will be requested to surrender to Hybrid or its transfer agent, as soon as practicable after the Effective Time, the certificate or certificates representing all the shares of Pacific Capital Stock issued and outstanding immediately prior to the Effective Time. Upon such surrender, the Shareholders will be entitled to receive certificate(s) evidencing ownership of the shares of Hybrid Common Stock which are deemed to be represented by the certificate or certificates surrendered (which do not include the Escrow Shares). As soon as practicable following such surrender Hybrid or its transfer agent will issue to the Shareholders such certificate(s). (e) ASSUMPTION OF OPTIONS AND WARRANTS. Promptly after the Effective Time, Hybrid will notify in writing each holder of a Pacific Option or Pacific Warrant of the assumption of such Pacific Option or Pacific Warrant by Hybrid, and the number of shares of Hybrid Common Stock that are then subject to such option or warrant and the exercise price of such option or warrant. 3. CONVERSION OF NEWCO SHARES. Each share of Newco Common Stock, $0.001 par value ("NEWCO COMMON STOCK"), that is issued and outstanding immediately prior to the Effective Time will, by virtue of the Merger and without further action on the part of the sole stockholder of Newco, will be converted into and become one (1) share of Pacific Common Stock that is issued and outstanding immediately after the Effective Time, and the shares of Pacific Common Stock into which the shares of Newco Common Stock are so converted shall be the only shares of Pacific Capital Stock that are issued and outstanding immediately after the effective time. 4. PLAN. Hybrid and Pacific are parties to the Agreement and Plan of Reorganization dated as of March 19, 1998 (the "PLAN"). The Plan and this Agreement are intended to be construed together in order to effectuate their purposes. 5. EFFECTS OF MERGER. At the Effective Time: (a) the separate existence of Newco will cease and Newco will be merged with and into Pacific and Pacific will be the surviving corporation pursuant to the terms of this Agreement; (b) the Articles of Incorporation of Pacific will be amended as attached hereto as EXHIBIT A and the Bylaws of Pacific will continue unchanged as the Bylaws of the surviving corporation; (c) each share of Pacific Capital Stock outstanding immediately prior to the Effective Time will be converted as provided in Section 2 of this Agreement; (d) each share of Newco Common Stock outstanding immediately prior to the Effective Time will be converted into one (1) outstanding share of Pacific Common Stock; (e) Richard B. Gold and Matt Miller will be appointed to the Board of Directors of Hybrid as Class I directors, with the current Class I directors resigning as of the Effective Time and Richard B. Gold will be appointed the President and Chief Operating Officer of Hybrid and the remaining directors and executive officers of Hybrid otherwise remaining unchanged, and the sole director of Newco immediately prior to the Effective Time will become the sole director of the surviving corporation and the officers of Newco immediately prior to the Effective Time will become the officers of the surviving corporation; and (f) the Merger will, at and after the Effective Time, have all of the effects provided by applicable law. A-2-2 6. FURTHER ASSIGNMENTS. After the Effective Time, Pacific and its officers and directors may execute and deliver such deeds, assignments and assurances and do all other things necessary or desirable to vest, perfect or confirm title to Newco's property or rights in Pacific and otherwise to carry out the purposes of the Plan in the name of Newco or otherwise. 7. TERMINATION. This Agreement may be terminated and the proposed Merger abandoned at any time prior to the Effective Time, whether before or after approval of this Agreement by the Shareholders of Pacific or the stockholders of Hybrid, by either party hereto upon termination of the Plan or by the mutual consent of the Boards of Directors of Hybrid and Pacific. 8. DISSENTING SHARES. Holders of Pacific Capital Stock who have complied with all requirements for perfecting the rights of dissenting shareholders as set forth in Section 1300, et. seq., of the California Corporations Code (the "CALIFORNIA CODE") shall be entitled to their rights under the California Code. 9. ASSIGNMENT. Neither party hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors, personal representatives and permitted assigns. 10. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and to be performed wholly within the State of California without regard to principles of conflict of laws. 11. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and year first above written. HN ACQUISITION CORP. PACIFIC MONOLITHICS, INC. By: By: --------------------------- --------------------------- Daniel E. Steimle, Richard B. Gold, President President and Secretary and Secretary A-2-3 EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PACIFIC MONOLITHICS, INC. ARTICLE I The name of the corporation is Pacific Monolithics, Inc. ARTICLE II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the California Corporations Code other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Unless applicable law otherwise provides, any amendment, repeal or modification of this Article III shall not adversely affect any right of any director under this Article III that existed at or prior to the time of such amendment, repeal or modification. ARTICLE IV The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, by agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Unless applicable law otherwise provides, any amendment, repeal or modification of any provision of this Article IV shall not adversely affect any contract or other right to indemnification of any agent of the corporation that existed at or prior to the time of such amendment, repeal or modification. ARTICLE V The corporation is authorized to issue only one class of shares of stock, which shall be designated "Common Stock" and which shall have no par value. The total number of shares of Common Stock the corporation is authorized to issue is 1,000 shares. A-2-4 APPENDIX B March 19, 1998 Board of Directors Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014 Gentlemen: We understand that Pacific Monolithics, Inc., a California corporation ("Seller"), and Hybrid Networks, Inc., a Delaware corporation ("Buyer"), propose to enter into an Agreement and Plan of Reorganization to be dated March 19, 1998 (the "Merger Agreement"), pursuant to which a wholly-owned subsidiary of Buyer will be merged with and into Seller, which will be the surviving entity (the "Merger"). Pursuant to the Merger, as more fully described in an undated draft Merger Agreement provided to us by management of Buyer and as further described to us by management of Buyer, we understand that all of the outstanding capital stock and options and warrants to purchase capital stock of Seller will be converted into and exchangeable for shares or options or warrants to purchase shares of the common stock, $.001 par value per share ("Buyer Common Stock") of Buyer, with an aggregate Closing Price (as defined in the Merger Agreement) of $12,500,000, provided that the Closing Price of Buyer Common Stock will not be less than $5.17 per share or more than $8.40 per share, subject to certain adjustments (the "Consideration"). The terms and conditions of the Merger are set forth in more detail in the draft Merger Agreement. You have asked for our opinion as investment bankers as to whether the Consideration to be paid by Buyer pursuant to the Merger is fair to Buyer from a financial point of view, as of the date hereof. In connection with our opinion, we have, among other things: (i) reviewed certain financial and other data with respect to Seller and Buyer, including the consolidated financial statements for recent years and interim periods to February 28, 1998 for Seller and Buyer and certain other relevant financial and operating data relating to Seller and Buyer made available to us from the internal records of Seller and Buyer; (ii) reviewed the financial terms and conditions of the draft Merger Agreement; (iii) compared Seller and Buyer from a financial point of view with certain other companies in the wireless telecommunications industry which we deemed to be relevant; (v) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies in the telecommunications industry which we deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with representatives of the management of Seller and Buyer certain information of a business and financial nature regarding Seller and Buyer, furnished to us by them, including financial forecasts and related assumptions of Seller and Buyer; (vii) made inquiries regarding and discussed the Merger and the draft Merger Agreement and other matters related thereto with Buyer's counsel; and (viii) performed such other analyses and examinations as we have deemed appropriate. In connection with our review, we have not assumed any obligation independently to verify the foregoing information and have relied on its being accurate and complete in all material respects. With respect to the financial forecasts for Seller and Buyer provided to us by their respective managements, upon their advice and with your consent we have assumed for purposes of our opinion that the forecasts (including the assumption regarding cost savings in operations and manufacturing, research and development, sales and marketing and general and administrative expenses) have been reasonably prepared on bases reflecting the best available estimates and judgments of their respective managements at the time of B-1 Board of Directors Hybrid Networks, Inc. March 19, 1998 preparation as to the future financial performance of Seller and Buyer and that they provide a reasonable basis upon which we can form our opinion. We have also assumed that there have been no material changes in Seller's or Buyer's assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to us. We have relied on advice of counsel and independent accountants to Seller and Buyer as to all legal and financial reporting matters with respect to Seller and Buyer, the Merger and the Merger Agreement. We have assumed that the Merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934 and all other applicable federal and state statutes, rules and regulations. In addition, we have not assumed responsibility for making an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (contingent or otherwise) of Seller or Buyer, nor have we been furnished with any such appraisals. You have informed us, and we have assumed, that the Merger will be recorded as a pooling of interests under generally accepted accounting principles. Finally, our opinion is based on economic, monetary and market and other conditions as in effect on, and the information made available to us as of, the date hereof. Accordingly, although subsequent developments may affect this opinion, we have not assumed any obligation to update, revise or reaffirm this opinion. We have further assumed with your consent that the Merger will be consummated in accordance with the terms described in the draft Merger Agreement, without any further amendments thereto, and without waiver by Buyer of any of the conditions to its obligations thereunder. We have acted as financial advisor to Buyer in connection with the Merger and will receive a fee for our services, including rendering this opinion, a significant portion of which is contingent upon the consummation of the Merger. In the ordinary course of our business, we actively trade the equity securities of Buyer for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. We have also acted as an underwriter in connection with an offering of securities of Buyer and performed various investment banking services for Buyer. Based upon the foregoing and in reliance thereon, it is our opinion as investment bankers that the Consideration to be paid by Buyer pursuant to the Merger is fair to Buyer from a financial point of view, as of the date hereof. This opinion is directed to the Board of Directors of Buyer in its consideration of the Merger and is not a recommendation to any shareholder as to how such shareholder should vote with respect to the Merger. Further, this opinion addresses only the financial fairness of the Consideration to Buyer and does not address the relative merits of the Merger and any alternatives to the Merger, Buyer's underlying decision to proceed with or effect the Merger, or any other aspect of the Merger. This opinion may not be used or referred to by Buyer, or quoted or disclosed to any person in any manner, without our prior written consent, which consent is hereby given to the inclusion of this opinion in any proxy statement or prospectus filed with the Securities and Exchange Commission in connection with the Merger. In furnishing this opinion, we do not admit that we are experts within the meaning of the term "experts" as used in the B-2 Board of Directors Hybrid Networks, Inc. March 19, 1998 Securities Act and the rules and regulations promulgated thereunder, nor do we admit that this opinion constitutes a report or valuation within the meaning of Section 11 of the Securities Act. Very truly yours, NATIONSBANC MONTGOMERY SECURITIES LLC B-3 APPENDIX C CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE DISSENTERS' RIGHTS SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING SHAREHOLDER" DEFINED. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. SECTION 1301. DEMAND FOR PURCHASE. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a C-1 brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in subparagraph (A) or (B) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. SECTION 1302. ENDORSEMENT OF SHARES. Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. SECTION 1303. AGREED PRICE--TIME FOR PAYMENT. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT. (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date C-2 on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. C-3 SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the share, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. SECTION 1311. EXEMPT SHARES. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except for an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such C-4 shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that this transaction is just and reasonable as to the shareholders of any party so controlled. C-5 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY 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 indemnity 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 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 II-1 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, has purchased director and officer liability insurance to the fullest extent permitted by the Delaware General Corporation Law. See also the undertakings in response to Item 22. 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 - ---------------------------------------------------------------------------------------------- ----------- Registrant's Amended and Restated Certificate of Incorporation................................ 3.01 Registrant's Amended and Restated Bylaws...................................................... 3.02 Amended and Restated Investors Rights Agreement, dated as of September 18, 1997, between Registrant and certain investors, as amended October 13, 1997 and as amended November 6, 1997........................................................................................ 10.01 Form of Indemnity Agreement................................................................... 10.08
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------------------------------------------------------------------------------------------------- 2.01 Agreement and Plan of Reorganization by and among the Registrant, Pacific Monolithics, Inc. and HN Acquisition Corp., dated March 19, 1998 (included as Appendix A-1 to the Joint Proxy Statement/Prospectus). 2.02 Agreement of Merger of HN Acquisition Corp. with and into Pacific Monolithics, Inc. (included as Appendix A-2 to the Joint Proxy Statement/Prospectus). (1)3.01 Registrant's Amended and Restated Certificate of Incorporation. 3.02 Registrant's Amended and Restated Bylaws. (2)4.01 Form of Specimen Certificate for the Registrant's Common Stock. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 8.01 Opinion of Fenwick & West LLP regarding taxation. (2)10.01 Amended and Restated Investors Rights Agreement, dated as of September 18, 1997, between the Registrant and certain investors, as amended October 31, 1997 and as amended November 6, 1997. (2)10.02 The Registrant's 1993 Equity Incentive Plan. (2)10.03 The Registrant's 1996 Equity Incentive Plan. (2)10.04 The Registrant's Executive Officer Incentive Plan. (2)10.05 The Registrant's 1997 Equity Incentive Plan. (2)10.06 The Registrant's 1997 Directors Stock Option Plan.
II-2
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------------------------------------------------------------------------------------------------- (2)10.07 The Registrant's 1997 Employee Stock Purchase Plan. (2)10.08 Form of Indemnity Agreement entered into by the Registration with each of its directors and executive officers. (2)10.09 Net Lease Agreement between Devcon/Bubb Road Investors and the Registrant dated May 25, 1995. (2)10.10 Sublease between Norian Corporation and the Registrant dated October 24, 1996. (2)10.11 Employment Agreement between the Registrant and Carl S. Ledbetter dated January 15, 1996. (2)10.12 Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between the Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior 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. (2)10.14 Commitment Letter between the Registrant and Venture Banking Group, a division of Cupertino National Bank ("Venture Banking Group"), dated September 16, 1997. (2)10.15 Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 29, 1996 and Addendum No. 1 thereto dated November 25, 1996. (2)10.16 Sales and Purchase Agreement between the Registrant and Itochu Corporation dated January 10, 1997.* (2)10.17 Value Added Reseller Agreement between the Registrant and Internet Ventures, Inc. dated July 1, 1996.* (2)10.18 Value Added Reseller Agreement between the Registrant and Network System Technologies dated November 25, 1996.* (2)10.19 The Registrant's Incentive Based Compensation Program. (2)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 security holders of the Registrant dated October 16, 1997. (2)10.21 Warrant Purchase Agreement by and between the Registrant and Alcatel dated as of November 3, 1997. (3)10.22 Employment Letter between the Registrant and Dan E. Steimle dated July 27, 1997. (3)10.23 Employment Letter between the Registrant and William H. Fry dated May 8, 1996 and Terms of Severance Arrangement with William H. Fry dated January 21, 1998. 10.24 Sublease by and between Viking Freight, Inc. and the Registrant dated February 9, 1998. 10.25 Volume Purchase Agreement between the Registrant and 3D Communications dated as of May 1997. 10.26 Loan and Security Agreement by and between Pacific Monolithics, Inc. and Coast Business Credit, a division of Southern Pacific Bank dated November 14, 1997. 10.27 Employment Agreement between the Registrant and Richard B. Gold dated March 31, 1998. 10.28 Noncompetition Agreement between the Registrant and Richard B. Gold dated March 31, 1998. 10.29 Pacific Monolithics, Inc. 1986 Incentive Stock Option Plan. 10.30 Pacific Monolithics, Inc. 1996 Equity Incentive Plan.
II-3
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------------------------------------------------------------------------------------------------- 10.31 Lease Agreement by and between Aetna Life Insurance Company and Pacific Monolithics, Inc. dated June 12, 1995. 21.01 List of the Registrant's subsidiaries. 23.01 Consent of Fenwick & West LLP (included in Exhibits 5.01 and 8.01). 23.02 Consent of Coopers & Lybrand L.L.P., independent accountants. 23.03 Consent of Deloitte & Touche LLP. 23.04 Consent of Richard B. Gold to serve as a director. 23.05 Consent of Matthew D. Miller to serve as a director. 24.01 Power of Attorney (see Page II-6 of this Registration Statement). 27.01 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to exhibit 3.03 of the Registrant's Registration Statement on Form S-1 (File No. 333-36001) declared effective by the Commission on November 10, 1997 (the "Form S-1"). (2) Incorporated by reference to the same exhibit number of the Form S-1. (3) Incorporated by reference to the same exhibit number of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. * Confidential treatment has been granted with respect to certain portions of this agreement. (b) The following financial statement schedule is filed herewith: Financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS (1) The Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the Registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The Registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately proceeding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), each such post-effective amendment 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. (3) The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus/Proxy Statement pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. II-4 (4) The Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (5) 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 discussed in Item 6 hereof, or otherwise, the Registrant has been advised that in the opinion of the 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 hereby, 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-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California, on this 6th day of May, 1998. HYBRID NETWORKS, INC. By: /s/ CARL S. LEDBETTER ------------------------------------------ Carl S. Ledbetter, PRESIDENT, AND CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Carl S. Ledbetter and Dan E. Steimle, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ CARL S. LEDBETTER President, Chief Executive May 6, 1998 - ------------------------------ Officer and Chairman of Carl S. Ledbetter the Board of Directors PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ DAN E. STEIMLE Vice President, Finance May 6, 1998 - ------------------------------ and Administration, Dan E. Steimle Chief Financial Officer and Secretary ADDITIONAL DIRECTORS: /s/ JAMES R. FLACH Director May 6, 1998 - ------------------------------ James R. Flach /s/ STEPHEN E. HALPRIN Director May 6, 1998 - ------------------------------ Stephen E. Halprin /s/ GARY M. LAUDER Director May 6, 1998 - ------------------------------ Gary M. Lauder /s/ DOUGLAS M. LEONE Director May 6, 1998 - ------------------------------ Douglas M. Leone II-6 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------------------------------------------------------------------------------------------------- 2.01 Agreement and Plan of Reorganization by and among the Registrant, Pacific Monolithics, Inc. and HN Acquisition Corp., dated March 19, 1998 (included as Appendix A-1 to the Joint Proxy Statement/Prospectus). 2.02 Agreement of Merger of HN Acquisition Corp. with and into Pacific Monolithics, Inc. (included as Appendix A-2 to the Joint Proxy Statement/Prospectus). (1)3.01 Registrant's Amended and Restated Certificate of Incorporation. 3.02 Registrant's Amended and Restated Bylaws. (2)4.01 Form of Specimen Certificate for the Registrant's Common Stock. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 8.01 Opinion of Fenwick & West LLP regarding taxation. (2)10.01 Amended and Restated Investors Rights Agreement, dated as of September 18, 1997, between the Registrant and certain investors, as amended October 31, 1997 and as amended November 6, 1997. (2)10.02 The Registrant's 1993 Equity Incentive Plan. (2)10.03 The Registrant's 1996 Equity Incentive Plan. (2)10.04 The Registrant's Executive Officer Incentive Plan. (2)10.05 The Registrant's 1997 Equity Incentive Plan. (2)10.06 The Registrant's 1997 Directors Stock Option Plan. (2)10.07 The Registrant's 1997 Employee Stock Purchase Plan. (2)10.08 Form of Indemnity Agreement entered into by the Registration with each of its directors and executive officers. (2)10.09 Net Lease Agreement between Devcon/Bubb Road Investors and the Registrant dated May 25, 1995. (2)10.10 Sublease between Norian Corporation and the Registrant dated October 24, 1996. (2)10.11 Employment Agreement between the Registrant and Carl S. Ledbetter dated January 15, 1996. (2)10.12 Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between the Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior 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. (2)10.14 Commitment Letter between the Registrant and Venture Banking Group, a division of Cupertino National Bank ("Venture Banking Group"), dated September 16, 1997. (2)10.15 Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 29, 1996 and Addendum No. 1 thereto dated November 25, 1996. (2)10.16 Sales and Purchase Agreement between the Registrant and Itochu Corporation dated January 10, 1997.* (2)10.17 Value Added Reseller Agreement between the Registrant and Internet Ventures, Inc. dated July 1, 1996.* (2)10.18 Value Added Reseller Agreement between the Registrant and Network System Technologies dated November 25, 1996.* (2)10.19 The Registrant's Incentive Based Compensation Program.
EXHIBIT NUMBER EXHIBIT TITLE - --------- ------------------------------------------------------------------------------------------------------- (2)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 security holders of the Registrant dated October 16, 1997. (2)10.21 Warrant Purchase Agreement by and between the Registrant and Alcatel dated as of November 3, 1997. (3)10.22 Employment Letter between the Registrant and Dan E. Steimle dated July 27, 1997. (3)10.23 Employment Letter between the Registrant and William H. Fry dated May 8, 1996 and Terms of Severance Arrangement with William H. Fry dated January 21, 1998. 10.24 Sublease by and between Viking Freight, Inc. and the Registrant dated February 9, 1998. 10.25 Volume Purchase Agreement between the Registrant and 3D Communications dated as of May 1997. 10.26 Loan and Security Agreement by and between Pacific Monolithics, Inc. and Coast Business Credit, a division of Southern Pacific Bank dated November 14, 1997. 10.27 Employment Agreement between the Registrant and Richard B. Gold dated March 31, 1998. 10.28 Noncompetition Agreement between the Registrant and Richard B. Gold dated March 31, 1998. 10.29 Pacific Monolithics, Inc. 1986 Incentive Stock Option Plan. 10.30 Pacific Monolithics, Inc. 1996 Equity Incentive Plan. 10.31 Lease Agreement by and between Aetna Life Insurance Company and Pacific Monolithics, Inc. dated June 12, 1995. 21.01 List of the Registrant's subsidiaries. 23.01 Consent of Fenwick & West LLP (included in Exhibits 5.01 and 8.01). 23.02 Consent of Coopers & Lybrand L.L.P., independent accountants. 23.03 Consent of Deloitte & Touche LLP. 23.04 Consent of Richard B. Gold to serve as a director. 23.05 Consent of Matthew D. Miller to serve as a director. 24.01 Power of Attorney (see Page II-6 of this Registration Statement). 27.01 Financial Data Schedule.
- ------------------------ (1) Incorporated by reference to exhibit 3.03 of the Registrant's Registration Statement on Form S-1 (File No. 333-36001) declared effective by the Commission on November 10, 1997 (the "Form S-1"). (2) Incorporated by reference to the same exhibit number of the Form S-1. (3) Incorporated by reference to the same exhibit number of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. * Confidential treatment has been granted with respect to certain portions of this agreement. EX-3.02 2 EXHIBIT 3.02 EXHIBIT 3.02 AMENDED AND RESTATED BYLAWS OF HYBRID NETWORKS, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of Delaware, as the board of Directors may from time to time authorize or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS SECTION 3. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 4. ANNUAL MEETING. Annual meetings of stockholders, commencing with the year 1991, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. SECTION 5. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of stockholders. SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders, for any purpose or purposes, may be called by the Chairman of the Board of Directors, or by the Chairman or the Secretary at the written request of a majority of the total number of directors which the corporation would have if there were no vacancies. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the stockholders, such officer forthwith shall cause notice to be given to the stockholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than 10 nor more than 60 days after receipt of such request. If such notice is not given within 20 days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 6 shall be construed as limiting, fixing or affecting the time or date when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to Section 6 (b) above, written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at that meeting (see Section 14 below), by the Secretary, assistant secretary or other person charged with that duty, not less than 10 nor more than 60 days before such meeting. Notice of any meeting of stockholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the stockholders; and (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election. At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business started in the notice of such meeting and any other business as may properly come before the meeting. SECTION 8. MANNER OF GIVING NOTICE. Notice of any meeting of stockholders shall be given either personally or by first-class mail, telegraphic or other written communication, addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that stockholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that addresses, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the stockholder on written demand by the stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 8, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. SECTION 9. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the stockholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by law or by the Certificate of Incorporation, and except as provided in Section 9(c). (b) At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (1) pursuant to the corporation's notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in this bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this bylaw. For business to be properly brought before any meeting by a stockholder pursuant to clause (3) of this Section 9 (b), the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 20 days nor more than 60 days prior to the date of the meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf of the proposal is made and (iv) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at a meeting except in accordance with procedures set forth in this Section 9 (b). The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by this Section 9 (b), and if such person should so determine, such person shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 9 (b), a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 (b). (c) The stockholders present at a duly called or held meeting of the stockholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (d) In the absence of a quorum, no business other than adjournment may be transacted, except as described in Section 9 (c). SECTION 10. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 7 and 8; provided that if any of the following three events occur, such notice must be given: (1) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (2) such meeting is adjourned for more than 30 days from the date set for the original meeting or (3) after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 11. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to this Section 11(b), the transactions of any meeting of stockholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 7 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. SECTION 12. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon the closing of the corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of the corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. SECTION 13. VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 14. Unless otherwise provided in the Certificate of Incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. Any stockholder may vote part of such stockholders shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares such stockholder is entitled to vote. SECTION 14. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 15. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of three years from the date of its execution, unless the proxy provides for a longer period. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. SECTION 16. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board of Directors may appoint one or more persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholders proxy shall, appoint a person to fill that vacancy. These inspectors shall: (i) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (ii) receive votes, ballots, or consents; (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote; (iv) count and tabulate all votes or consents; (v) determine when the polls shall close; (vi) determine the result; and (vii) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III BOARD OF DIRECTORS SECTION 17. POWERS. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. SECTION 18. NUMBER OF DIRECTORS. The authorized number of directors of this corporation shall be not less than five and not more than nine. As of the date of the adoption of these bylaws, the number of directors shall be 5, and thereafter the number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies. No reduction in the number of directors shall remove any director prior to the expiration of such director's term of office. Any bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors shall require the affirmative vote of a majority of the total number of directors which the corporation would have if there were no vacancies. In the event of any increase or reduction in the authorized number of directors: (i) each director then serving shall nevertheless continue as a director of the class of which such director is a member until the expiration of such director's current term, or such director's earlier resignation, removal from office or death, and (ii) the newly created or eliminated directorship or directorships resulting from such increase or reduction shall be apportioned by the Board of Directors, by resolution adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies, among the three classes of directors so as to maintain such classes as nearly equal in number as possible. SECTION 19. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be divided into three classes. The term of office of the first class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 1998; the term of office of the second class, which class shall consists of one director, shall expire at the annual meeting of stockholders held in 1999; and the term of office of the third class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 2000. Thereafter, each term of each class shall expire at each third succeeding annual meeting of stockholders after the meeting of stockholders at which the director or directors in such class were elected. Each Director shall serve until his or her successor is elected and qualified, or until his or her earlier resignation or removal. Nominations for election to the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors of the corporation, must be preceded by notification in writing received by the Secretary of the corporation not less than 20 days nor more than 60 days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee: (a) the name, age, residence, address, and business address of each proposed nominee and of each such person; (b) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person; (c) the amount of stock of the corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and (d) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the corporation will or may be a party. The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a nomination not preceded by notification made in accordance with the foregoing procedure shall be disregarded. SECTION 20. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 22 to take office on the date that the resignation becomes effective. SECTION 21. REMOVAL. The entire Board of Directors or any individual director may be removed from office by the affirmative vote of at least a majority of the combined voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. SECTION 22. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if stockholders fail to elect the full authorized number of directors at an annual meeting of stockholders or if, for whatever reason, there are fewer directors on the Board of Directors than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office for the remainder of the term of the class of the director for which such vacancy exists and until their earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute. SECTION 23. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 23 may be held without notice. SECTION 24. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. SECTION 25. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two directors. SECTION 26. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24, shall be delivered personally, orally or in writing, or by telephone, telegraph or facsimile, to each director at least 48 hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 27. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. SECTION 28. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. SECTION 29. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Certificate of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 30 of these bylaws. SECTION 30. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than 24 hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 31. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. SECTION 32. COMPENSATION. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 33. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE IV OFFICERS SECTION 34. OFFICERS. The officers of the corporation shall be a President, Chief Financial Officer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. SECTION 35. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President, a Treasurer, and a Secretary and may choose Vice Presidents. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. SECTION 36. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such Officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary. SECTION 37. RESIGNATION. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. SECTION 38. REMOVAL. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 35, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. SECTION 39. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. SECTION 40. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He/she shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. SECTION 41. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. SECTION 42. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Sections 34 and 35 or otherwise pursuant to these bylaws. SECTION 43. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's stockholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's stockholders, showing the names and addresses of all stockholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Give, or cause to be given, notice of all meetings of stockholders, directors and committees of the Board of Directors, as required by law or by these bylaws. (d) Keep the seal of the corporation, if any, in safe custody. (e) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge Such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 44. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 45. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE V CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS SECTION 46. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 47. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firms, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. SECTION 48. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositories as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. SECTION 49. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made, without counter-signature by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. ARTICLE VI CERTIFICATES FOR STOCK AND THEIR TRANSFER SECTION 50. CERTIFICATE FOR STOCK. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 51. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. SECTION 52. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. SECTION 53. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. ARTICLE VII INSPECTION OF CORPORATE RECORDS SECTION 54. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 55. INSPECTION BY STOCKHOLDERS. (a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at is registered office in the State of Delaware or at its principal place of business. (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 43 and shall be open to inspection by the stockholders at all reasonable times during office hours. A current copy of these bylaws shall be furnished to any stockholder upon written request. SECTION 56. WRITTEN FORM. If any record subject to inspection pursuant to Section 55 is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. ARTICLE VIII MISCELLANEOUS SECTION 57. FISCAL YEAR. Unless otherwise freed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year. SECTION 58. ANNUAL REPORT. (a) Subject to the provisions of Section 58 (b), the Board of Directors shall cause an annual report to be/sent to each stockholder of the corporation in the manner provided in Section 8 of these bylaws not later than 120 days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall be sent to stockholders at least 15 (or, if sent by third-class mail, 35) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. SECTION 59. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 14 shall apply with respect to notice of meetings, votes, and contents and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopt the resolutions relating thereto, or the 60th day prior to the date of such other action or event, whichever is later. Only stockholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Certificate of Incorporation, by agreement or by law. SECTION 60. BYLAW AMENDMENTS. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to make, alter, amend and repeal these bylaws subject to the power of the holders of capital stock of the corporation to alter, amend or repeal the bylaws; provided, however, that, with respect to the powers of holders of capital stock to make, alter, amend and repeal bylaws of the corporation, notwithstanding any other provision of these bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the corporation required by law, these bylaws or any preferred stock, the affirmative vote of the holders of at least a majority of the combined voting power of all of the then-outstanding shares entitled to vote generally in the election of directors, voting together as a single class, shall be required to make, alter, amend or repeal any provision of these bylaws. SECTION 61. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. SECTION 62. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 63. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum of sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 64. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an executive officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 66 with respect to proceedings to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. SECTION 65. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 64 shall include the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 65 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 64 and 65 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. SECTION 66. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 64 or 65 of this ARTICLE IX is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE IX or otherwise shall be on the corporation. SECTION 67. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this ARTICLE IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation's Certificate of Incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 68. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 69. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any officer, employee or agent of the corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and executive officers of the corporation. EX-5.01 3 EXHIBIT 5.01 EXHIBIT 5.01 May 6, 1998 Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014 Gentlemen/Ladies: At your request, we have examined the Registration Statement on Form S-4 (the "REGISTRATION STATEMENT") to be filed by you with the Securities and Exchange Commission (the "COMMISSION") on or about May 7, 1998 in connection with the registration under the Securities Act of 1933, as amended, of up to 2,417,795 shares of your Common Stock, $0.001 par value (the "HYBRID STOCK"), to be issued pursuant to the Agreement and Plan of Reorganization dated as of March 19, 1998 among you, Pacific Monolithics, Inc. and HN Acquisition Corp. (the "Plan") and the related Agreement of Merger attached as Exhibit A to the Plan (the "Merger Agreement"). In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) your registration statement on Form 8-A filed with the Commission on October 30, 1997; (3) the Joint Proxy Statement/Prospectus prepared in connection with the Registration Statement; (4) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in your minute books that are in our possession; and (5) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies, the legal capacity of all natural persons executing the same, the lack of any undisclosed terminations, modifications, waivers or amendments to any documents reviewed by us and the due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof. As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information included in the documents referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; HOWEVER, we are not aware of any facts that would lead us to believe that the opinion expressed herein is not accurate. Based upon the foregoing, it is our opinion that the up to 2,417,795 shares of Hybrid Stock to be issued by you, when issued in accordance with the terms of the Plan and the Merger Agreement and as provided in the relevant Joint Proxy Statement/Prospectus and the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Joint Proxy Statement/Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and is intended solely for your use as an exhibit to the Registration Statement for the purpose of the above sale of the Hybrid Stock and is not to be relied upon for any other purpose. Very truly yours, FENWICK & WEST LLP By: /s/ Edwin N. Lowe ---------------------------- EX-8.01 4 EXHIBIT 8.01 EXHIBIT 8.01 May 6, 1998 VIA FEDEX DELIVERY HYBRID NETWORKS, INC. 10161 Bubb Road Cupertino, California 95014 Attention: Board of Directors Re: EXHIBIT TAX OPINION TO THE S-4 REGISTRATION STATEMENT FILED IN CONNECTION WITH THE MERGER TRANSACTION INVOLVING HYBRID NETWORKS, INC. AND PACIFIC MONOLITHICS, INC. Ladies and Gentlemen: We have been requested to render this opinion concerning certain matters of U.S. federal income tax law in connection with the proposed merger (the "MERGER") involving Hybrid Networks, Inc., a corporation organized and existing under the laws of the State of Delaware ("HYBRID"), H Acquisition Corp., a new corporation that will be organized under the laws of the State of Delaware as a wholly-owned subsidiary of Hybrid ("MERGER SUB"), and Pacific Monolithics, Inc., a corporation organized and existing under the laws of the State of California ("PMI"). The Merger is further described in and is in accordance with the Securities and Exchange Commission Form S-4 Registration Statement to be filed on or about May 7, 1998, and related Exhibits thereto, as thereafter amended at any time to and including the date hereof (the "S-4 REGISTRATION STATEMENT"). Our opinion has been requested solely in connection with the filing of the S-4 Registration Statement with the Securities and Exchange Commission with respect to the Merger. The Merger is structured as a statutory merger of MERGER SUB with and into PMI, with PMI surviving the merger and becoming a wholly-owned subsidiary of Hybrid, all pursuant to the applicable corporate laws of the States of Delaware and California in accordance with the Agreement and Plan of Reorganization by and among PMI, Hybrid and MERGER SUB, dated as of March 19, 1998, and exhibits thereto (collectively, the "AGREEMENT") and the related Agreement of Merger (collectively, the "MERGER AGREEMENTS"). Except as otherwise indicated, capitalized terms used herein have the meanings set forth in the Merger Agreements. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "CODE"). We have acted as legal counsel to Hybrid in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents (including all schedules and exhibits thereto), among others: 1. The S-4 Registration Statement (including exhibits thereto); 2. The Merger Agreements; 3. An Officers' Tax Certificate of Hybrid and MERGER SUB dated May 4, 1998, signed by an authorized officer of each of Hybrid and MERGER SUB and delivered to us from Hybrid and MERGER SUB and incorporated herein by reference; a copy of this Certificate of Officer is attached hereto as Exhibit A; 4. An Officer's Tax Certificate of PMI dated May 4, 1998, signed by an authorized officer of PMI and delivered to us from PMI and incorporated herein by reference; a copy of this Certificate of Officer is attached hereto as Exhibit B; and 5. An opinion of counsel, received by Hybrid from Wilson Sonsini Goodrich & Rosati, substantially identical in substance to this opinion (the "WILSON SONSINI TAX OPINION"). In addition, we have reviewed such other instruments and documents related to the formation, organization and operation of PMI, Hybrid and MERGER SUB or the consummation of the Merger and the transactions contemplated thereby as we have deemed necessary or appropriate. In connection with rendering this opinion, we have assumed or obtained representations and are relying thereon (without any independent investigation or review thereof) that: (1) Original documents (including signature) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the Effective Time of the Merger) due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof; (2) Any representation or statement referred to above made "to the best of knowledge" or otherwise similarly qualified is correct without such qualification, and all statements and representations, whether or not qualified are true and will remain true through the Effective Date; (3) The Merger will be consummated pursuant to the Merger Agreements and will be effective under the laws of the states of California and Delaware; (4) Hybrid has no plan or intention directly or indirectly (through one or more related parties) to reacquire any of the Hybrid voting common stock issued in the Merger, and the PMI stockholders are not participating in or otherwise aware of any such plan. For these purposes "related parties" include corporations which are members of the same affiliated group as defined in Sec. 1504 (determined without regard to Section 1504(b)), or two corporations if the first corporation purchases the stock of the second corporation in a transaction which would be treated as a distribution in redemption of the stock of the first corporation under Section 304(a)(2) (determined without regard to Treas. Reg. Section 1.1502-80(b)). In addition, a corporation will be treated as related to another corporation if such relationship exists immediately before or immediately after the acquisition of the stock involved. Moreover, a corporation, other than PMI or a person related to PMI, will be treated as related to Hybrid if the relationship is created in connection with the Merger. (5) Following the Merger, PMI will hold "substantially all" of its and MERGER SUB's assets within the meaning of Section 368(a)(2)(E)(i) of the Code and the Treasury Regulations promulgated thereunder and will continue its historic business or use a significant portion of its historic business assets in a business; (6) To the extent any expenses relating to the Merger (or the "plan of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with respect to the Merger) are funded directly or indirectly by a party other than the incurring party, such expenses will be within the guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid on behalf of PMI stockholders will not exceed one percent (1%) of the total consideration that will be issued in the Merger to PMI stockholders in exchange for their shares of PMI stock; (7) At all relevant times prior to and including the Effective Date, (i) no outstanding indebtedness of PMI, Hybrid, or MERGER SUB has or will represent equity for tax purposes; (ii) no outstanding equity of PMI, Hybrid, or MERGER SUB has represented or will represent indebtedness for tax purposes; (iii) no outstanding security, instrument, agreement or arrangement that provides for, contains, or represents either a right to acquire PMI capital stock (or to share in the appreciation thereof) constitutes or will constitute "stock" for purposes of Section 368(c) of the Code; (8) None of PMI, Hybrid, or MERGER SUB is, or will be at the time of the Merger, an investment company as defined in Section 368(a)(2)(F) of the Code; and (9) Counsel for PMI and Hybrid will, pursuant to Paragraphs 4.18 and 5.5 of the Agreement, deliver opinions dated the Closing Date to the effect that the Merger will be treated as a "reorganization" within the meaning of Section 368(a) of the Code; and (10) The Wilson Sonsini Tax Opinion has been delivered and will not be withdrawn prior to the Effective Date. Based on the foregoing documents, materials, assumptions and information, and subject to the qualifications and assumptions set forth herein, we are of the opinion that, if the Merger is consummated in accordance with the provisions of the Agreement and the exhibits thereto (and without any waiver, breach or amendment of any of the provisions thereof), the Merger will be a "reorganization" for federal income tax purposes within the meaning of Section 368(a) of the Code and Hybrid, MERGER SUB, and PMI each will be a "party to the reorganization" within the meaning of Section 368(b) of the Code; Our opinion set forth above is based on the existing provisions of the Code, Treasury Regulations (including Temporary Treasury Regulations) promulgated under the Code, published Revenue Rulings, Revenue Procedures and other announcements of the Internal Revenue Service (the "SERVICE") and existing court decisions, any of which could be changed at any time. Any such changes might be retroactive with respect to transactions entered into prior to the date of such changes and could significantly modify the opinion set forth above. Nevertheless, we undertake no responsibility to advise you of any subsequent developments in the application, operation or interpretation of the U.S. federal income tax laws. Our opinion concerning certain of the U.S. federal tax consequences of the Merger is limited to the specific U.S. federal tax consequences presented above. No opinion is expressed as to any transaction other than the Merger, including any transaction undertaken in connection with the Merger. In addition, this opinion does not address any estate, gift, state, local or foreign tax consequences that may result from the Merger. In particular, we express no opinion regarding: (i) the amount, existence, or availability after the Merger, of any of the U.S. federal income tax attributes of PMI, Hybrid or MERGER SUB; (ii) any transaction in which PMI Common Stock is acquired or Hybrid Common Stock is disposed other than pursuant to the Merger; (iii) the potential application of the "disqualifying disposition" rules of Section 421 of the Code to dispositions of PMI Common Stock; (iv) the effects of the Merger and Hybrid's assumption of outstanding options to acquire PMI stock on the holders of such options under any PMI employee stock option or stock purchase plan, respectively; (v) the effects of the Merger on any PMI stock acquired by the holder subject to the provision of Section 83(a) of the Code; (vi) the effects of the Merger on any payment which is or may be subject to the provisions of Section 280G of the Code; and (vii) the application of the collapsible corporation provisions of Section 341 of the Code to PMI, Hybrid or MERGER SUB as a result of the Merger. No ruling has been or will be requested from the Service concerning the U.S. federal income tax consequences of the Merger. In reviewing this opinion, you should be aware that the opinion set forth above represents our conclusions regarding the application of existing U.S. federal income tax law to the instant transaction. If the facts vary from those relied upon (including if any representations, covenant, warranty or assumption upon which we have relied is inaccurate, incomplete, breached or ineffective), our opinions contained herein could be inapplicable. You should be aware that an opinion of counsel represents only counsel's best legal judgment, and has no binding effect or official status of any kind, and that no assurance can be given that contrary positions may not be taken by the Service or that a court considering the issues would not hold otherwise. In addition to the request for our opinion on this specific matter of federal income tax law, we have been asked to review the discussion of federal income tax issues contained in the Registration Statement. We have reviewed the discussion entitled "CERTAIN FEDERAL INCOME TAX CONSIDERATION" contained in the Registration Statement and believe that such information fairly presents the current federal income tax law applicable to the Merger, and the material tax consequences to PMI and PMI's shareholders as a result of the Merger. This exhibit opinion is being delivered solely for the purpose of being included as an exhibit to the S-4 Registration Statement; it may not be relied upon or utilized for any other purpose (including, without limitation, satisfying any conditions in the Agreement) or by any other person or entity, and may not be made available to any other person or entity, without our prior written consent. We do, however, consent to the use of this opinion as an exhibit to the S-4 Registration Statement and to the use of our name in the S-4 Registration Statement wherever it appears. Very truly yours, /s/ Fenwick & West LLP -------------------------- FENWICK & WEST LLP A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS EXHIBITS: EXHIBIT A -- An Officers' Tax Certificate of Hybrid Networks, Inc. and H Acquisition Corp., dated May 6, 1998, and signed by authorized officers of Hybrid Networks, Inc. and H Acquisition Corp. EXHIBIT B -- An Officer's Tax Certificate of Pacific Monolithics, Inc., dated May 6, 1998, and signed by an authorized officer of Pacific Monolithics, Inc. CERTIFICATE OF OFFICERS OF HYBRID NETWORKS, INC. AND HN ACQUISITION CORP. May 6, 1998 Fenwick & West LLP Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Two Palo Alto Square Palo Alto, CA 94304-1050 Palo Alto, CA 94306 The undersigned officers of Hybrid Networks, Inc., a Delaware corporation ("HYBRID"), and HN Acquisition Corp., a Delaware corporation ("SUB"), on behalf of Hybrid and Sub, respectively, after consulting with legal counsel and financial auditors regarding the meaning of and the factual support for the following representations, hereby represent, in connection with the proposed merger of sub with and into Pacific Monolithics, Inc., a California corporation ("PACIFIC"), with Pacific surviving the merger (the "MERGER"), all pursuant to that certain Agreement and Plan of Reorganization by and among Hybrid, Sub and Pacific, dated as of March 19, 1998, and Exhibits thereto (collectively, the "AGREEMENT"),(1) that to the best of their knowledge and belief the following facts are now true, and will continue to be true as of the Closing Date and Effective Time for the Merger, and thereafter as relevant: 1. Sub is a newly-formed corporation that was created for the sole purpose of facilitating Hybrid's acquisition of Pacific. It has not conducted and is not conducting any business activities and has no significant assets. 2. Following the transaction, Pacific will hold at least 90 percent of the fair market value of its net assets, at least 70 percent of the fair market value of its gross assets, at least 90 percent of the fair market value of Sub's net assets, and at least 70 percent of the fair market value of Sub's gross assets held immediately prior to the transaction. For purposes of this representation, amounts paid by Pacific or Sub to dissenters, amounts paid by Pacific or Sub to shareholders who receive cash or other property, amounts used by Pacific or Sub to pay reorganization expenses, all redemptions and distributions (except for regular, normal dividends) made by Sub, and Pacific or Sub assets disposed of at less than fair market value by Pacific or Sub prior to the Merger and in contemplation thereof (including without limitation any asset disposed of by pacific or Sub, other than in the ordinary course of business, during the period ending on the Effective Time and beginning with the commencement of negotiations (whether formal or informal) between Pacific and Hybrid regarding the Merger (the "PRE-MERGER PERIOD")), will be included as assets of Pacific or Sub, respectively, immediately prior to the - ------------------------- (1)Unless otherwise indicated, all capitalized terms shall have the meaning defined in the Agreement. transaction; provided, however, that any property received in exchange for assets disposed of at less than fair market value will not be included as assets of Pacific or Sub immediately prior to the transaction. 3. Prior to the Merger, Hybrid will be in Control of Sub. As used herein, "CONTROL" shall mean ownership of stock possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation. For purposes of determining Control, a person shall not be considered to own voting stock if rights to vote such stock (or to restrict or otherwise control the voting of such stock) are held by a third party (including a voting trust) other than an agent of such person. 4. Hybrid will acquire Control of Pacific in the Merger solely in exchange for Hybrid voting common stock. 5. Hybrid has no plan or intention to cause Pacific to issue, after the Merger, additional shares of stock (or rights to acquire shares of Pacific stock) that would result in Hybrid losing Control of Pacific. 6. Hybrid has no plan or intention directly or indirectly (through one or more related parties) to reacquire any of its voting common stock issued in the Merger. For these purposes "RELATED PARTIES" include corporations which are members of the same affiliated group as defined in Section 1504 of the 1986 Internal Revenue Code, as amended (the "Code") (determined without regard to Section 1504(b) of the Code), or two corporations if the first corporation purchases the stock of the second corporation in a transaction which would be treated as a distribution in redemption of the stock of the first corporation under Section 304(a)(2) of the Code (determined without regard to Treas. Reg. Section 1.1502-80(b)). In addition, a corporation will be treated as related to another corporation if such relationship exists immediately before or immediately after the acquisition of the stock involved. Moreover, a corporation, other than Pacific or a person related to Pacific, will be treated as related to Hybrid if the relationship is created in connection with the Merger. For purposes of this representation, it should be noted that Hybrid may from time to time repurchase some of its issued and outstanding common stock in open market repurchase transactions unrelated to the Merger. 7. Hybrid has no plan or intention to: (i) cause Pacific to sell, transfer or otherwise dispose of any of its assets or of any of the assets acquired from Sub except for dispositions made in the ordinary course of business or for the payment of expenses incurred by Pacific in the Merger; (ii) liquidate Pacific; (iii) merge Pacific with or into another corporation including Hybrid or its affiliates; or (iv) to sell, distribute or otherwise dispose of the stock of Pacific. 8. In the Merger, Sub will have no liabilities assumed by Pacific and will not transfer to Pacific any assets subject to liabilities. 9. Hybrid intends that, following the Merger, Pacific will continue its historic business or use a significant portion of its historic business assets in a business. -2- 10. Neither Hybrid nor any Hybrid subsidiary owns, or has owned during the past five (5) years, directly or indirectly, any shares of Pacific stock, or the right to acquire or vote any such stock. 11. No shareholder of Pacific is acting as agent for Hybrid in connection with the Merger or approval thereof. 12. The transfer of cash to Pacific shareholders in lieu of fractional Hybrid voting common stock shares, if any, is solely for the purpose of avoiding the expense and inconvenience to Hybrid of accounting for fractional shares and does not represent separately bargained-for consideration. 13. Except with respect to payments of cash in lieu of fractional shares of Hybrid voting common stock and cash paid for Pacific Dissenting Shares, if any, one hundred percent (100%) of the Pacific stock outstanding immediately prior to the Merger will be exchanged solely for Hybrid voting common stock. Thus, except as set forth in the preceding sentence, Sub and Hybrid intend that no consideration other than Hybrid voting common stock be paid or received (directly or indirectly, actually or constructively) for Pacific stock. 14. The total fair market value of all consideration other than Hybrid voting common stock received by Pacific shareholders in exchange for their Pacific stock in the Merger (including, without limitation, cash paid to Pacific shareholders in lieu of fractional shares of Hybrid voting common stock and cash for Pacific Dissenting Shares) will be less than twenty percent (20%) of the aggregate fair market value of Pacific stock outstanding immediately prior to the Merger. 15. No shares of Sub have been or will be used as consideration or issued to shareholders of Pacific in the Merger. 16. Hybrid and Sub will each pay its own expenses in connection with the Merger as contemplated by the Agreement, except as otherwise provided in the Agreement; provided, however, that to the extent any expenses relating to the Merger (or the "plan of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with respect to the Merger) are funded directly or indirectly by a party other than the incurring party, such expenses will be within the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.. 17. There is no inter-corporate indebtedness existing between Hybrid and Pacific or between Sub and Pacific that was issued, acquired, or will be settled at a discount, and Hybrid will assume no liabilities of Pacific or any Pacific shareholder in connection with the Merger. 18. None of the payments to be received by any shareholder of Pacific which are designated as compensation are actually separate consideration for, or allocable to, any of their shares of Pacific stock; and the compensation to be paid to any shareholder of Pacific will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. -3- 19. Neither Hybrid nor Sub are investments companies as defined in Section 368(a)(2)(F) of the Code. 20. Hybrid and Sub are authorized to make all of the representations set forth herein, and the undersigned are authorized to execute this certificate on behalf of Hybrid and Sub. The undersigned recognize that counsel to and auditors for Pacific and counsel to and auditors for Hybrid and Sub will rely upon the foregoing representations in evaluating the US federal income tax consequences of the Merger. Hybrid Networks, Inc., a Delaware corporation: By: --------------------------------------- Dan E. Steimle, Vice President, Finance and Administration and Chief Financial Officer Date: ___________________ HN Acquisition Corp., a Delaware corporation: By: ----------------------------------------- Dan E. Steimle, President Date: ____________________ -4- CERTIFICATE OF OFFICER OF PACIFIC MONOLITHICS, INC. May 6, 1998 Fenwick & West LLP Wilson Sonsini Goodrich & Rosati Two Palo Alto Square 650 Page Mill Road Palo Alto, CA 94306 Palo Alto, CA 94304-1050 The undersigned officer of Pacific Monolithics, Inc. a California corporation ("PACIFIC"), on behalf of the management of Pacific, after consulting with legal counsel and financial auditors regarding the meaning of and the factual support for the following representations, hereby represents, in connection with the proposed merger of HN Acquisition Corp., a Delaware corporation ("SUB") and wholly-owned subsidiary of Hybrid Networks, Inc., a Delaware corporation ("HYBRID"), with and into Pacific, with Pacific surviving the merger (the "MERGER"), all pursuant to that certain Agreement and Plan of Reorganization by and among Hybrid, Sub and Pacific, dated as of March 19, 1998, and Exhibits thereto (collectively the "AGREEMENT"),(1) that to the best of their knowledge and belief the following facts are now true, and will continue to be true as of the Closing Date and Effective Time for the Merger, and thereafter as relevant: 1. At least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by Pacific immediately prior to the Merger will be held by Pacific immediately before the Merger. For purposes of this representation, amounts paid by Pacific or Sub to dissenters, amounts paid by Pacific or Sub to shareholders who receive cash or other property, amounts used by Pacific or Sub to pay reorganization expenses, all redemptions and distributions (except for regular, normal dividends) made by Sub, and Pacific or Sub assets disposed of at less than fair market value by Pacific or Sub prior to the Merger and in contemplation thereof (including without limitation any asset disposed of by pacific or Sub, other than in the ordinary course of business, during the period ending on the Effective Time and beginning with the commencement of negotiations (whether formal or informal) between Pacific and Hybrid regarding the Merger (the "PRE-MERGER PERIOD")), will be included as assets of Pacific or Sub, respectively, immediately prior to the transaction; provided, however, that any property received in exchange for assets disposed of at less than fair market value will not be included as assets of Pacific or Sub immediately prior to the transaction. - ------------- (1) Unless otherwise indicated, all capitalized terms shall have the meaning defined in the Agreement. 2. Pacific has made no transfer of any of its assets (including any distribution of assets with respect to, or in redemption of, stock) in contemplation of the Merger or during the Pre-Merger Period other than (i) in the ordinary course of business, and (ii) payments for expenses incurred in connection with the Merger. 3. In the Merger, shares of Pacific stock representing Control of Pacific will be exchanged solely for voting common stock of Hybrid; at the time of the Merger, there will exist no rights of any kind (including without limitation warrants, options, convertible securities, contingent rights, informal or unwritten rights) to acquire Pacific stock or to vote (or restrict or otherwise control the vote of) Pacific stock which, if exercised, could affect Hybrid's acquisition and retention of Control of Pacific. For purposes of this representation, shares of Pacific stock exchanged in the Merger for cash and other property will be treated as Pacific stock outstanding on the date of the Merger but not exchanged for voting common stock of Hybrid. As used herein, the term "CONTROL" shall mean ownership of stock possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation. For purposes of determining Control, a person shall not be considered to own voting stock if rights to vote such stock (or to restrict or otherwise control the voting of such stock) are held by a third party (including a voting trust) other than an agent of such person. 4. At the Effective Time of the Merger, there will be no accrued but unpaid dividends on shares of Pacific stock. 5. The total fair market value of all consideration other than Hybrid voting common stock received by Pacific shareholders in exchange for their Pacific stock in the Merger (including, without limitation, cash paid to Pacific shareholders in lieu of fractional shares of Hybrid voting common stock) will be less than twenty percent (20%) of the aggregate fair market value of Pacific stock outstanding immediately prior to the Merger. 6. Pacific has no obligation, understanding, agreement or intention to issue additional shares of stock after the Merger that would result in Hybrid losing Control of Pacific. 7. Pacific has no plan or intention, and is under no obligation, to discontinue its business, to sell or otherwise dispose of any of its assets or of any of the assets acquired from Sub in the Merger except for dispositions made in the ordinary course of business or the payment of expenses incurred by Pacific pursuant to the Merger. 8. There is no plan or intention on the part of any Pacific shareholder to engage in a sale, exchange, transfer, distribution, pledge, disposition or any other transaction with Hybrid or any related party in which any Pacific shareholder would directly or indirectly dispose (a "SALE") of shares of Hybrid voting common stock to be issued in the Merger to Hybrid or any related party. For these purposes "RELATED PARTIES" include corporations which are members of the same affiliated group as defined in Section 1504 of the 1986 Internal Revenue Code, as amended (the "Code") (determined without regard to Section 1504(b) of the Code), or two corporations if the first corporation purchases the stock of the second corporation in a transaction which would be treated as a distribution in redemption of the stock of the first corporation under 2 Section 304(a)(2) of the Code (determined without regard to Treas. Reg. Section 1.1502-80(b)). In addition, a corporation will be treated as related to another corporation if such relationship exists immediately before or immediately after the acquisition of the stock involved. Moreover, a corporation, other than Pacific or a person related to Pacific, will be treated as related to Hybrid if the relationship is created in connection with the Merger. 9. The transfer of cash to Pacific shareholders in lieu of fractional Hybrid voting common stock shares, if any, is solely for the purpose of avoiding the expense and inconvenience to Hybrid of accounting for fractional shares and does not represent separately bargained-for consideration. 10. Except with respect to payments of cash to Pacific shareholders in lieu of fractional shares of Hybrid voting common stock and cash paid for Pacific Dissenting Shares, if any, or as otherwise provided in the Agreement, one hundred percent (100%) of the Pacific stock outstanding immediately prior to the Merger will be exchanged solely for Hybrid voting common stock. Thus, except as set forth in the preceding sentence, Pacific intends that no consideration other than Hybrid voting common stock be paid or received (directly or indirectly, actually or constructively) for Pacific stock. 11. Pacific and the shareholders of Pacific will each pay separately its or their own expenses in connection with the Merger as contemplated by the Agreement, except as otherwise provided in the Agreement; provided, however, that to the extent any expenses relating to the Merger (or the "plan of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with respect to the Merger) are funded directly or indirectly by a party other than the incurring party, such expenses will be within the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187. 12. There is no inter corporate indebtedness existing between Hybrid and Pacific or between Sub and Pacific that was issued, acquired, or will be settled at a discount, and to the best knowledge of the management of Pacific, Hybrid will assume no liabilities of Pacific or any Pacific shareholder in connection with the Merger. 13. None of the payments received by any shareholder of Pacific which have been designated as compensation are actually separate consideration for, or allocable to, any of their shares of Pacific stock; and the compensation paid to any shareholder of Pacific will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. 14. Pacific is not an investment company as defined in Section 368(a)(2)(F) of the Code, and is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 15. Pacific is authorized to make all of the representations set forth herein, and the undersigned is authorized to execute this certificate on behalf of Pacific. 3 The undersigned recognize that counsel to and auditors for Pacific and counsel to and auditors for Hybrid and Sub will rely upon the foregoing representations in evaluating the federal income tax consequences of the Merger. Pacific Monolithics, Inc., a California corporation: By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Date: ------------------------------ 4 EX-10.24 5 EXHIBIT 10.24 EXHIBIT 10.24 SUBLEASE THIS SUBLEASE is made as of this 9th day of February, 1998 (the "Effective Date"), by and between VIKING FREIGHT, INC., a California corporation ("Sublandlord"), and HYBRID NETWORKS, INC., a Delaware corporation ("Subtenant"). RECITALS A. Brokaw Interests, a California limited partnership (as successor-in-interest to Sobrato Development Companies #941, a California limited partnership) ("Landlord"), and Sublandlord are parties to that certain Lease, dated August 9, 1996, a Memorandum of Lease evidencing which was recorded on August 29, 1996 as Instrument No. 13425262 in the Santa Clara County, California Official Records, as amended by that certain First Amendment to Lease dated of even date herewith (collectively, the "Lease"), a copy of which Lease is attached hereto as Exhibit "A" and made a part hereof as provided in Section 14 of this Sublease, covering certain Premises now commonly known as 6409 Guadalupe Mines Road, San Jose, California and more particularly described in the Lease. B. Sublandlord desires to sublease to Subtenant, and Subtenant desires to sublease from Sublandlord, the entire Premises on the terms and conditions of this Sublease. AGREEMENTS NOW THEREFORE, for and in consideration of the covenants herein, Sublandlord does hereby sublease to Subtenant, and Subtenant does hereby sublease from Sublandlord, the entire Premises, subject to the following terms, covenants, conditions and obligations: 1. TERM; OPTION TO RENEW. (a) The initial term of this Sublease (the "Initial Term") shall commence on the earlier of (i) May 1, 1998 or (ii) the date on which the Subtenant Improvements (as hereinafter defined) are substantially completed (the "Commencement Date"), and shall expire on April 30, 2004. In the event that the Initial Term shall commence prior to May 1, 1998, Subtenant shall be entitled to occupy the Premises without being obligated to pay Base Rent for any period prior to May 1, 1998; PROVIDED, HOWEVER, that such occupancy by Subtenant shall be expressly subject to all of the other terms and conditions of this Sublease, including without limitation the obligations to pay Operating Expenses, to maintain the Premises, to maintain the required insurance coverages and to indemnify Sublandlord and Landlord. (b) Provided that Subtenant shall not be in default under this Sublease, Subtenant shall have the right, by written notice delivered to Sublandlord not more than two hundred seventy (270) days and not less than one hundred eighty (180) days prior to the expiration of the Initial Term, to extend the Initial Term for the period from May 1, 2004 through October 31, 2009 (the "Extension Term"). The Initial Term and the Extension Term (if exercised by Subtenant) are collectively referred to herein as the "Term". During the Extension Term, all of the terms and conditions of this Sublease (other than the right to extend set forth in this paragraph) shall remain fully applicable, except that Base Rent shall be as set forth in Section 2(b) below. 2. RENT. (a) For the Initial Term, Subtenant shall pay to Sublandlord, as the base subrent for the Premises (the "Base Rent"), the aggregate amount of $5,439,372. Such Base Rent shall be payable in monthly installments in accordance with the following schedule: Commencement Date to October 31, 1999: $68,888 per month November 1, 1999 to April 30, 2002: $74,950 per month May 1, 2002 to April 30, 2004: $81,287 per month Such monthly installments of Base Rent shall be due on the first day of each and every such month of the Term and shall be made to Sublandlord at the primary notice address for Sublandlord set forth below. Base Rent for any partial months at the commencement or expiration of the Term shall be prorated based upon the number of days in such month. (b) During the Extension Term, the Base Rent shall be the greater of (i) $51,608 per month or (ii) ninety-five percent (95%) of the "Fair Market Rental" for the Premises. Such "Fair Market Rental" shall be determined in accordance with the procedures set forth in Paragraph 37 of the Lease, with the term "Landlord" as used therein meaning Sublandlord and the term "Tenant" as used therein meaning Subtenant. Base Rent shall be subject to adjustment during the Extension Term as and when appropriate based upon changes in rental values in the market in which the Premises are located. (c) It is the purpose and intent of Sublandlord and Subtenant that the Base Rent payable hereunder shall be absolutely "triple net" to Sublandlord, without any abatement, set-off or counterclaim, except to the extent specifically provided for in this Sublease, and that all costs, expenses and obligations of every kind and nature which are obligations of the "Tenant" under the Lease (or which otherwise pertain to the Premises) with respect to the Term shall be paid by Subtenant, except for any such obligations and charges as otherwise expressly may have been assumed by Sublandlord in accordance with the terms and conditions of this Sublease. 3. PRE-PAID RENT; SECURITY DEPOSIT. (a) Upon execution of this Sublease, Subtenant shall pay to Sublandlord as pre-paid rent the Base Rent for the first month of the Initial Term in the amount of $68,888. (b) As security for the full, faithful and timely performance of all of Subtenant's obligations under this Sublease Subtenant shall, upon execution of this Sublease, deposit with Sublandlord a certificate of deposit solely in the name of Sublandlord in the principal sum of $81,287, which certificate of deposit shall be issued by a financial institution satisfactory to Sublandlord in its reasonable discretion and shall be for an initial term of one (1) year, with an automatic "rollover" provision for successive one (1) year terms. Such certificate of deposit shall be held by Sublandlord, and upon an event of default by Subtenant under this Sublease Sublandlord may, regardless of the term of such certificate of deposit or any penalty for early redemption thereof, cash such security deposit, use the proceeds thereof to cure such default, and retain the balance as a portion of the security deposit. Upon notice from Sublandlord, Subtenant immediately shall deposit additional funds with Sublandlord so that the security deposit held by Sublandlord at all times equals at least $81,287. All interest earned on such certificate of deposit shall belong (i) to Sublandlord as additional security deposit if Sublandlord shall be entitled to cash such certificate of deposit hereunder and (ii) to Subtenant if upon the expiration of the Term Sublandlord shall not have cashed such certificate of deposit. The parties agree that the foregoing amount shall not constitute a prepayment of the Base Rent due for the last month of the Initial Term hereunder and that the same shall not be considered or treated by the parties as liquidated damages, but rather as a security deposit to provide Sublandlord with security in the event of a default by Subtenant under this Sublease. 4. STATUS OF BUILDING; SUBTENANT IMPROVEMENTS. (a) The provisions of this Section 4 shall be fully applicable and effective from and after the Effective Date, despite the fact that the Commencement Date shall not yet have occurred. (b) Based upon the representation and warranty from Landlord set forth in Paragraph 2 of the First Amendment to the Lease, Sublandlord represents and warrants to Subtenant that construction of the shell of the building on the Premises (the "Building") has been completed by Landlord in accordance with the provisions of Paragraph 7 of the Lease. Sublandlord shall deliver the Premises to Subtenant with (i) electrical service run to the Building and panel set (which electrical service shall be a minimum of 2000 amps, 480 volts), (ii) the elevator in place, (iii) the parking lot and landscaping completed, (iv) all water and sewer hook-up fees paid in full, and (v) all "punch-list" items (other than the leak in the deck of the second floor balcony, which Sublandlord shall cause Landlord promptly to repair) completed, all as and to the extent required under Paragraph 7 of the Lease. Sublandlord shall deliver possession of the Premises to Subtenant on February 16, 1998. The Commencement Date shall be postponed one (1) day beyond May 1, 1998 for each day beyond February 16, 1998 that possession of the Premises is not so delivered to Subtenant; provided, however, that, the foregoing notwithstanding, the Commencement Date shall be the earlier to occur of such postponed Commencement Date or the date on which the Subtenant Improvements are substantially complete. Notwithstanding the foregoing, Subtenant acknowledges that Sublandlord currently is utilizing the Premises for storage of equipment, that such equipment may not all have been removed by February 16, 1998, and that Sublandlord shall be deemed to have delivered possession of the Premises to Subtenant on such date even if a portion of such equipment shall remain on the Premises. Sublandlord shall have until March 2, 1998 to complete the removal of such equipment, and until such equipment is removed (A) Sublandlord shall be responsible for all property damage or injury to persons resulting from the removal of such equipment by Sublandlord or its agents, and (B) Subtenant shall be responsible for any damage to such equipment of Sublandlord resulting from the actions of Subtenant or its agents. (c) Subtenant shall be responsible at its sole cost and expense (without any contribution from Sublandlord or Landlord) for all construction, space plans, fees, permits and other out-of-pocket costs relating to or associated with completing interior office/research and development improvements to the interior of the Building (the "Subtenant Improvements"). All construction of the Subtenant Improvements shall be (A) performed by a contractor(s) selected by Subtenant but acceptable to Sublandlord and Landlord in each such party's reasonable discretion, and (B) completed no later than July 1, 1998. All of the Subtenant Improvements shall be expressly subject to the requirements set forth in Paragraphs 7.L and 10 of the Lease to the same extent that such requirements apply to "Alterations" requiring the consent of Landlord and/or to other work by "Tenant" thereunder, with the term "Tenant" as used therein meaning Subtenant and the term "Landlord" as used therein meaning both Sublandlord and Landlord. Without limiting the generality of the foregoing, all plans and specifications for the Subtenant Improvements shall be submitted to both Landlord and Sublandlord for their review and approval prior to any construction being commenced, and all such construction shall be performed in full compliance with such approved plans and specifications and all applicable laws and in a good and workmanlike manner. Prior to commencement of construction of the Subtenant Improvements, Subtenant shall deposit the sum of $500,000 in a money market account with a major financial institution acceptable to Sublandlord (the "Money Market Account"). The sole purpose of the Money Market Account shall be to provide to Sublandlord readily available funds to cure any defaults by Subtenant in the performance of Subtenant's obligations under this Sublease with respect to the construction of and payment for the Subtenant Improvements. The Money Market Account shall be structured in such a manner as to (i) prohibit any withdrawals therefrom without Sublandlord's written consent or direction and (ii) allow Sublandlord to make withdrawals therefrom in the Sublandlord's absolute and unfettered discretion and without the requirement for any further action by Subtenant or any other party (Subtenant hereby agreeing to execute and deliver to Sublandlord such checks or other instruments as shall permit such withdrawals by Sublandlord). In the event that the principal balance of the Money Market Account shall at any time be less than $500,000, Subtenant immediately shall deposit additional sums in the Money Market Account so that the principal balance thereof shall at all times equal at least $500,000. Promptly following the making of any withdrawal from the Money Market Account, Sublandlord shall notify Subtenant of the nature of such default and the estimated cost of curing the same. Notwithstanding the foregoing, as soon as construction of the Subtenant Improvements has been completed and Subtenant has demonstrated to the reasonable satisfaction of Sublandlord that the same have been fully paid for by Subtenant, Sublandlord immediately shall take all actions necessary on its part to cause all of the funds remaining in the Money Market Account to be disbursed to Subtenant. Subtenant shall indemnify, protect, defend and hold harmless both Sublandlord and Landlord from and against all liability, cost, expense, or damage (including, without limitation, attorneys fees) arising from (A) the construction of the Subtenant Improvements (including any property damage, death or personal injury caused in connection therewith), (B) any construction defects, (C) any failure to properly construct the Subtenant Improvements in accordance with the approved plans and specifications therefor, (D) any failure to construct the Subtenant Improvements in a good and workmanlike manner, or (E) any failure to construct the Subtenant Improvements in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. Neither Sublandlord or Landlord shall be responsible to ensure that the plans and specifications for the Subtenant Improvements comply with law or applicable building codes, and Sublandlord's and/or Landlord's review and approval of any plans, specifications, or any other documents shall not relieve Subtenant from Subtenant's obligations under the foregoing indemnification. Subtenant shall procure at its expense and keep in effect from the execution date of this Lease until the completion of construction of the Subtenant Improvements a "Broad Form" liability insurance policy in the amount of Three Million Dollars ($3,000,000.00), insuring all of Subtenant's activities with respect to the Building, the Subtenant Improvements and the Premises, including Subtenant's indemnity obligations under this paragraph. In addition, Subtenant shall procure a policy of builder's risk insurance, insuring the Building and the Subtenant Improvements for their full replacement cost while the Subtenant Improvements are under construction. Both Sublandlord and Landlord shall be listed as additional named insureds with respect to the foregoing insurance policies. (d) Subtenant covenants and agrees to make timely payment of all costs and expenses relating to the Subtenant Improvements. Subtenant shall ensure that no liens attach to the Premises in connection with the Subtenant Improvements. (e) Sublandlord's remedies for any failure by Subtenant to fulfill its obligations under this Section 4 shall include all of the remedies available to Sublandlord for any failure by Subtenant to pay Base Rent or any other amount due hereunder. 5. REAL PROPERTY TAXES. Subtenant shall be liable for all taxes levied against Subtenant's personal property and trade or business fixtures, and agrees to pay, as additional rental, one hundred percent (100%) of all real estate taxes and special assessment installments levied on all of the improvements (including the Building and the Subtenant Improvements) comprising a portion of the Premises, all real estate taxes and special assessment installments levied on the land portions of the Premises, and all taxes levied upon the occupancy of the Premises, including any substitute or additional charges, which may be imposed during, or applicable to, the Term, including real estate tax increases due to a sale or other transfer of the Premises. Subtenant shall pay all such taxes and assessments which Sublandlord is responsible for paying under the Lease to Sublandlord at the time the same are due under Paragraph 13 of the Lease, but in any event in time to prevent Sublandlord from having to pay such amounts itself under the Lease. 6. OPERATING EXPENSES. Subtenant shall be responsible for one hundred percent (100%) of all operating expenses of every sort pertaining to the Premises. Notwithstanding the foregoing, in the event that Sublandlord in its sole discretion elects to provide or cause to be provided any services (E.G., landscaping or trash removal) with respect to both the Premises and the adjoining properties operated by Sublandlord (which, together with the Premises, comprise a building complex totalling approximately 178,110 square feet of building space), Subtenant shall reimburse Sublandlord for thirty-one percent (31%) of the cost (including a reasonable administrative charge to Sublandlord) of such services. In the event that Subtenant exercises its right to cause the Addition to be constructed and such services also are provided for the Addition, such percentage of reimbursement shall be increased to the percentage determined by dividing the aggregate square footage of the Building and the Addition by the total building square footage of the building complex (including the Addition). Such reimbursement shall be made by Subtenant to Sublandlord from time to time within ten (10) days following delivery to Subtenant of an invoice therefor. 7. USE. Subject to the restrictions set forth in the Lease, Subtenant shall use the Premises only for general office, light manufacturing/testing, warehousing, research and development, sales and distribution, and related lawful uses. Subtenant shall not change the use of the Premises without the prior written consent of Sublandlord. Sublandlord makes no representation or warranty that any specific use of the Premises desired by Subtenant is permitted under applicable laws. 8. OPTION TO EXPAND BUILDING. Under Paragraph 10 of the Lease, Sublandlord has the right to add, at its expense, an approximately 50,000 square foot addition to the building on the Premises in the location shown on Exhibit "A" to the Lease (the "Addition"). Subtenant shall have the right to cause the Addition to be constructed by Landlord provided that (a) such right shall be exercised, if at all, by written notice delivered by Subtenant to both Sublandlord and Landlord on or before April 30, 2000, (b) at the time of such exercise, Subtenant shall be a corporation the shares of which are traded on a nationally recognized stock exchange, (c) at the time of such exercise, Subtenant shall have a tangible net worth (calculated in accordance with GAAP) of not less than $30,000,000 and shall have shown profits for the previous four (4) consecutive calendar quarters, and (d) Landlord's lender holding a security interest in the Premises at such time shall consent to the construction of the Addition by Landlord. In the event that both Subtenant so exercises the foregoing right and at the time of such exercise such conditions are satisfied (i) such portion of the land area leased by Sublandlord under the Lease as shall be required for the Addition (the "Addition Land") automatically, and without the requirement for any further action by any party, shall cease to be a portion of the Premises under both this Sublease and the Lease, provided that sufficient land area remains within the Premises to provide adequate parking and satisfy zoning requirements therefor, but with no reduction in the Base Rent payable by Subtenant hereunder, and (ii) Subtenant and Landlord shall enter into a separate lease agreement (to which Sublandlord shall not be a party and with respect to which Sublandlord shall be subjected to no liability) pursuant to which Landlord shall construct the Addition, Landlord shall lease the Addition Land and the Addition directly to Subtenant at a rental rate equal to the greater of (A) $1.25 per square foot per month or (B) the "Fair Market Rental" for the Addition and the Addition Land as determined in accordance with the procedures set forth in Paragraph 37 of the Lease, and Subtenant shall construct the leasehold improvements for the Addition. In the event that either Subtenant fails so to exercise the foregoing right or at the time of such exercise any of such conditions are not satisfied, Subtenant shall have no further rights with respect to the Addition and Sublandlord may, by written notice delivered to Subtenant at any time thereafter, remove from the Premises under this Sublease (either with or without retaining as a portion of the "Premises" under the Lease) the Addition Land. In such event, there shall be no reduction in the Base Rent payable by Subtenant hereunder, but Subtenant shall be relieved of any further obligations with respect to the Addition Land as of the date set forth in such notice from Sublandlord. 9. MAINTENANCE. Subtenant shall maintain the Premises, at its sole cost and expense, in the condition that Sublandlord is required to maintain the Premises under the Lease. 10. UTILITIES. Sublandlord shall not be responsible for the payment of any charges for utility consumption on the Premises during the Term, and Subtenant shall pay for all such charges. 11. DAMAGE OR DESTRUCTION; CONDEMNATION. In the event of any damage to or destruction of the Premises, or if any part of the Premises shall be taken for any public or quasi-public use under any statute or by right of eminent domain or private purchase in lieu thereof, this Sublease shall terminate if and when the Lease is terminated as a result thereof. If the Lease is not terminated, this Sublease shall continue in full force and effect and Subtenant shall be entitled to an abatement of Base Rent in proportion to any abatement in rent to which Sublandlord shall be entitled under the Lease. In no event shall Sublandlord have any obligation to repair or restore the Premises or any personal property thereon. 12. ASSIGNMENT AND SUBLETTING. Subtenant shall have no right to assign (voluntarily, involuntarily or by operation of law), pledge, mortgage or hypothecate this Sublease, or to further sublease any portion of the Premises or allow any party other than Subtenant to use or occupy any portion thereof, without the prior written consent of Sublandlord, which shall not be unreasonably withheld. For purposes of this Section 12, the term "assign" shall include, without limitation, any change from the date of this Sublease in (a) the ownership or power to vote, on a cumulative basis, a majority of Subtenant's outstanding stock, except as the result of trading of Subtenant's capital stock through any public exchange, or (b) the management of or power to control Subtenant's day-to-day operations. Notwithstanding the foregoing, Subtenant may assign this Sublease or sublet the Premises without Sublandlord's consent to any corporation owned and controlled by or under common ownership and control with Subtenant. In the event that Sublandlord shall consent to any further subleasing of the Premises or any portion thereof by Subtenant, any rent or other economic consideration realized by Subtenant in excess of the sum of (i) the Base Rent payable hereunder, (ii) reasonable subletting and assignment costs (including brokerage commissions), and (iii) the net unamortized cost of the Subtenant Improvements paid for by Subtenant in the portion of the Premises covered by such subletting or assignment, shall be divided and paid fifty percent (50%) to Landlord, twenty-five percent (25%) to Subtenant, and twenty-five percent (25%) to Sublandlord. No assignment or subletting by Subtenant shall relieve Subtenant of any obligation under this Sublease. 13. NOTICES. All notices required hereunder shall be in writing and shall be deemed properly served if delivered in person, if sent by registered or certified mail with postage prepaid and return receipt requested, or if sent by a nationally recognized overnight courier service, in each case to the following addresses (or to such other addresses as either party subsequently may designate by notice given in accordance herewith); If to Sublandlord: Viking Freight, Inc. 6411 Guadalupe Mines Road Suite 2185 San Jose, California 95120 Attn: Director, Properties and Facilities with a copy to: Caliber System, Inc. 3925 Embassy Parkway Akron, Ohio 44333 Attn: Real Estate Department If to Subtenant: Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014-4167 If to Landlord: Brokaw Interests 10600 North De Anza Blvd. Suite 200 Cupertino, California 95014 Following the date on which Subtenant takes occupancy of the Premises, the notice address for Subtenant automatically shall be changed to the street address of the Premises. For the purposes of this Sublease, all notices shall be deemed given on the date of a signed receipt if delivered in person, two (2) days after mailing if mailed in the manner specified above, and on the date of delivery or the date on which delivery is refused if sent by overnight courier. 14. LEASE PROVISIONS. Subtenant agrees that its rights hereunder are subject and subordinate to the Lease and each and every provision thereof and that the conditions and obligations of the "Tenant" under the Lease shall likewise be binding upon Subtenant hereto, except to the extent that such provisions are inconsistent with the terms expressed under this Sublease. Without limiting the generality of the foregoing, Subtenant expressly agrees to perform and be responsible to Sublandlord for the obligations of, and to be subject to the matters binding upon, the "Tenant" under the following provisions of the Lease: Paragraphs 6, 7.L., 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 27, 32, 33, 36, 39 (except to the extent otherwise expressly provided in the First Amendment to Lease and this Sublease), 43 and 44. In each such provision, the term "Lease" shall mean this Sublease, and Sublandlord shall be entitled to exercise the rights of the "Landlord" thereunder. In addition, the "Miscellaneous Provisions" of Paragraph 45 of the Lease hereby are expressly incorporated into this Sublease by reference; provided, however, that (a) the term "Lease" as used therein shall mean this Sublease, (b) the term "Tenant" as used therein shall mean Subtenant, and (c) the term "Landlord" as used therein shall mean Sublandlord. 15. BROKERAGE. Sublandlord and Subtenant warrant and covenant to each other that they have had no dealings with any broker, finder or agent in connection with this Sublease other than Michael E. Filice and Jim Obermeyer of Wayne Mascia Associates, representing Subtenant, and Mark P. Zamudio and Stephen C. Condrey of Colliers Parrish International, Inc., representing Sublandlord. Sublandlord covenants and agrees to pay to Colliers Parrish International, Inc. a real estate commission for this sublease transaction in such amount and in such manner as is expressly set forth in the listing agreement between Sublandlord and Colliers Parrish International, Inc. dated March 21, 1997. Sublandlord shall not be obligated to pay any commission, finders fee, consulting fee or similar charge to any other party as a result of this sublease transaction. 16. HOLDING OVER. In the event Subtenant shall hold over after the expiration of the Term, Subtenant shall (a) pay to Sublandlord Base Rent for the period of such holdover in an amount equal to one hundred fifty percent (150%) of the Base Rent applicable to the last month of the Term, and (b) indemnify and hold Sublandlord harmless against any liability which Sublandlord may incur to Landlord as a result of Subtenant not vacating the Premises. Any such holding over shall otherwise be on the terms and conditions of this Sublease, except those relating to term and the option to extend, which are expressly waived during any holdover. Notwithstanding the foregoing, Subtenant shall have no right to hold over beyond the Term, and any such holdover shall be deemed to be a tenancy at sufferance, terminable upon notice to Subtenant. 17. PARKING. Subtenant shall be entitled to utilize 3.5 surface parking spaces per 1000 square feet of leased floor area of the Premises. The precise parking areas to be utilized by Subtenant shall be designated by Sublandlord with Subtenant's approval, which shall not be unreasonably withheld, and shall be depicted on a site plan which subsequently shall be attached as Exhibit "B" to this Sublease. 18. MONUMENT SIGN. Subtenant shall have the non-exclusive right to utilize the existing monument sign located on Guadalupe Mines Road, subject to the approval by Sublandlord and Landlord of the size and configuration of Subtenant's signage thereon. Subtenant agrees that, upon request from Sublandlord or Landlord, it shall reconfigure its signage on such monument sign to create sufficient space thereon to accommodate other parties. 19. ANTENNAS. Subtenant shall have the right, subject to the approval of Sublandlord, the City of San Jose and any other applicable governmental authorities, to install one or more antennas and/or microwave dishes on the roof of the building. Subtenant shall be fully responsible for all costs and expenses relating to such antennas and/or microwave dishes, including without limitation any damage or liability resulting from the installation, use or removal thereof. 20. DEFAULT; REMEDIES. The provisions of Paragraph 22 of the Lease (including subparagraphs (a) - (d) thereof) are expressly incorporated into this Sublease by reference and shall govern the occurrence of a default by Subtenant under this Sublease and the remedies available to Sublandlord as a result of such a default; provided, however, that (a) the term "Lease" as used therein shall mean this Sublease, (b) the term "Tenant" as used therein shall mean Subtenant, and (c) the term "Landlord" as used therein shall mean Sublandlord. 21. SUBLANDLORD'S UNDERTAKING. Sublandlord, at its cost and expense, shall diligently and promptly take all reasonable actions to cause Landlord to perform its duties and obligations under the Lease. 22. MEMORANDUM OF SUBLEASE. Sublandlord and Subtenant shall execute and deliver a memorandum of this Sublease in recordable form (which memorandum shall contain the information required to entitle the same to recordation but shall not include the Base Rent payable hereunder), which Subtenant may record in the Santa Clara County, California Official Records. 23. DEFINED TERMS. Capitalized terms in this Sublease shall have the meaning ascribed to such terms in the Lease, unless otherwise defined herein. 24. COUNTERPART EXECUTION. This Sublease may be executed in counterparts, each of which shall be deemed an original document, but all of which shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of the month, day and year first written above. SUBLANDLORD: VIKING FREIGHT, INC. By: /s/ Rodger G. Marticke ------------------------------------ Name: Rodger G. Marticke ------------------------------------ Its: President ------------------------------------ SUBTENANT: HYBRID NETWORKS, INC. By: /s/ William H. Fry ------------------------------------ Name: William H. Fry ------------------------------------ Its: Vice President ------------------------------------ And: /s/ Dan E. Steimle ------------------------------------ Name: Dan E. Steimle ------------------------------------ Its: CFO ------------------------------------ EXHIBIT "A" LEASE 1. PARTIES: THIS LEASE, is entered into on this 9th day of August, 1996, between SDC 941, a California limited partnership, whose address is 10600 North De Anza Blvd., Suite 200 Cupertino, CA 95014 and VIKING FREIGHT, INC., a California corporation, whose address is 411 East Plumeria Drive, San Jose, CA 95134 Attn: Director of Properties. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises and all appurtenances thereto, situated in the City of San Jose, County of Santa Clara, State of California, and more particularly described as follows, to-wit: That certain real property consisting of a building to be constructed by Landlord as provided in paragraph 7 below of approximately 55,116 rentable square feet square feet (the "Building") on a 6.98 acre parcel including parking for PLUS OR MINUS 340 cars for Tenant's exclusive use as outlined on EXHIBIT "A" together with a non-exclusive right of way for ingress and egress and for the installment and maintenance of Public Utilities over a strip of land 50 feet in width commonly known as Guadalupe Mines Road, a private street, all as more particularly described on Exhibit "A-1" (the "Premises"). The Premises and the adjacent building of 123,000 square feet on a 9.04 acre site comprise the "Project" for purposes of this Lease. 3. USE: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld: Office, administrative, clinical medical office, research, development, training, ancillary medical, warehouse, cafeteria, exercise rooms, and related lawful uses. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any laws. 4. TERM AND RENTAL: The term shall commence on Substantial Completion of the Building as defined in paragraph 7.H, ("Commencement Date") and shall terminate on the thirty first day of October 2009. Base monthly rent shall be payable by Tenant in monthly installments of Sixty Seven Thousand Seven Hundred Fifty Three and No/100 Dollars ($67,753.00) ("Base Monthly Rent"). Base Monthly Rent shall increase every thirty (30) months of the Lease Term by the product of the Base Monthly Rent payable for the preceding month and one and 85/1000 (1.085). The Base Monthly Rental shall be due on or before the first day of each calendar month during the term hereof. Said rental shall be paid in lawful money of the United States of America, without offset or deduction except as provided in paragraphs 14, 28 and 30 of the Lease, and shall be paid to Landlord at such place or places as may be designated from time to time by Landlord. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. A. ADJUSTMENT FOR VARIANCE IN BUILDING SQUARE FOOTAGE: In the event the square footage of the Building is other than 55,116 determined by measurement after completion of construction, within thirty (30) days after the Commencement Date, Landlord and Tenant shall execute an amendment to the Lease setting forth the actual rentable square feet of the Building, which calculation shall be consistent with the BOMA standard for Industrial Buildings (i.e. outside of outside wall to outside of outside wall including balcony areas without deduction). 5. SECURITY DEPOSIT: None required. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, administrative, processing, accounting charges, and late charges, which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount which shall be due and payable with the payment then delinquent. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder unless by such acceptance the default is cured, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. 7. CONSTRUCTION AND POSSESSION: A. BUILDING SHELL CONSTRUCTION. Landlord shall cause the shell of the Building ("Building Shell") to be constructed by independent contractors to be employed by and under the supervision of Landlord, in accordance with the building shell plans prepared by Arctec ("Architect") and approved by Landlord and Tenant and guideline specifications, which are attached hereto as EXHIBIT "B" and are incorporated herein by this reference ("Shell Plans and Specifications"). Landlord shall construct the Building Shell in a good and workmanlike manner and in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. Landlord shall pay for all costs and expenses associated with the construction of the Building Shell. The Building Shell shall include all items customarily included within the definition of a speculative "building shell," including without limitation, those items set forth in the Building Shell Definition, attached hereto as EXHIBIT "C", and incorporated herein by this reference. Landlord shall provide Tenant half-size vellum as-built drawings of the Building Shell within thirty (30) days following completion of construction thereof. B. TENANT IMPROVEMENT PLANS. Tenant, at Tenant's sole cost and expense, has also hired _______________ ("Tenant's Architect"), to prepare plans and outline specifications ("Tenant Improvement Plans and Specifications") to be attached hereto as EXHIBIT "D" with respect to the construction of improvements to the interior premises ("Tenant Improvements"). The Tenant Improvements shall consist of all those items not included within in the scope of the Building Shell definition pursuant to Article 7.A above and EXHIBIT "C". The Tenant Improvement Plans and Specifications shall be prepared in sufficient detail to allow Landlord to construct the Tenant Improvements. Landlord shall construct the Tenant Improvements in accordance with the Tenant Improvement Plans and Specifications in a good and workmanlike manner and in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances; provided, however, Landlord shall not be responsible to ensure the Tenant Improvement Plans and Specifications comply with law or applicable building codes. Tenant shall pay for all costs and expenses associated with the construction of the Tenant Improvements. C. PRELIMINARY COST ESTIMATE FOR THE TENANT IMPROVEMENTS. Within fourteen (14) days after Tenant's delivery of the Tenant Improvement Plans and Specifications to Landlord, Landlord shall deliver to Tenant a preliminary cost estimate of the cost to construct the Tenant Improvements. The preliminary cost estimate shall contain sufficient detail for Tenant to understand the cost element of each portion of the proposed Tenant Improvements. D. FINAL PRICING FOR THE TENANT IMPROVEMENTS. Within ten (10) days after Tenant's approval of the preliminary cost estimate for the Tenant Improvements, Landlord shall submit to Tenant competitive bids from a minimum of three (3) subcontractors not affiliated with Landlord for each aspect of the work which is to be performed. In the event Tenant is dissatisfied with the bids for the Tenant Improvements, Tenant shall have the right to (i) modify the Tenant Improvement Plans and Specifications within ten (10) days thereafter to reduce the construction cost or (ii) to request Landlord obtain additional bids from alternate subcontractors. In such event, Landlord shall rebid and submit to Tenant a revised cost estimate with five (5) days after receipt of such revised plans. Landlord must utilize the low bid in each case, unless Tenant approves Landlord's use of another subcontractor, and the cost of the Tenant Improvements shall be based upon construction expenses equal to the sum of the bid amounts as approved by Tenant. Upon Tenant's written approval of the contract bids, Landlord and Tenant shall each be deemed to have given their approval of the final Tenant Improvement Plans and Specifications on which the cost estimate was made, and Landlord shall proceed with the construction of the Tenant Improvements in accordance with the terms of Article 7.H below. If Tenant does not specifically approve or disapprove the bids within seven (7) days, Tenant shall be deemed to have approved the bids. E. CHANGE ORDERS. Tenant shall have the right to order changes in the manner and type of construction of the Building Shell or the Tenant Improvements. Any change orders which are submitted by Tenant after the date which is ten (10) days after the issuance by the City of San Jose of a building permit for the construction of the Building Shell, which cause Landlord's construction schedule to be delayed shall cause the Commencement Date to occur one (1) day in advance of the date the Building Shell is Substantially Complete, as defined in Article 7.H, for each day of actual delay suffered by Landlord as a direct result of such change order. Upon request and prior to Tenant's submitting any binding change order, Landlord shall promptly provide Tenant with written statements of the cost to implement and the time delay and any increased or decreased construction costs associated with any proposed change order, which statements shall be binding on Landlord. If no time delay or change in construction cost amount is noted on the written statement, the parties agree that there shall be no adjustment to the construction cost or the Commencement Date associated with such change order. If ordered by Tenant, Landlord shall implement such change order, and the cost of constructing the Tenant Improvements shall be increased or decreased in accordance with the cost statement previously delivered by Landlord to Tenant for any such change order. F. BUILDING SHELL COSTS. Landlord shall pay for all costs and expenses associated with the construction of the Building Shell as defined in EXHIBIT "C". G. TENANT IMPROVEMENT COSTS. The costs of the Tenant Improvements shall consist of only the following costs to the extent actually incurred by Landlord in connection with the construction of the Tenant Improvements: costs of construction, costs of permits, and the Landlord overhead in a sum equal to six and 50/100 percent (6.50%) of such cost of construction and permits. During the course of construction of the Tenant Improvements, Landlord may deliver to Tenant not more than once each calendar month a written request for payment which shall include and be accompanied by: (i) Landlord's certified statements setting forth the amount requested certifying the percentage of completion of each item for which reimbursement is requested and certifying that the progress payment requested is due to a subcontractor of Landlord pursuant to a contract between Landlord and Landlord's subcontractor. Tenant shall pay to Landlord, within fifteen (15) days after Tenant's receipt of the above items, the costs incurred by Landlord in connection with the Tenant Improvements installed in the Building in accordance with the Tenant Improvement Plans and Specifications minus the retainage set forth below. Tenant shall be entitled to retain ten percent (10%) of the amount invoiced by Landlord until the Tenant Improvements are "Substantially Complete" (defined in Article 7.H below). Tenant shall pay the retained balance owing to Landlord within fifteen (15) days following the date that the Tenant Improvements are Substantially Complete. All costs for Tenant Improvements shall be fully documented to and verified by Tenant and shall be subject to audit by Tenant in the event of a challenge. The amounts charged to Tenant shall not exceed the bid which Landlord is required to utilize pursuant to Article 7.D above. H. CONSTRUCTION. Landlord shall use its best efforts to obtain a building permit from the City of San Jose as soon as possible after Tenant's approval of the Shell Plans and Specifications. The Building Shell and Tenant Improvements shall be deemed substantially complete ("Substantially Complete") when the Building Shell and Tenant Improvements have been substantially completed in accordance with the Shell Plans and Specifications and Tenant Improvement Plans and Specifications, as evidenced by the issuance of a certificate of occupancy or its equivalent by the appropriate governmental authority for the Building Shell and Tenant Improvements, and the issuance of a certificate by the Architect certifying that the Building Shell and Tenant Improvements have been completed in accordance with the plans. I. This paragraph intentionally left blank J. INSURANCE/INDEMNITY. Landlord shall indemnify, protect, defend and hold Tenant harmless from and against all liability, cost, expense, or damage (including, without limitation, attorneys fees) arising from: (i) the construction of the Building Shell or the Tenant Improvements; or (ii) any construction defects, or (iii) any failure to properly construct the Building Shell or Tenant Improvements in accordance with the Shell Plans and Specifications or Tenant Improvement Plans and Specifications, or (iv) any failure to construct the Building Shell or Tenant Improvements in a good and workmanlike manner, or (v) any failure to construct the Building Shell or Tenant Improvements in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances; provided, however, Landlord shall not be responsible to ensure the Tenant Improvement Plans and Specifications comply with law or applicable building codes. Tenant's review and approval of any plans, specifications, or any other documents shall not relieve Landlord from Landlord's obligations under the foregoing indemnification. Landlord shall procure (as a cost of the Building Shell) and keep in effect from the execution date of this Lease until the termination of this Lease a "Broad Form" liability insurance policy in the amount of Three Million Dollars ($3,000,000.00), insuring all of Landlord's activities with respect to the Building and Premises, including Landlord's indemnity obligations under this Article 7.J. In addition, Landlord shall procure (as a cost of the Building Shell) builder's risk insurance, insuring the Building Shell and Tenant Improvements for their full replacement cost while the Building and Tenant Improvements are under construction, and until the date that the fire insurance policy described in Article 12 of the Lease is in full force and effect. K. PUNCHLIST & WARRANTY. After the Building Shell and Tenant Improvements are Substantially Complete, Landlord shall immediately correct any construction defect or other "punchlist" item which Tenant brings to Landlord's attention. All such work shall be performed in a manner designed to cause the least possible interruption to Tenant and Tenant's activities on the Premises. Landlord shall provide a standard contractor's warranty with respect to the Premises for one (1) year from the Commencement Date. Such warranty shall exclude (i) routine maintenance, (ii) damage caused by the negligence or misuse by Tenant and (iii) acts of God L. OTHER WORK BY TENANT: All work not within the scope of work normally constructed by the construction trades employed on the Building and not described in the Shell Plans and Specifications or Tenant Improvement Plans and Specifications, such as furniture, telephone equipment, telephone wiring and office equipment work, shall be furnished and installed by Tenant. When the construction of the Tenant Improvements has proceeded to the point where Tenant's work of installing its fixtures and equipment in the Premises can be commenced, Landlord shall notify Tenant and shall permit Tenant, and its authorized representatives and contractors, to have access to the Premises before the Commencement Date for the purpose of installing Tenant's trade fixtures and equipment. Any such installation work by Tenant, or its authorized representatives and contractor, shall be undertaken upon the following conditions: (i) if the entry into the Premises by Tenant, or its representatives or contractors, interferes with or delays Landlord's construction work, Tenant shall cause the party responsible for such interference or delay to leave the Premises; (ii) any contractor used by Tenant in connection with such entry and installation shall use union labor and its entry on the Premises shall not interfere with Landlord's work. M. LANDLORD'S FAILURE TO COMPLETE CONSTRUCTION: Notwithstanding the foregoing, if for any reason the Premises are not Substantially Complete on or before that date which is ten (10) months following the date of execution of this Lease, Tenant shall be entitled to rental abatement hereunder of one (1) day's rent beyond the Commencement Date for each day beyond said ten (10) month period in which the Premises are not Substantially Complete. If for any reason the Premises are not Substantially Complete on or before that date which is eighteen (18) months following the date of execution of this Lease, Tenant shall be entitled to terminate this Lease by providing written notice to Landlord within thirty (30) days following the expiration of said eighteen (18) month period. The above dates shall be extended one day for every day of delay in completion caused by Tenant Delays. The foregoing remedies provided in this Article 7.M shall be the sole and exclusive remedy of Tenant with respect by the failure by Landlord to achieve Substantial Completion within the ten (10) month period. 8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Building and the other improvements in their present condition, except for latent defects. Tenant agrees on the last day of the term hereof, or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, reasonable wear and tear, destruction by casualties, permitted alterations and maintenance and repairs for which Tenant is not responsible hereunder excepted. "Good condition" shall mean that the interior walls of all office and warehouse areas, the floors of all office and warehouse areas, all suspended ceilings and any carpeting will be cleaned to the same condition as existed at the commencement of the Lease, normal wear and tear excepted. Not later than thirty (30) days before termination of this Lease, Landlord shall notify Tenant in writing of all alterations, additions and improvements made to the Premises ("Alterations") which Landlord requires Tenant to remove and with respect to which Tenant is required to restore the Premises to their condition as of the Commencement Date at Tenant's sole cost and expense; provided, however, Landlord shall not require Tenant to remove any Alterations which Landlord has agreed can remain at the time of consent pursuant to paragraph 10 below. On or before the end of the term or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises, and all property not so removed within thirty (30) days after termination shall be deemed to be abandoned by Tenant. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. 9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed, any waste upon the said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the Buildings in which the Premises may be located or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful or objectionable purpose, or place any loads upon the floor, walls, or ceiling which endanger the structure, or use any machinery or apparatus which will in any manner vibrate or shake the Premises or the Building of which it is a part to such an extent as to significantly endanger the structural integrity, floors or interior walls of the Building or the Premises, or place any harmful liquids or hazardous materials in the drainage system of, or upon or in the soils surrounding the Building in violation of law. Except in enclosed refuse storage areas, no materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature or any waste materials, refuse, scrap or debris shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper without Landlord's prior approval, which may be withheld in its reasonable discretion. 10. ALTERATIONS AND ADDITIONS: Tenant shall be entitled without obtaining Landlord's consent or the consent of any lender secured by the Premises, to make any Alterations to the Premises which do not affect (i) the exterior appearance of the Building or (ii) the structure of the Building. If an Alteration requires Landlord's consent, Tenant shall deliver to Landlord the proposed architectural and structural plans for all such alterations and Landlord shall indicate to Tenant in writing within five (5) business days following receipt of Tenant's request, whether Landlord consents to the proposed Alteration, and if so, whether Landlord will require Tenant to remove such Alteration at the expiration of the lease term. As to Alterations requiring Landlord's consent, such consent shall not be unreasonably withheld or delayed. Any Alteration to the said Premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord. Alterations which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air conditioning, permanent partitioning, carpeting, or any other installation which has become an integral part of the Premises. After having obtained Landlord's consent, Tenant agrees that it will not proceed to make such Alterations until three (3) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall have the right to add, at its expense, approximately 50,000 square feet of space to the Premises (the "Addition") in the location shown on EXHIBIT "A" at any time during the term of the Lease. The Landlord's consent or the consent of any lender secured by the Premises shall not be required to construct the Addition, provided the Addition is constructed in compliance with all laws and is architecturally consistent with the Premises. The provisions of paragraph 10 shall generally govern the construction of the Addition except that Substantial Completion of the Addition shall not affect the rent and Tenant shall be responsible for all costs associated with the Addition. 11. MAINTENANCE OF PREMISES: Landlord warrants that as of the date of this Lease, the roof, exterior walls, glazing, plumbing, electrical and HVAC systems, sidewalks and parking areas, related to the Premises are in good and sanitary order, condition, and repair. Subject to Landlord's warranties contained in this paragraph 11 and paragraph 7.K, Tenant shall, at its sole cost, keep and maintain, repair and replace, said Premises and appurtenances and every part hereof, including but not limited to, exterior walls, roof membrane (maintenance only), glazing, plumbing, electrical and HVAC systems, and all the Tenant Improvements in good and sanitary order, condition, and repair. Notwithstanding the foregoing, Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and when necessary, the foundation, exterior walls, structure and structural members, and roof structure and roof membrane (replacement only) of the Building. Tenant shall provide Landlord with a copy of a service contract between Tenant and a licensed air-conditioning and heating contractor which contract shall provide for bi-monthly maintenance of all air conditioning and heating equipment at the Premises. Tenant shall pay the cost of all air-conditioning and heating equipment repairs or replacements which are either excluded from such service contract or any existing equipment warranties. Tenant shall be responsible for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if (i) Tenant contracts with a licensed roof contractor who is reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the roof membrane at least every six months, with the first inspection due the sixth (6th) month after the Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide to Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. All vinyl wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. 12. HAZARD INSURANCE: Tenant shall not use, or permit said Premises, or any part thereof, to be used, for any purpose other than that for which the said Premises are hereby leased; and no use shall be made or permitted to be made of the said Premises, nor acts done, which will cause an increase in premiums or a cancellation of any insurance policy covering said Building, or any part thereof, nor shall Tenant sell or permit to be kept, used or sold, in or about said Premises, any article which may be prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to Tenant's use of said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering said Building and appurtenances. Landlord shall purchase and keep in force "all risk" (including earthquake and flood) casualty and 12 month rental loss insurance. The amount of the "all risk" casualty insurance shall equal to the replacement cost of the Building Shell, the Tenant Improvements, and, if applicable, the Alterations or the Addition (without depreciation). All such policies shall provide for thirty (30) days' prior written notice to Tenant of any cancellation or termination. The Tenant agrees to pay to the Landlord as additional rent, on demand each year thirty (30) days prior to the date due, the full cost of said insurance as evidenced by insurance billings to the Landlord. Payment shall be due to Landlord within thirty (30) days after written invoice to Tenant. Notwithstanding the foregoing, Tenant reserves the right to provide the "all risk" casualty coverage insurance for the Premises provided (i) Tenant can obtain such insurance at a more favorable rate than Landlord; (ii) the form of coverage and insurer are satisfactory to Landlord and its lender; (iii) Landlord and its lender are named as additional insured; (iv) such insurance provides that it may not be subject to cancellation or change except after at least sixty (60) days written notice to Landlord; and (v) Tenant has delivered to Landlord a certificate of insurance evidencing such policy is in effect. In addition, Tenant agrees to insure its personal property, additions, alterations, and improvements for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises of $5,000,000.00 combined single limited for bodily injury and property damage. Each party shall name the other as an additional insured on their respective policies, shall deliver a copy of their certificates of insurance to each other. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation or termination. Tenant's insurance may be provided through a blanket policy covering the Premises and other properties owned or leased by Tenant. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the commencement and termination dates of this Lease. Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to the Premises or its contents, and which may arise from any risk covered by their respective insurance policies, as set forth above. The parties shall obtain from their respective property insurance companies a waiver of any right of subrogation which said insurance company may have against the Landlord or the Tenant, as the case may be. 13. TAXES: Tenant shall be liable for all taxes levied against Tenant's personal property and trade or business fixtures, and agrees to pay, as additional rental, all real estate taxes and special assessment installments levied on the Premises, upon the occupancy of the Premises and including any substitute or additional charges which may be imposed during, or applicable to the Lease term including real estate tax increases due to a sale or other transfer of the Premises, as they appear on the City and County tax bills during the Lease term, and as they become due. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the commencement and termination dates of this Lease. In any time during the term of this Lease a tax, excise on rents, business license tax, or any other tax, however described, is levied or assessed against Landlord, as a substitute or addition in whole or in part for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge his prorata share of such tax or excise on rents or other tax before it becomes delinquent, except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon the Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that the Tenant cannot pay and discharge his prorata share of such tax on behalf of the Landlord, then at the sole election of the Landlord, the Landlord may increase the rental charged hereunder to cover the exact amount of such tax. Tenant shall have the right to contest the amount of any such taxes so long as such contest does not result in a lien against the property or other impairment of Landlord's title to the property and Landlord agrees to cooperate in such proceedings. 14. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, heat, light, power, telephone and other utilities supplied to the Premises. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or failure to furnish any of utilities to the Premises except to the extent the failure is caused by Landlord's negligence or willful misconduct. Tenant shall be entitled to abatement or reduction of rent as to the unusable portion of the Premises provided any failure to provide and furnish the utilities to the Premises is due (i) to Landlord's negligence or willful misconduct and (ii) such interruption of utilities continues more thirty (30) days. 15. ABANDONMENT: Tenant shall not abandon the Premises at any time during the term; and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 16. FREE FROM LIENS: Tenant shall keep the Premises and the property on which the Premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Tenant shall have the right to contest such liens if Tenant obtains a bond equal to 150% of the amount of such lien to prevent enforcement of the lien during such contest or otherwise makes adequate provision to prevent enforcement of the lien during such contest and during the pendency of any such contest Tenant's failure to pay and discharge such liens shall not constitute a default hereunder. 17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, (i) pertaining to Tenant's use of the Premises, or (ii) resulting from any Alterations made by Tenant, and shall faithfully observe in the use of the Premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Landlord and Tenant. Tenant shall have the right to contest such laws if Tenant makes adequate provision to prevent enforcement of the law during such contest, and during the pendency of any such contest Tenant's failure to comply with such laws shall not constitute a default hereunder. Landlord warrants that to its best knowledge, the Premises and the Project are in compliance with all Municipal ordinances and authorities and State and Federal statutes and authorities now in force. 18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: Without the prior written consent of Landlord, and except for standard office products and cleaning supplies, Tenant shall not bring, allow, use or permit upon the Premises, or generate or create at or emit or dispose in violation of law from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or extraction procedure toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code as the same may be amended from time to time. Tenant shall comply, at its sole cost, with all laws pertaining to, and shall indemnify and hold Landlord harmless from any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from such bringing, allowing, using, permitting, generating, creating, or emitting or disposing of any such materials by Tenant. Tenant's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the cleanup or containment of wastes, the identification of the pollutants in the waste, the identification of scope of any environmental contamination, the removal of pollutants from soils, riverbeds or aquifers, the provision of an alternative public drinking water source, or the long term monitoring of ground water and surface waters, and (iii) all costs of defending such claims. In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. Landlord shall indemnify and hold Tenant harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant associated with the removal, investigation, monitoring or remediation of hazardous materials whose presence arises from the bringing, allowing, using, permitting, generating, creating, or emitting or disposing of any such materials in violation of law on the Premises or in the Building by Landlord or any other person unrelated to Tenant. 19. INDEMNITY: As a material part of the consideration to be rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause arising at any time during the term of this Lease except for claims caused by the willful or negligent acts or omissions of Landlord and its employees, agents and contractors, and Tenant will hold Landlord exempt and harmless from any damage or injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises by Tenant, or from the failure of Tenant to keep the Premises in good condition and repair, as herein provided. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. Landlord shall indemnify and hold harmless Tenant from all damages, liabilities, judgments, actions, attorneys' fees, consultants' fees, cost and expenses arising from the negligence or willful misconduct of Landlord or its employees, agents, contractors or invitees, or the breach of Landlord's obligations or representations under this Lease. 20. ADVERTISEMENTS AND SIGNS: Except for the monument sign to be provided by Landlord pursuant to paragraph 7, Tenant will not place or permit to be placed, in, upon or about the said Premises any signs not approved by the city or other governing authority. Any sign so placed on the Premises shall be so placed upon the understanding and agreement that Tenant will remove same at the termination of the tenancy herein created and repair any damage or injury to the Premises caused thereby, and if not so removed by Tenant then Landlord may have same so removed at Tenant's expense. Landlord agrees that, subject to City approval, Tenant may have signage similar to that currently permitted for the other tenants in the Project. 21. ATTORNEY'S FEES: In case suit should be brought for the possession of the Premises, for the recovery of any sum due hereunder, or because of the breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee as part of its costs which shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. 22. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: a) Any failure by Tenant to pay the rental or to make any other payment required to be made by Tenant hereunder, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; b) The abandonment of the Premises by Tenant; c) A failure by Tenant to observe and perform any other provision of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion; d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed after the filing within thirty (30) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. 22.(a) REMEDIES: In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform his obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, and e) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. The term "rent", as used herein, shall be deemed to be and to mean the minimum monthly installments of rent and all other sums required to be paid by Tenant pursuant to the terms of this Lease, all other such sums being deemed to be additional rent due hereunder. As used in (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of the discount rate of the Federal Reserve Bank of San Francisco plus three (3%) percent per annum. As used in (c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. 22.(b) This paragraph intentionally left blank 22.(c) ABANDONMENT: In the event of the abandonment of the Premises by Tenant if Landlord does not elect to terminate this Lease as provided in paragraph 22.(a) above, then the provisions of California Civil Code Section 1951.4, as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its reasonable discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 22.(d) NO TERMINATION: No re-entry or taking possession of the Premises by Landlord pursuant to 22.(c) of this Article 22 shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Premises. Instead, at the option of Landlord, Tenant's surrender may terminate all or any existing sublease or subtenancies, or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct relationship between Landlord and any subtenants. 24. This paragraph intentionally left blank. 25. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure such failure, (except in the case of an emergency in which event only a reasonable attempt to notice Landlord verbally or in writing shall be required), prior to any claim for breach or for damages resulting from such failure; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Landlord shall not be deemed to be in default if Landlord shall within such period commence such cure and thereafter diligently prosecute the same to completion. In the event of any default by Landlord not cured as provided in this paragraph, Tenant shall have all remedies available in this Lease at law or in equity including without limitation the remedies of damages, specific performance or the right to perform such obligation on Landlord's behalf. 26. NOTICES: All notices required to be given under this Lease shall be sent by U.S. certified mail, return receipt requested or by personal delivery addressed to the party to be notified at the address for such party specified in paragraph 1 of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. In addition Landlord agrees to provide a copy of all notices to Caliber System, Inc., at 1815 West Market St., Akron, OH 44313 Attn.: Real Estate Department. Notices shall be deemed received on the date delivered to the party being noticed. 27. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to enter into and upon said Premises at all reasonable times upon reasonable notice of at least 24 hours (except in case of emergency) subject to any security regulations of Tenant for the purpose of inspecting the same or for the purpose of maintaining the Premises or for the purpose of making repairs, alterations or additions to any other portion of said Premises or for the purpose of erecting additional building(s) and improvements on the land where the Premises are situated, or on adjacent land owned by Landlord, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required without any rebate of rent or without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned; provided, however, (i) Landlord shall not unreasonably interfere with Tenant 's normal business operations, (ii) any such scaffolding, canopies, fences and props shall remain in place no longer than reasonably necessary for Landlord's reasonable business purpose, and (iii) such alterations, additions or additional improvements shall not materially interfere with access, light and ventilation to the Premises. Tenant shall permit Landlord and his agents, at any time within ninety (90) days prior to the expiration of this Lease, to place upon said Premises any "For Sale" or "To Lease" signs and exhibit the Premises to prospective tenants at reasonable hours following reasonable notice to Tenant. 28. DESTRUCTION OF PREMISES: In the event of any destruction to all or any part of the Building or Premises by a casualty (i) which is required to be insured under paragraph 12, (ii) which is actually insured by Landlord, or (iii) which is uninsured, but the cost to restore is less than One Hundred Thousand and No/100 Dollars, Landlord shall cause a contractor selected by Landlord to prepare a reasonable good faith opinion (the "Contractor's Estimate") of the number of days needed to repair such damage, and shall deliver the Contractor's Estimate to Tenant within thirty (30) days following such destruction (unless such destruction has been fully repaired within such thirty (30) day period). In the event of a destruction of the Premises by an insured casualty (or by an uninsured casualty if the cost of restoration is less than $100,000) during the term from any cause, Landlord shall forthwith repair the same to substantially their former condition in a good and workmanlike manner and in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances, provided such repairs can be made within one (1) year from the date of destruction, including receipt of all necessary governmental approvals, under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the Premises. If the Contractor's Estimate indicates that such repairs cannot be made in one (1) year from the date of destruction, Landlord or Tenant may, at their option, terminate this Lease. In the event this Lease is terminated, Tenant shall be entitled to any insurance proceeds received by Landlord which are attributable to the Tenant Improvements, Alterations, or the Addition. A destruction of the Premises by a casualty not required to be insured by Landlord under this Lease and not actually insured by Landlord costing in excess of One Hundred Thousand and No/100 Dollars ($100,000.00) to restore, shall terminate this Lease, unless either Landlord or Tenant elects to pay the difference between $100,000.00 and the actual cost to restore the Premises, in which event Landlord shall restore as provided above. In all events Landlord or Tenant shall be entitled to terminate this Lease effective as of the date of the destruction if the actual repairs have not been completed within one (1) year following the date of the destruction. In the event of any termination of this Lease pursuant to this paragraph 28 and the Premises are habitable, Landlord and Tenant shall use reasonable good faith efforts to negotiate a termination date and fair rental value to be paid by Tenant prior to such termination date. In all events in which Landlord is obligated to restore the Premises, Landlord shall be required to restore the Tenant Improvements, and, if the same have been made, Alterations and the Addition, but shall not be required to restore Tenant's fixtures or personal property. 29. ASSIGNMENT OR SUBLEASE: In the event Tenant desires to assign this Lease or any interest therein including, without limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver to Landlord executed counterparts of any such agreement and of all ancillary agreements with the proposed assignee or subtenant, financial statements, and any additional information as reasonably required to determine whether Landlord will consent to the proposed assignment or sublease. Landlord shall then have a period of ten (10) days following receipt of such notice within which to notify Tenant in writing that Landlord elects (i) to permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice, or (ii) to refuse consent. If Landlord should fail to notify Tenant in writing of such election within said 10-day period, Landlord shall be deemed to have elected option (i) above. Any rent or other economic consideration realized by Tenant under any such sublease and assignment in excess of the rent payable hereunder, after the net unamortized cost of the Tenant Extra Improvements for which Tenant has itself paid, and reasonable subletting and assignment costs including brokerage commissions, shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration shall constitute an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease, constitute a material inducement for the Landlord to enter into the Lease, and are agreed as between the parties to be commercially reasonable. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease except for obligations created by any subsequent amendment of this Lease to which Tenant is not a party. Any assignment or subletting which conflicts with the provisions hereof shall be void. Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord and Tenant) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that: (i) in Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in such a business, and the Premises, or the relevant part thereof, will be used in such a manner, that is limited to the use expressly permitted under this Lease; (ii) the proposed assignee or subtenant is a reputable company with sufficient financial worth and management ability to undertake the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (iii) the proposed assignment or sublease shall be in form reasonably satisfactory to Landlord; (iv) Tenant shall reimburse Landlord on demand for any costs that may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent not to exceed $1500 per request for assignment or sublease; and (v) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to Landlord. Any assignment or transfer shall be made only if and shall not be effective until the assignee shall execute, acknowledge and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed following the date of the assignment and shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent or additional rent by Landlord from any subtenant or assignee, Tenant shall and will remain fully liable for the payment of the rent and additional rent due, and to become due hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed except with respect to obligations of Tenant created by subsequent amendments of this Lease to which Tenant is not a party, and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant shall further indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims by any real estate brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs as described in paragraph 22 above and Tenant has failed to cure such default within ten (10) days following notice of such default from Landlord. The termination of this Lease due to Tenant's default shall not automatically terminate any assignment or sublease then in existence. At the election of Landlord, the assignee or subtenant shall attorn to Landlord and Landlord shall undertake the obligations of the Tenant under the sublease or assignment; provided the Landlord shall not be liable for prepaid rent, security deposits or other defaults of the Tenant to the subtenant or assignee. Notwithstanding the foregoing, Tenant may, without the requirement to comply with the provisions of this paragraph 29, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, division or corporation controlled or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization, or government action; or (iii) a purchaser of substantially all of Tenant's assets (a "Permitted Transferee"). For the purpose of this Lease, sale of Tenant's capital stock through any public exchange shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 30. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder in Tenant's reasonable opinion, this Lease shall as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Tenant shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking. If all of the Premises, or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder in Tenant's reasonable opinion, this Lease shall thereupon terminate. If more than twenty-five percent (25%) of the Premises is taken, either Landlord or Tenant may terminate this Lease as of the effective date of such taking by written notice to the other party prior to the effective date of the taking. If this Lease is not terminated pursuant to this paragraph, Landlord shall, at Landlord's sole cost, repair any damage to the Premises resulting from such taking. If a part or all of the Premises be taken, all compensation awarded upon such taking shall go to the Landlord and the Tenant shall have no claim thereto but Landlord shall cooperate with Tenant to recover compensation for damage to or taking of any alterations, additions or improvements made by Tenant or for Tenant's moving costs. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130. 31. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the owner for the time being of the land and Building, containing the Premises, so that, in the event of any sale of said land or Building, or in the event of a master Lease of the Building, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of the Landlord hereunder arising following such sale, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the master tenant of the Building, that the purchaser or master tenant of the Building has assumed and agreed to carry out any and all covenants and obligations of the Landlord hereunder. 32. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of trust, or other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Tenant agrees to promptly execute any documents which may be required to effectuate such subordination; provided that such ground lessor or mortgagee executes a written agreement with Landlord in form and substance reasonably satisfactory to Tenant providing that Tenant's right to quiet possession of the Premises shall not be disturbed either before or after the foreclosure if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease. At the request of any lender, Tenant agrees to execute and deliver any reasonable modifications of this Lease which do not materially adversely affect the leasehold or Tenant's rights or obligations hereunder. 33. WAIVER: The waiver by Landlord or Tenant of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 34. HOLDING OVER: Any holding over after the termination or expiration of the said term, shall be construed to be a hold over tenancy and Tenant shall pay rent to Landlord at a rate equal to one hundred twenty five percent (125%) of the monthly rental installment due in the month preceding the termination or expiration of the Lease, prorated on a daily basis. Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the term and any options to extend or renew, which terms are expressly waived during any hold over. Furthermore, no holding over shall be deemed or construed to exercise any option to extend or renew this Lease in lieu of full and timely exercise of any such option as required hereunder. 35. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 36. ESTOPPEL CERTIFICATES: Landlord or Tenant shall at any time during the term of this Lease, upon not less than ten (10) days prior written notice from the other party, execute and deliver to the requesting party a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to such party's knowledge, any uncured defaults on the part of the requesting party hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Failure of the requested party to deliver such statement within such time shall be conclusive upon such party that: (a) this Lease is in full force and effect, without modification except as may be represented by the requesting party; (b) there are not uncured defaults in the requesting party's performance. Tenant also agrees to provide three (3) years of its publicly available audited consolidated financial statements within ten (10) days of a request by Landlord for Landlord's use in financing the Premises with commercial lenders. Landlord and any commercial lenders which are furnished the financial statements agree to keep such information confidential. 37. OPTION TO EXTEND THE TERM: Landlord hereby grants to Tenant, upon and subject to the terms and conditions set forth in this paragraph, the option (the "Option") to extend the term of this Lease for two (2) additional terms of sixty (60) months each (individually an "Option Term") . The Option Term shall be exercised, if at all, by written notice to Landlord on or before the date that is twelve (12) months prior to the expiration date of the initial term of the Lease. If Tenant exercises the Option, each of the terms, covenants and conditions of this Lease except this paragraph shall apply during the Option Term as though the expiration date of the Option Term was the date originally set forth herein as the expiration date of the initial term, provided that the Base Monthly Rent to be paid shall be equal to the greater of (i) Fifty One Thousand Six Hundred Eight ($51,608.00), or (ii) ninety five percent (95%) of the Fair Market Rental, as hereinafter defined, for the Premises for the Option Term. The appraisers shall be instructed that the foregoing five percent (5%) discount is intended to reduce comparable rents which include (i) brokerage commissions, (ii) tenant improvement allowances, and (iii) vacancy costs, to account for the fact that Landlord will not suffer such costs in the event Tenant exercises its Option. Anything contained herein to the contrary notwithstanding, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the expiration date of this Lease shall be and remain the expiration date of the initial term. As used herein, the term "Fair Market Rental" for the Premises shall mean the rental and all other monetary payments that Landlord could obtain during the Option Term from a third party desiring to lease the Premises for the Option Term taking into account the age of the Building, the quality of construction of the Building and the Premises, the services provided under the terms of this Lease, the rental and other monetary payments, and any escalations and adjustments thereto (including without limitation Consumer Price Indexing) then being obtained for new leases of space comparable to the Premises in the locality of the Building and all other factors that would be relevant to a third party desiring to lease the Premises for the Option Term in determining the rental such party would be willing to pay therefor. The Fair Market Rental shall not include, however, the value of any Tenant Improvements paid for by Tenant or any addition to the Premises constructed by Tenant pursuant to paragraph 10 above. If Tenant exercises the Option, Landlord shall send to Tenant a notice setting forth the Fair Market Rental for the Premises for the Option Term, on or before the date that is one hundred fifty (150) days prior to the expiration date of the initial term. If Tenant disputes Landlord's determination of the Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of Landlord's notice setting forth the Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either (x) elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the expiration date of the initial term in the manner provided herein, or (y) disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in paragraph 37(a) below. If Tenant does not send to Landlord a notice as provided in the previous sentence, Landlord's determination of the Fair Market Rental shall be the basis for determining the rent to be paid by Tenant hereunder during the Option Term. If Tenant elects to resolve the disagreement as provided in paragraph 37(a) below and such procedures shall not have been concluded prior to the commencement date of the Option Term, Tenant shall pay rent to Landlord hereunder adjusted to reflect the Fair Market Rental as determined by Landlord in the manner provided above. If the amount of Fair Market Rental as finally determined pursuant to in paragraph 37(a) below is greater than Landlord's determination, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 37(a) below within thirty (30) days after the determination. If the Fair Market Rental as finally determined in paragraph 37(a) below is less than Landlord's determination, the difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 37(a) below shall be credited against the next installments of rent due from Tenant to Landlord hereunder. 37(a). RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement regarding the Fair Market Rental shall be resolved as follows: (i) Within thirty (30) days after Tenant's response to Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant shall meet no less than two (2) times, at a mutually agreeable time and place, to attempt to resolve any such disagreement. (ii) If within the thirty (30) day period referred to in (i) above, Landlord and Tenant can not reach agreement as to the Fair Market Rental, they shall each select one appraiser to determine the Fair Market Rental. Each such appraiser shall arrive at a determination of the Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the thirty (30) day consultation period described in (i) above. (iii) If only one appraisal is submitted within the requisite time period, it shall be deemed to be the Fair Market Rental. If both appraisals are submitted within such time period, and if the two appraisals so submitted differ by less than ten percent (10%) of the higher of the two, the average of the two shall be the Fair Market Rental. If the two appraisals differ by more than ten percent (10%) of the higher of the two, then the two appraisers shall immediately select a third appraiser who shall within thirty (30) days after his or her selection make a determination of the Fair Market Rental and submit such determination to Landlord and Tenant. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be the Fair Market Rental. (iv) All appraisers specified pursuant to this paragraph shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising commercial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser plus one-half of any other costs incurred in resolving the dispute pursuant to this paragraph. 38. RIGHT OF FIRST OFFERING TO PURCHASE: Landlord hereby grants Tenant a right of first offering to purchase the Premises. Prior to Landlord offering to sell the Premises to a third party, Landlord shall give Tenant written notice of such desire and the terms and other information under which Landlord intends to sell the Premises. Provided at the time of exercise, Tenant (i) is not in default and (ii) substantially occupies the Premises, Tenant shall have the option, which must be exercised, if at all, by written notice to Landlord within twenty (20) business days after Tenant's receipt of Landlord's notice, to purchase the Premises at the sales price and terms of sale specified in the notice. In the event Tenant timely exercises such option to purchase the Premises, Landlord shall sell the Premises to Tenant, and Tenant shall purchase the Premises from Landlord in accordance with the price and terms specified in Landlord's notice. Landlord and Tenant shall, in good faith, attempt to reach agreement on the terms of a mutually acceptable purchase agreement consistent with the terms set forth in Landlord's notice within thirty (30) days of Landlord's notice. In the event (i) Landlord and Tenant are unable to reach agreement on a mutually acceptable purchase agreement within such thirty (30) day period or (ii) Tenant fails to exercise Tenant's option within said twenty (20) day period, Landlord shall have one hundred eighty (180) days thereafter to sell the Premises at no less than ninety percent (90%) of the sales price and upon the same or substantially the same other terms of sale as specified in the notice to Tenant. In the event Landlord fails to sell the Premises within said one hundred eighty (180) day period or in the event Landlord proposes to sell the Premises at less than ninety percent (90%) of the sales price or on other material terms which are more favorable to the prospective tenant than that proposed to Tenant, Landlord shall be required to resubmit such offer to Tenant in accordance with this Right of First Offering. This Right of First Offering shall automatically terminate, (i) upon the expiration or sooner termination of the Lease, or (ii) in the event of a foreclosure or other transfer of Landlord's interest in the Premises to a lender. Notwithstanding the forgoing, this Right of First Offering shall not apply to or terminate upon a transfers of all or a portion of the Premises to (i) John A. Sobrato and/or John M. Sobrato (individually and collectively "Sobrato"), and (ii) any immediate family member of Sobrato, and (iii) any trust established, in whole or in part, for the benefit of Sobrato and/or any immediate family member of Sobrato, (iv) any partnership in which Sobrato or any immediate family member, either directly or indirectly (e.g., through a partnership or corporate entity or a trust) retains a general partner interest, and/or (v) any corporation under the control, either directly or indirectly, by Sobrato or any immediate family member of Sobrato. 39. OPTIONS: All Options provided Tenant in this Lease are personal and granted to original Tenant and any Permitted Transferee and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord's sole discretion. In the event that Tenant hereunder has any multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. 40. QUIET ENJOYMENT: As long as Tenant faithfully and timely performs all the terms and covenants of this Lease, Tenant shall quietly have and hold the Premises for the term and any extensions thereof. 41. BROKERS: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Colliers Parrish and Tenant agrees to indemnify and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any other broker or finder claiming through Tenant. Tenant agrees to pay the commission of $3.00 per square foot due Colliers Parrish with respect to this Lease. Landlord represents it has not utilized or contacted a real estate broker or finder with respect to this Lease, and Landlord agrees to indemnify and hold Tenant harmless against any claim, cost, liability or cause of action asserted by any other broker or finder claiming through Landlord. 42. LANDLORD'S LIABILITY: Provided Landlord maintains at least $1,000,000 of equity in the Premises, If Tenant should recover a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of Landlord's interest in the Premises including the improvements and real property and neither Landlord or any of its partners shall be liable personally for any deficiency. 43. AUTHORITY OF PARTIES: Tenant represents and warrants that each individual executing this Lease on behalf of said corporation is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Landlord represents and warrants that each individual executing this Lease on behalf of said limited partnership is duly authorized to execute and deliver this Lease on behalf of said limited partnership, and that this Lease is binding upon said limited partnership in accordance with its terms. 44. DISCLOSURES: Landlord has advised Tenant of a potential health concern related to the presence in the air of Aspergillus related to the composting activities at the nearby landfill. Tenant has agreed it will not seek to terminate the lease based any potential health hazard related to the Aspergillus. 45. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights and remedies in law and in equity. If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term provided such term is reasonably severable. This Lease shall be governed by and construed in accordance with California law. Tenant shall not permit or condone any nuisance or disturbance of any kind on the Premises which unreasonably annoys or disturbs Landlord. All sums due hereunder, including rent and additional rent, if not paid after expiration of any applicable grace period, shall bear interest at the prime rate charged from time to time by Union Bank accruing from the date due until the date paid to Landlord. Time is of the essence hereunder. The headings or titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may, after providing any required notice and after allowing any applicable cure period to elapse, perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance within ten (10) days following Landlord's written notice for such payment. If Landlord fails to perform any obligation required under this Lease or by law or governmental regulation, Tenant in its sole discretion may, after providing any required notice and after allowing any applicable cure period to elapse, perform such obligation, in which event Landlord shall pay Tenant as additional rent all sums paid by Tenant in connection with such substitute performance within ten (10) days following Tenant's written notice for such payment, failing which Tenant shall be entitled to all remedies available at law or in equity. Any delinquent sum shall bear interest at the per annum interest rate announced from time to time by Union Bank, as its prime rate at its principal office. Except as expressly stated in this Lease, Tenant acknowledges that neither Landlord or its affiliates or agents have made any agreements, representations, warranties or promises with respect to the demised Premises or the Building of which they are a part, or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth, Tenant relied on no statement of Landlord or its agents for that purpose. All monetary sums due from Tenant to Landlord under this Lease shall be deemed to be rent. IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day and year first above written. LANDLORD: TENANT: SOBRATO DEVELOPMENT COS. #941 VIKING FREIGHT, INC., a California Limited Partnership a California Corporation By: /s/ illegible By: /s/ illegible ----------------------------- ------------------------------ - ------------------------------- Its: Managing General Partner Its: President ------------------------------ EXHIBIT "A" PREMISES & PROJECT [Graphic of Premises] EXHIBIT A-1 TO SUBLEASE SITUATED IN THE CITY OF SAN JOSE, COUNTY OF SANTA CLARA AND STATE OF CALIFORNIA, AND MORE PARTICULARLY DESCRIBED AS FOLLOWS: Parcel 2 as shown on that certain parcel map filed in Book 587 of Maps at Pages 18, 19 and 20, Santa Clara County Records. Excepting therefrom that certain portion of said Parcel 2 described as follows: Beginning at the most Southeasterly corner of said Parcel 2; Thence from said point of beginning along with Southeasterly line of said Parcel 2 following three courses: North 31 DEG. 05' 28" East 227.66 feet to the beginning of a curve to the left; Along said curve through a central angle of 2 DEG. 21' 55" having a radius of 320.00 feet and an arc distance of 13.21 feet; North 28 DEG. 43' 31" east 15.71 feet; Thence North 61 DEG. 10' 34" West 130.28 feet to the beginning of a non-tangent curve to the left to which point a radial line bears North 13 DEG. 35' 02" West; Thence Westerly along said curve through a central angle of 35 DEG. 26' 28" having a radius of 365.00 feet and an arc distance of 225.78 feet to the beginning of a non-tangent curve to the left to which point a radial line bears North 5 DEG. 21' 12" East; Thence along said curve through a central angle of 38 DEG. 57' 38" having a radius of 150.00 feet and an arc distance of 86.76 feet to the Southwesterly line of said Parcel 2; Thence along said Southwesterly line the following twelve courses: South 38 DEG. 18' 35" East 51.23 feet; South 60 DEG. 17' 44" East 67.38 feet; North 30 DEG. 10' 44" East 5.48 feet; South 59 DEG. 20' 48" East 14.00 feet to the beginning of non-tangent curve to the right to which point a radial line bears North 59 DEG. 20' 48" West; Along said curve Northeasterly through a central angle of 8 DEG. 18' 25" having a radius of 317.00 feet and an arc distance of 45.96 feet; South 51 DEG. 02' 23" East 30.00 feet; 1 South 38 DEG. 38' 20" West 3.22 feet; South 51 DEG. 40' 57" East 52.00 feet; North 38 DEG. 31' 48" East 1.74 feet; South 51 DEG. 15' 27" East 40.00 feet; North 38 DEG. 54' 32" East 1.13 feet; South 50 DEG. 55' 30" East 49.59 feet; To the point of bargaining. Together with that certain portion of Parcel 1 as shown on the above- mentioned parcel map described as follows: Beginning at the Northerly corner of said Parcel 1; Thence from said point of beginning along the Northerly lines of said Parcel 2 South 38 DEG. 18' 35" East 292.55 feet to the beginning of a non-tangent curve to the left to which a radial line bears North 31 DEG. 36' 23" West; Thence Southwesterly along said curve through a central angle of 18 DEG. 31' 34" having a radius of 150.00 feet and an arc distance of 48.50 feet; Thence North 33 DEG. 16' 46" West 169.14 feet; Thence North 68 DEG. 28' 08" West 90.19 feet to the Northwesterly line of said Parcel 1; Thence along said Northwesterly line North 21 DEG. 37' 00" East 66.09 feet to the beginning of a curve to the right; Thence along said curve through a central angle of 16 DEG. 37' 59" having a radius of 135.00 feet and an arc distance of 39.19 feet to the point of beginning. TOGETHER WITH: A non-exclusive right of way for ingress and egress and for the installment and maintenance of public utilities over a strip of land 50 feet in width, the center line of which is described as follows: Beginning at an iron pipe at the point of intersection of the Northerly line of that certain Parcel of land described as Parcel No. Three in the deed from the Francesca Chouteau to James Rolph III and June Irene Rolph, his wife, dated December 30, 1995 and recorded January 12, 1996 in Book 3385 of Official Records Page 6, Santa Clara County Records, with the center line of a 50 foot right of way, as said iron pipe; Northerly line and said center line, are shown on the map of record of survey filed in the Office of the Recorder of the 2 County of Santa Clara, State of California, on March 8, 1956 in Book 67 of Maps, at page 29, said point of beginning also being the Southerly terminus of the center line of the Guadelupe Mines Road, as shown on said map of record of survey; thence from said point of beginning along the center line of said 50 foot right of way South 15 DEG. 47' 08". West 260.98 feet to an iron pipe; thence South 8 DEG. 56' 38" West 178.61 feet to an iron pipe; South 2 DEG. 55' 08" West 478.06 feet to an iron pipe, South 28 DEG. 43' 31" West 210.62 feet to an iron pipe, South 31 DEG. 05' 26" West 500.67 feet to an iron pipe; South 35 DEG. 22' 21" West 191.00 feet to an iron pipe; South 15 DEG. 50' 31" West 125.11 feet to an iron pipe, South 26 DEG. 51' 51" West 134.17 feet to an iron pipe, South _9 DEG. 03' 41" West 134.17 feet to an iron pipe, South 61 DEG. 51' 21" West 210.15 feet to an iron pipe. 3 EXHIBIT "B" - SHELL PLANS AND SPECIFICATIONS
Architect Sheet References Last Revision Date - ----------- ---------------- ------------------ Arctec A0.1, A1.0-1.1, A2.0-2.4, A3.0, A4.0-4.3, A6.0, A8.0-8.2, 7/24/96 A10.0-10.7 SEI S1.0, S2.0, S3.0, S4.0, S5.0-5.1, S6.0-S6.1, S7.0-7.1, S8.08.2, 7/24/96 S9.0, S10.0, S11.0, S12.0 Spring SE0, SE1 7/24/96 Kier & Wright C-1, C-2 7/24/96 Guzzardo L-1, L-2 7/24/96
EXHIBIT "C" - BUILDING SHELL DEFINITION The Building Shell includes the following items: 1. SITE WORK a. Asphalt concrete paving, wheel stops, and striping. b. Concrete sidewalks, curbs, gutter, driveway, approaches, and planter walls. c. Landscaping, landscape lighting, and irrigation. d. Underground utilities - water, gas, fire line, sanitary line, site storm drainage system, transformers and primary and secondary electrical lines stubbed into building. The routing of the under slab utilities shall be done as part of the Building Shell construction if the location of the lines are determined prior to the pouring of the floor slab. e. Any offsite improvement work required by the City of San Jose to obtain building permits. 2. BUILDING STRUCTURE Includes all elements necessary to provide for a completely waterproof Building Shell including but not limited to: a. Concrete foundation and slab on grade including all reinforcing steel and wire mesh including two loading docks. b. Structural steel columns and beams. c. Steel joist and girder second floor system with concrete and metal deck. d. Insulated wood panelized glulam roof structure with fiberglass built-up roofing including roof drainage plumbing. e. Glass, glazing and perimeter roll up or hollow metal doors including normal passage hardware. f. Concrete tilt up, plaster or Dry-Vit on metal stud framed exterior walls. g. Exterior painting. h. All city permits, fees, and taxes, connection charges related to the Building Shell construction. j. All architectural and engineering costs related to the design of the Building Shell. k. Batt and seam metal mansard roof EXHIBIT "D" - TENANT IMPROVEMENT PLANS AND SPECIFICATIONS (SHEET REFERENCES TO BE ATTACHED WHEN COMPLETE) EXHIBIT "E" - GUARANTY OF LEASE This Guaranty of Lease ("Guaranty") is made as of this 9th day of August, 1996 by CALIBER SYSTEM, INC. ("Guarantor") in favor of Landlord, and recites as follows: WHEREAS, as an inducement for Landlord to enter into the Lease, Guarantor desires to guarantee the full performance of all obligations of Tenant under the Lease upon the terms set forth below. NOW THEREFORE, in consideration of the execution of the Lease by Landlord, Guarantor unconditionally agrees as follows: 1. GUARANTY. Guarantor, continually, directly and unconditionally hereby guarantees the full performance by Tenant of each and every term, covenant, condition and obligation of the Lease to be performed by Tenant (the foregoing obligations are hereinafter sometimes collectively referred to as the "Guaranteed Obligations"). The Guaranteed Obligations shall include, without limitation, the payment of Base Rent, Additional Rent and all other sums becoming due under the Lease and the compliance with all of Tenant's obligations under the Lease which relate to Hazardous Materials. 2. CONTINUING GUARANTY. This Guaranty is a continuing one and shall terminate only upon the full and complete performance by Tenant of all of the Guaranteed Obligations. Guarantor's liability under this Guaranty with respect to the full and unconditional performance of the Guaranteed Obligations shall continue following the termination of the Lease Term to the extent any of the Guaranteed Obligations have not otherwise been performed. Guarantor may not revoke the continuing nature of this Guaranty. In the event that Landlord should seek to enforce any of its rights provided in this Guaranty, and demand payment or performance from Guarantor, such demand and compliance thereto shall not release, extinguish, exonerate or, in any way, affect or diminish Guarantor's continuing obligations hereunder. 3. LEASE MODIFICATIONS. This Guaranty shall continue in full force and effect as to any and all renewals, modifications, amendments or extensions of the Lease entered into by Landlord and Tenant while Tenant is an affiliate of Guarantor, but none other, whether or not Guarantor shall have received any notice of or consented to such renewals, modifications, amendments or extensions. No renewal, modification, amendment or extension of the Lease shall in any manner release, discharge or diminish the obligations of Guarantor hereunder. This paragraph modifies the provision of California Civil Code Section 2819. 4. ASSIGNMENT BY LANDLORD. Landlord may, without notice, assign, transfer, hypothecate, encumber or otherwise dispose of, in whole or in part, any of Landlord's rights, claims or interests in the Lease, the Premises or this Guaranty. No assignment, hypothecation, encumbrance, disposition or other transfer of the Lease, the Premises or this Guaranty shall operate to extinguish or diminish, in any way, the obligations of Guarantor hereunder. 5. ASSIGNMENT BY TENANT. This Guaranty shall continue and remain unconditionally unaffected by any assignment of the Lease by Tenant, any sublet by Tenant of the Premises, or any change in the entity comprising Tenant. Upon any assignment of the Lease or any sublet, the Guarantor shall continue to remain liable and obligated for the full performance by Tenant's successor of the Guaranteed Obligations. "Tenant" as used in this Guaranty shall include all successors and assigns of Tenant. 6. ADDITION OR RELEASE OF SECURITY. This Guaranty shall remain in full force and effect notwithstanding the receipt by Landlord of any additional security, whether from Guarantor, Tenant or a third party, securing the performance of the Guaranteed Obligations. The release by Landlord of any security held for the performance of any of the Guaranteed Obligations shall not release, extinguish or, in any way, affect or diminish the obligations of Guarantor hereunder. 7. LOSSES DUE TO LEASE DEFAULT. Landlord may terminate the Lease upon default by Tenant of any term, covenant or condition of the Lease and the giving of all required notices and the expiration of all applicable cure periods. Such termination, however shall not extinguish, release or, in any way, affect or diminish the obligations of Guarantor hereunder. In no event shall Landlord be obligated to lease the Premises to Guarantor after such termination. Upon termination of the Lease, as a result of Tenant's default thereunder, this Guaranty shall extend to the payment to Landlord of all damages payable by Tenant. 8. ACTIONS OF LANDLORD. This Guaranty shall not be released, extinguished, modified or, in any way, affected or diminished by failure, on the part of Landlord, to enforce any or all of the rights or remedies of Landlord under the Lease, or by Landlord's grant of any indulgences or extensions of time to Tenant for the performance of any of the Guaranteed Obligations. This Guaranty shall remain in full force and effect notwithstanding the failure of Landlord to insist, in any one or more instances, upon a strict performance or observance of the Guaranteed Obligations or upon the exercise of any of Landlord's rights under the Lease. Receipt by Landlord of Base Rent or other performance from Tenant, after breach by Tenant, with the knowledge of such breach, shall not be deemed a waiver of such breach, except to the extent that such breach consisted of the failure to pay the amount so rendered or the performance so accepted by Landlord. Any reference herein to any liability of Tenant shall, at the same time, refer to the obligations of Guarantor hereunder. 9. ABILITY TO PROCEED DIRECTLY AGAINST GUARANTOR. With respect to any default by Tenant, Landlord agrees to provide both Tenant and Guarantor with written notice of such default and the right to cure such default following such notice as provided in the Lease prior to proceeding against Guarantor hereunder. Landlord may, at Landlord's option, proceed immediately and directly against Guarantor, jointly or severally, in order to enforce the performance of the Guaranteed Obligations under the Lease. Landlord shall not be required, in order to enforce its rights hereunder upon the default of Tenant to first institute suit, proceedings, or otherwise exhaust its legal remedies against Tenant. 10. GUARANTOR'S ADDITIONAL COVENANTS. Until all of the Guaranteed obligations are fully performed and observed, Guarantor covenant that they: (i) shall have no right of subrogation against Tenant by reason of any payments or acts of performance by Guarantor in compliance with the obligations of Guarantor hereunder; and (ii) shall have no right to enforce any remedy which Guarantor now or hereafter shall have against Tenant by reason of any one or more payments or acts of performance by Guarantor in compliance with the obligations of Guarantor hereunder. 11. GUARANTOR'S WAIVERS. Guarantor hereby waives (i) all defenses based upon any legal disability of Tenant or any discharge or limitation of liability of Tenant, to Landlord, arising by operation of law or any bankruptcy, insolvency or debtor-relief proceeding or from any other cause; and (iii) all rights to be exonerated hereunder pursuant to the provisions of California Civil Code Section 2819 and/or 2845 and/or 2850 and pursuant to any other statute or rule of law of similar import. Guarantor does not waive and shall have available to it, all defenses available to Tenant under the Lease or based upon any acts or failures to act by Landlord, and all defenses otherwise available to Guarantor at law or in equity (except for any based upon any legal disability of Tenant or any discharge or limitation of liability of Tenant to Landlord arising by operation of law or by any bankruptcy, insolvency or debtor-relief proceeding). 12. STATUS OF TENANT. Guarantor represent and warrant that Tenant is under no disability in connection with the execution and delivery of the Lease. 13. ENFORCEMENT OF GUARANTY UPON DEFAULT. The enforcement of this Guaranty upon the default of Tenant shall not constitute an assignment to Guarantor, by Landlord, of any rights or claims which Landlord may have against Tenant. 14. DUTY OF GUARANTOR/BINDING EFFECT. The obligations of Guarantor hereunder are direct, unconditional and independent of those of Tenant under the Lease. Guarantor shall punctually perform its obligations hereunder upon demand by Landlord. This Guaranty shall be binding upon the Guarantor, its respective successors and assigns. 15. OTHER GUARANTOR. This Guaranty shall remain in full force and effect, notwithstanding that other guarantors from time to time may guarantee or otherwise become responsible for the performance of any of the terms, covenants and conditions of the Lease. 16. RIGHTS CUMULATIVE. All rights of Landlord under this Guaranty are cumulative and are in addition to any other rights which Landlord may otherwise have. 17. PROVISIONS SEVERABLE. The provisions of this Guaranty are severable, and if any provision herein is invalid, the balance of this Guaranty shall remain in force and effect to the fullest extent permitted by law. 18. CONDEMNATION. In the event that the Premises, for any reason, are condemned by a public entity, Guarantor shall have no rights or claims to any condemnation awards recovered by Landlord or Tenant therefrom. 19. ESTOPPEL CERTIFICATE. Upon demand by Landlord, Guarantor shall deliver to Landlord and to any prospective purchaser, mortgagee and/or beneficiary under a deed of trust, or other lender designated by Landlord, an estoppel certificate, executed and acknowledged by Guarantor, to the effect that this Guaranty is in full force and effect and has not been amended or terminated. Guarantor shall also certify to its knowledge such other matters relating to the Lease, the Premises or this Guaranty as may be requested by a lender making a loan to Landlord or a purchaser of the Premises from Landlord. 20. BANKRUPTCY OF TENANT. This Guaranty shall remain and continue in full force and effect, notwithstanding: (i) the commencement or continuation of any case, action, or proceeding by, against or concerning Tenant, under any federal or state bankruptcy, insolvency, or other debtor's relief law, including, without limitation: (x) a case under Title 11 of the United States Code concerning Tenant, whether under Chapter 7, 11 or 13 of such Title or under any other Chapter, or (y) a case, action or proceeding seeking Tenant's financial reorganization or an arrangement with any of Tenant's creditors; (ii) the voluntary or involuntary appointment of a receiver, trustee, keeper or other person who takes possession of substantially all of Tenant's assets or o~ any asset used in Tenant's business on the Premises, regardless of whether such appointment occurs as a result of insolvency or other cause; or (iii) the execution of an assignment for the benefit of creditors of substantially all assets of Tenant available by law for the satisfaction of judgment creditors. 21. NO CONDITION PRECEDENT. This Guaranty shall not be subject to any condition precedent to the effectiveness hereof. 22. ATTORNEYS' FEES. In the event any action or proceeding should be commenced by Landlord or Guarantor with respect to the terms, covenants or conditions of this Guaranty, the prevailing party shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses incurred by the prevailing party in connection with such action or proceeding. 23. NOTICE PROVISION. Any notice to be delivered hereunder shall be in writing and shall be deemed delivered on the date delivered to the party being noticed by the U.S. Postal Service, postage prepaid, registered or certified, return receipt requested, addressed as follows: Caliber System, Inc. 1815 West Market St. Akron, OH 44313 Attn.: Real Estate Department 24. MODIFICATIONS IN WRITING. This Guaranty may not be changed, waived, discharged or terminated orally or by course of conduct, but rather only by an instrument in writing signed by the party against whom enforcement of the charge, waiver, discharge or termination is sought. 25. CHOICE OF LAW. The parties agree that the terms of the Lease and this Guaranty of Lease were negotiated in the County of Santa Clara, State of California. This Guaranty of Lease shall be governed by and construed in accordance with the laws of the State of California. Guarantor hereby submits to the legal jurisdiction of the State of California and to the service of process of any court of the State of California. The parties agree that all disputes shall be determined by resort to the courts of California of competent jurisdiction, with venue in Santa Clara County. 26. DESCRIPTIVE HEADINGS. Descriptive headings are for reference purposes only and shall not affect any meaning, construction or interpretation of this Guaranty. IN WITNESS WHEREOF, the undersigned Guarantor has executed this agreement as of the 9th day of August 1996. GUARANTOR: CALIBER SYSTEM, INC. by: /s/ illegible ------------------------------ its: V.P. & Treasurer ------------------------------ EXHIBIT "B" SITE PLAN [TO BE ATTACHED PER SECTION 17 OF SUBLEASE] FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this "Amendment") is entered into on this 9th day of February, 1998, between BROKAW INTERESTS, a California limited partnership ("Landlord"), and VIKING FREIGHT, INC., a California corporation ("Tenant"). WITNESSETH that: WHEREAS, Landlord (as successor-in-interest to Sobrato Development Companies #941, a California limited partnership) and Tenant are parties to that certain Lease dated August 9, 1996 (the "Lease"), a Memorandum of Lease evidencing which was recorded on August 9, 1996 as Instrument No. 13425262 in the Santa Clara County, California Official Records, pursuant to which Tenant leases from Landlord the premises now commonly known as 6409 Guadalupe Mines Road, San Jose, California (the "Premises"); WHEREAS, Landlord and Tenant desire to amend the Lease in certain respects, as set forth below; and WHEREAS, Tenant is subleasing the entire Premises to Hybrid Networks, Inc., a Delaware corporation ("Hybrid"), pursuant to a Sublease in the form attached hereto as Exhibit "A" (the "Sublease"), which Sublease is being executed simultaneously with this Amendment; NOW, THEREFORE, for and in consideration of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that: 1. All capitalized terms utilized but not defined in this Amendment shall have the meanings ascribed to them in the Lease. 2. Landlord represents and warrants for the benefit of Tenant and Hybrid that construction of the shell of the building on the Premises has been completed by Landlord in accordance with the provisions of Paragraph 7 of the Lease, with the exception of the punchlist item of repairing a leak in the deck of the second floor balcony, which repair promptly shall be performed by Landlord. Landlord hereby (a) waives the requirement contained in Paragraph 7 of the Lease that Landlord shall be the entity which constructs the Tenant Improvements, (b) agrees that Hybrid shall have the Tenant Improvements constructed utilizing a third party general contractor selected by Hybrid and approved by both Landlord and Tenant, which approval shall not be unreasonably withheld, conditioned or delayed, and (c) agrees that none of the provisions of the Lease imposing upon Landlord obligations, or affording to Landlord payment rights, with respect to the construction of the Tenant Improvements shall be applicable to such construction. 3. With respect to Tenant's right to add the Addition as set forth in Paragraph 10 of the Lease, Landlord and Tenant agree that: (a) Hybrid shall have the right, within the timeframe and subject to the conditions set forth in the first paragraph of Section 8 of the Sublease (including without limitation the condition that Landlord's lender holding a security interest in the Premises at such time consents to the construction thereof by Landlord), to cause Landlord to construct the Addition, in which event (i) such portion of the land area covered by the Lease as shall be required for the Addition (the "Addition Land") automatically, and without the requirement for further action by either party, shall cease to be a portion of the Premises, provided that sufficient land area remains within the Premises to provide adequate parking and satisfy zoning requirements, but with no reduction in the Base Monthly Rent payable by Tenant, and (ii) Landlord and Hybrid shall enter into a separate lease agreement (to which Tenant shall not be a party and with respect to which Tenant shall be subjected to no liability) pursuant to which (A) Landlord shall construct the Addition, (B) Landlord shall lease the Addition Land and the Addition directly to Hybrid at a rental rate equal to the greater of (x) $1.25 per month or (y) the Fair Market Value for the Addition and the Addition Land as determined in accordance with the procedures set forth in Paragraph 37 of the Lease, and (C) Hybrid shall be obligated to construct all improvements other than the building shell (including all leasehold improvements) for the Addition. (b) In the event that either Hybrid fails to exercise the foregoing right with respect to the Addition in the manner set forth in Section 8 of the Sublease or at the time of such exercise any of the conditions set forth therein are not satisfied, then Tenant shall have the right, exercisable by written notice delivered to Landlord on or before October 31, 2000, to construct the Addition in accordance with the terms of the Lease. In the event that Tenant exercises such right, it shall cause the Addition Land to be removed from the premises under the Sublease, but the Addition Land shall remain subject to the Lease. Upon any subletting by Tenant of, or any assignment by Tenant of its leasehold interest in, the Addition Land and the Addition, there shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant any rent or other economic consideration realized by Tenant under any such sublease or assignment in excess of the sum of (i) the rent payable to Landlord, (ii) reasonable subletting and assignment costs (including brokerage commissions), and (iii) the costs and expenses incurred by Tenant to construct the Addition and any leasehold improvements thereto. (c) In the event that both (i) Subtenant either fails to exercise its foregoing right with respect to the Addition in the manner set forth in Section 8 of the Sublease or at the time of such exercise any of the conditions set forth therein are not satisfied, and (ii) Tenant fails to exercise its foregoing right with respect to the Addition in the manner set forth above, Landlord shall have the right, by written notice delivered to Tenant at any time after October 31, 2000, to remove the Addition Land from the Premises under the Lease (and thereby from the Premises under the Sublease), provided that sufficient land area remains within the Premises to provide adequate parking and satisfy zoning requirements. In such event (A) there shall be no reduction in the Base Monthly Rent payable by Tenant, but Tenant shall be relieved of any further obligations with respect to the Addition Land as of the date of such notice from Sublandlord, and (B) Landlord shall be entitled to construct improvements on the land so removed from the Premises under the Lease and lease or sell the same to any third party, retaining all consideration therefrom. 4. Landlord, pursuant to Paragraph 29 of the Lease, hereby expressly (a) consents to the subletting of the Premises by Tenant to Hybrid pursuant to the Sublease, (b) consents to the use of the Premises as described in Section 7 of the Sublease, (c) waives any right which it may have to share with Tenant in any rent or other economic consideration payable to Tenant under the Sublease with respect to the Initial Term (as defined in the Sublease), and (d) without limiting the generality of the foregoing, specifically consents and agrees to the provisions of Section 8, the provisions of Section 12, and the provisions of Section 19 of such Sublease. 5. At such time as Hybrid shall commence making payments of Base Rent under the Sublease, Landlord shall exercise diligent efforts to obtain from Principal Mutual Life Insurance Company (or such other lender as may hold a security interest in the Premises at such time) a nondisturbance agreement in favor of Hybrid, provided that Hybrid executes an estoppel certificate in favor of Landlord and such lender, both of which documents shall be in form and substance acceptable to Hybrid, Landlord and such lender in each such party's reasonable discretion. 6. Paragraph 26 of the Lease hereby is amended to change the notice addresses for Tenant to the following: Viking Freight, Inc. 6411 Guadalupe Mines Road Suite 2185 San Jose, California 95120 Attn: Director, Properties and Facilities with a copy to: Caliber System, Inc. 3925 Embassy Parkway Akron, Ohio 44333 Attn: Real Estate Department 7. Landlord and Tenant acknowledge and agree that the Lease, as modified by this Amendment, remains in full force and effect in accordance with its terms. 8. This Amendment may be executed in counterparts, each of which will be deemed an original document, but all of which shall constitute a single document. IN WITNESS WHEREOF, authorized representatives of Landlord and Tenant have executed and delivered this Amendment as of the date first above written. "LANDLORD" BROKAW INTERESTS, a California limited partnership, as amended By: Sobrato 1979 Revocable Trust, Managing General Partner By: -------------------------------------- John M. Sobrato, Trustee "TENANT" VIKING FREIGHT, INC. By: ---------------------------------------- Name: -------------------------------------- Its: --------------------------------------- EX-10.25 6 EXHIBIT 10.25 [HYBRID LETTERHEAD] EXHIBIT 10.25 VOLUME PURCHASE AGREEMENT THIS AGREEMENT ("Agreement") is made this ___ day of May, 1997 ("effective date") by and between HYBRID NETWORKS, INC., ("Hybrid") having its principal place of business at 10161 Bubb Road, Cupertino, CA 95014 3D COMMUNICATIONS ("CUSTOMER") and selected affiliated companies having its principal place of business at ___________________________________. RECITALS A. Hybrid designs, develops, manufactures and distributes certain equipment relating to high speed modem/routers for use in wireless and cable environments. B. CUSTOMER is a ____________________________________________________________ __________________________________________________________________. C. CUSTOMER desires to purchase certain equipment from Hybrid, and Hybrid is willing to sell such equipment to CUSTOMER, on and subject to the terms set forth below. Now, therefore, in consideration of the mutual agreements and covenants herein contained, the parties, intending to be legally bound, agree as follows: 1. SALE AND PURCHASE A. On and subject to the terms and conditions hereof, CUSTOMER agrees to purchase from Hybrid, and Hybrid agrees to sell to CUSTOMER, a minimum of _______ units (the "Units") consisting of either Hybrid's model CCM-201/221 wireless and cable client cable modem/router (multi-user (which modems shall be capable of serving at least 20 users)) or N-201/221 modem (single user), or any combination thereof (the "Purchase Commitment"). The per-Unit purchase price for the CCM-201/221 shall be are identified in Addendum A (less the volume purchase agreement identified in Addendum B for the modems). B. Both parties agree to use their best efforts to develop a mutually agreed-upon forecasted delivery schedule not later than ____________, which schedule shall be revised on a quarterly basis not later than the 10h business days of each new quarter. C. CUSTOMER shall order Products by issuing written purchase orders to Hybrid. Such purchase orders will be subject to written acceptance by Hybrid, and upon acceptance, will constitute a binding agreement between Hybrid and CUSTOMER with respect to the Products identified herein on the term and conditions included herein. All purchase orders submitted by CUSTOMER to Hybrid shall be in English. The terms and conditions of this Agreement will prevail over any inconsistent wording on purchase order forms. Hybrid shall make best efforts to meet the quantities and shipping dates specified by CUSTOMER in each purchase order; however, Hybrid shall notify CUSTOMER within two (2) days following receipt of an order by Hybrid when quantities or shipping dates differ from those specified by CUSTOMER. Hybrid's standard lead times of released products is 45 days after receipt of order. Expedite requests will be handled on a case-by-case basis, Hybrid will make best effort to met CUSTOMER expedite requirements at no additional charge. D. Orders placed by CUSTOMER for Products will be accepted by Hybrid provided that: i) order is signed by CUSTOMER authorized representative ii) the order is received and accepted by Hybrid during the Term iii) the value of any single order is not less than $500 and iv) the order specifies the Products ordered, purchase price(s), exact "ship-to" and "bill-to" address and requested delivery schedule. Page 1 [HYBRID LETTERHEAD] 2. TERM OF AGREEMENT This Agreement shall come into force on the date first written above ("Effective Date") and shall remain valid for orders placed and delivered during the period of ____________ months beginning on the Effective Date (the "term"). 3. PRICES/TAXES All purchase prices are exclusive of shipping and insurance charges which shall be billed separately. Installation and related charges are only included if stated on the face of the order or quotation. Installation and related charges are subject to change due to CUSTOMER failure to complete site readiness as stated, non-standard site conditions, force majeure events or CUSTOMER caused delays. CUSTOMER agrees to pay all such additional charges as invoiced by Hybrid only upon prior written approval of CUSTOMER. All prices are exclusive of all sales, use, excise, and other taxes, duties or charges. Unless evidence of tax exempt status is provided by CUSTOMER, CUSTOMER shall pay, or upon receipt of invoice from Hybrid, shall reimburse Hybrid for all such taxes or charges levied or imposed on CUSTOMER, or required to be collected by Hybrid, resulting from the Purchase Commitment or any part thereof. All prices are FOB Hybrid' Factory Cupertino, California, U.S.A. Unless instructed otherwise, Hybrid will arrange for insurance and standard commercial shipping, the costs of which will be invoiced to the CUSTOMER. Prior to delivery, Hybrid reserves the right to make substitutions, modifications and improvements to the Products, provided that such substitution, modification or improvement shall not adversely affect performance in the application originally agreed to with CUSTOMER, including, without limitation, any substitution, modification or improvement that adversely affects a Product's compatibility with the current Series 2000 system, 4. PAYMENT/FINANCING Terms of payment will be made on a per order basis and are subject to review by Hybrid. All amounts are payable to Hybrid Networks, Inc. at the address set forth on the invoice. If CUSTOMER fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to accept an order or may allow CUSTOMER to make other arrangements satisfactory to Hybrid prior to shipment. 5. EQUIPMENT WARRANTY Hybrid warrants that all Hybrid manufactured equipment, at the time of shipment that all products will be free from defects of material and workmanship and to conform to manufacturer's published specifications for a period of one (1) year from the date of delivery under normal operating conditions, which specifications are attached hereto as Addendum A and incorporated herein by this reference. Should a product fail within this warranty period, Hybrid will repair or replace, at its discretion, the defective product when it is returned to Hybrid, shipping prepaid. Replacement products may be refurbished or contain refurbished materials. Proof of date of delivery of the returned product is required. Hybrid' sole obligation shall be to repair, replace, or refund the purchase price, at its option. Replacement Equipment may be new, refurbished or remanufactured; provided, however, that any Replacement Equipment provided by Hybrid to replace failed equipment upon initial installation thereof shall be new. Returned replaced Equipment shall become Hybrid' property. Replacement Equipment shall be warranted for the unexpired portion of the returned Equipment's warranty. The warranty provided under this section, shall not apply to any item of the equipment which has been altered or modified including any change, addition, or improvement. Hybrids' sole warranty liability to CUSTOMER with respect to equipment manufactured by a third party that does not reside in Hybrid's current price list (in Addendum A), and incorporated into Hybrid equipment shall be to pass through to CUSTOMER such Page 2 [HYBRID LETTERHEAD] original equipment manufacturer's available product warranty. The warranty provided herein does not cover damage, defects, malfunctions or service failures caused by: a) CUSTOMER's failure to follow Hybrid' environmental, installation, operation or maintenance specifications or instructions; b) Modifications, alterations or repairs made other than by Hybrid; c) CUSTOMER's mishandling, abuse, misuse, negligence, or improper storage, servicing or operation of the Equipment (including without limitation use with incompatible equipment). Addendum H includes a written list of compatible equipment to the Hybrid PoP equipment, which list will be updated by Hybrid from time to time. ; or d) Power failures, surges, fire, flood, accident, actions of third parties or other like events outside Hybrid' control. Repairs necessitated during the warranty period by any of the foregoing causes may be made by Hybrid, and the CUSTOMER shall pay Hybrid' standard charges for time and materials, together with all shipping and handling charges arising from such repairs. THIS WARRANTY CONSTITUTES HYBRIDS' SOLE AND EXCLUSIVE LIABILITY HEREUNDER, AND CUSTOMER'S SOLE AND EXCLUSIVE REMEDY, FOR DEFECTIVE OR NONCONFORMING ITEMS AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY (INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). 6. SOFTWARE a) LICENSE. In connection with the purchase of the Units, Hybrid grants to CUSTOMER a non-exclusive, non-transferable license to use the software and related documentation ("Software"). The Software may include software and documentation that are owned by third parties and distributed by Hybrid under license from the owner. (b) COPIES. CUSTOMER shall not make any copies of the Software, except for a single archival copy solely for internal purposes. (c) CONFIDENTIALITY. CUSTOMER shall maintain the confidentiality of the Software and shall not sub-license, sell, rent, disclose, make available, disassemble, or otherwise communicate the Software to any other person, or use the Software except as expressly authorized in writing by Hybrid. (d) TITLE. The Software and all copies thereof will at all times remain the sole and exclusive property of Hybrid or its licensor, as applicable, and CUSTOMER shall obtain no title to the Software. (e) COPYRIGHT. CUSTOMER shall reproduce all copyright notices and any other proprietary legends on any copy of the Software made by CUSTOMER. (f) ALTERATION. CUSTOMER shall not modify, disassemble, or decompile the Software. (g) WARRANTY. Hybrid does not warrant that the operation of the Software will be error free. Hybrid will use reasonable efforts to correct any defects reported to Hybrid in writing within 90 days of the date of shipment, exclusive of defects caused by physical defects in Software disks due to mishandling, operator error or interfacing other systems not approved by Hybrid. Maintenance and enhancement releases occurring during the Term of this Agreement will automatically be sent to CUSTOMER at no additional charge. THIS WARRANTY CONSTITUTES HYBRID'S SOLE AND EXCLUSIVE LIABILITY HEREUNDER, AND CUSTOMER'S SOLE AND EXCLUSIVE REMEDY, FOR DEFECTIVE OR NON-CONFORMING ITEMS AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY (INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). 7. SYSTEM/SOFTWARE SUPPORT Page 3 [HYBRID LETTERHEAD] CUSTOMER will receive free of charge "System support" as outlined in ADDENDUM C, for all head end location sites during the first 90-days following the delivery of the units in these markets. After this period, an "Annual System Support Contract" may be purchased by CUSTOMER at the rate set forth in Addendum C. Hybrid will support the Series 2000 product line with Technical Support and spare parts for the Term hereof. Hybrid will follow the "Trouble ticket Process & Clearing" as outlined in ADDENDUM D. If these procedures are changed, Hybrid will notify CUSTOMER in writing prior to the effective date of such change. Hybrid will follow the "Escalation Procedures" as outlined in ADDENDUM F. If these procedures are changed, Hybrid will notify CUSTOMER in writing prior to the effective date of such change. 8. TECHNICAL SPECIFICATIONS System functionality is limited to the published "Hybrid Series 2000 - System Description". A copy of said manual has been forwarded to CUSTOMER. If customer contracts with Hybrid to complete installation, such installation services will be completed in accordance with Hybrids' normal installation practices. Hybrid shall perform its standard acceptance testing as outlined on ADDENDUM F, on the installed Equipment and CUSTOMER agrees to monitor said testing. Upon completion of installation, as described above, Hybrid shall notify CUSTOMER that the Equipment has been installed and operates in accordance with applicable test and performance specifications. The date of such notification shall be the installation cutover date. Hybrid may at its sole discretion use subcontractors to provide installation services. 9. EXCUSABLE DELAY Notwithstanding anything contained in this Agreement to the contrary, neither party shall be liable to the other for failure to perform any obligation under this Agreement (nor shall any charge or payments be made in respect thereof) if prevented from doing so by reason of acts of God, strikes, labor unrest, embargoes, civil commotion, rationing or other governmental orders or requirements, acts of civil or military authorities, or other contingencies if and to the extent such cause is beyond the reasonable control of such party and all requirements as to notice, another performance required hereunder within a specified period, shall be automatically extended to accommodate the period of any such cause which shall interfere with such performance. 10. CHANGE, CANCELLATION, AND TERMINATION In the event that either party breaches any provision of this Agreement and fails to cure such breach within thirty (30) days after written notice from the other party, the breaching party shall be in default and the non-breaching party shall have the right, but not the obligation, to terminate this Agreement by providing written notice to the breaching party at least thirty (30) days prior to the date of termination. Any subsequent cure of the breach that resulted in the termination notice will not affect the validity of the termination notice, unless such notice is withdrawn by the non-breaching party. Hybrid' maximum liability and CUSTOMER's maximum recovery for any claim arising out of or in connection with the sale or use of Products shall not in the aggregate exceed the price paid by CUSTOMER for such Products hereunder less the price of Products delivered to and retained by CUSTOMER. 11. ASSIGNMENT Neither party may assign this Agreement in whole or in part without the prior written consent signed by an officer of the other party, which consent shall not be unreasonably withheld; provided, however, that CUSTOMER shall be permitted to assign this Agreement, in whole or in part, with notice, but without the necessity of consent, to any of its affiliates (defined in Rule 12b-2 of the Security Exchange Act of 1934, as amended). 12. GOVERNING LAW, VENUE, AND JURISDICTION Page 4 [HYBRID LETTERHEAD] This Agreement will be governed by and construed in accordance with the laws of the State of California. The parties agree that any action to enforce any provision of this Agreement or arising out of or based upon this Agreement or the business relationship between Hybrid and CUSTOMER will be brought in a local or Federal court of competent jurisdiction in Santa Clara County, California. Reasonable attorney fees shall be reimbursed, with respect to the foregoing, to the party who prevails on the merits. 13. ENFORCEABILITY If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall in no way be affected or impaired. 14. NOTICES Any notice required to be given by either party to the other party shall be in writing and shall be deemed given if personally delivered, if sent by facsimile (with receipt acknowledged) to the facsimile number the other party set forth below or if mailed postage prepaid, to: Hybrid Networks, Inc. CUSTOMER 10161 Bubb Road _________________________ Cupertino, CA 95014 _________________________ ATTN.: Sale Department ATTN.: _________________ Fax no. 408/725-2439 Fax no. _________________ or such other address as the party to which the notice is sent shall have provided to the other party by written notice in accordance with this Section. 15. LIMITATION OF LIABILITY NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS CONTRACT, UNDER NO CIRCUMSTANCES SHALL HYBRID BE LIABLE TO CUSTOMER OR ANY THIRD PARTY CLAIMING UNDER CUSTOMER FOR SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, AS A RESULT OF A BREACH OF ANY PROVISION OF THIS CONTRACT. CUSTOMER HEREBY INDEMNIFIES HYBRID AGAINST ALL LOSS OR LIABILITY FROM CLAIMS BY CUSTOMER OR A THIRD PARTY ARISING OUT OF OR RELATING TO THE INSTALLATION, OPERATION, OR USE OF THE EQUIPMENT, WHETHER ON ACCOUNT OF NEGLIGENCE OR OTHERWISE. 16. ENTIRE AGREEMENT This Agreement supersedes all previous communications, transactions, and understandings, whether oral, or written, and constitutes the sole and entire agreement between the parties pertaining to the subject matter hereof. No modification or deletion of, or addition to these terms shall be binding on either party unless made in writing and signed by a duly authorized representative of both parties. IN WITNESS WHEREOF, duly authorized representatives of the Parties, hereto have executed this Agreement as of the day and year first above written. HYBRID NETWORKS, INC. CUSTOMER: By:_______________________________ By:_________________________________ Title:____________________________ Title:______________________________ Date:_____________________________ Date:_______________________________ Page 5 [HYBRID LETTERHEAD] ADDENDUM A GLOBAL PRICE LIST
PoP Equipment - ------------------------------------------------------------------------------------------------------------------------------- CMG-2000 CyberMngr 2000 w\HybridWare + SW for 500 Subs. $25,000 - ------------------------------------------------------------------------------------------------------------------------------- SNL-0500 Subscriber 500 Network License $5,000 - ------------------------------------------------------------------------------------------------------------------------------- SNL-2500 Subscriber 2500 Network License $25,000 - ------------------------------------------------------------------------------------------------------------------------------- CMD-2000 CM Downstream Router with Hybridware + SW $18,170 - ------------------------------------------------------------------------------------------------------------------------------- SEC-010 Secure Encryption Card (DES) $895 - ------------------------------------------------------------------------------------------------------------------------------- SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) $4,150 - ------------------------------------------------------------------------------------------------------------------------------- SVC-100 4VSB 3-Ch SIF Card $4,150 - ------------------------------------------------------------------------------------------------------------------------------- HEM-2004 Encoder/Modulator (4-VSB) $3,200 - ------------------------------------------------------------------------------------------------------------------------------- QMC-200-3 64 QAM Modulator Card w/ Filter & Combiner, 3 channel $4,820 - ------------------------------------------------------------------------------------------------------------------------------- QMC-200-3C 64 QAM Modulator Card w/ Combiner, 3 channel $4,820 - ------------------------------------------------------------------------------------------------------------------------------- HEM-2004-B Baseband Transmitter (IF-to BB) $2,600 - ------------------------------------------------------------------------------------------------------------------------------- HEM-2004-I Baseband Receiver (BB to IF) $3,400 - ------------------------------------------------------------------------------------------------------------------------------- HEM-2204-B Encoder-Baseband (64 QAM) $2,600 - ------------------------------------------------------------------------------------------------------------------------------- HEM-2204-I Modulator-IF (64 QAM) $3,400 - ------------------------------------------------------------------------------------------------------------------------------- HFL-2220 IF Filter (standalone, special purpose) POA - ------------------------------------------------------------------------------------------------------------------------------- CMU-2000-8T CM Upstream Router with HybridWare + SW $18,285 - ------------------------------------------------------------------------------------------------------------------------------- CMU-2000-14C CM Upstream Router with HybridWare + SW $18,860 - ------------------------------------------------------------------------------------------------------------------------------- VDC-010-2 4-VSB Demodulator Card, 2 channels per card $2,595 - ------------------------------------------------------------------------------------------------------------------------------- VBU-010-x Hybrid Block Upconverter $3,200 - ------------------------------------------------------------------------------------------------------------------------------- CKT-201 Baseline One-Way System Cabling Kit $100 - ------------------------------------------------------------------------------------------------------------------------------- TDC-001-8 Phone Modem Card, 8 lines per card $3,095 - ------------------------------------------------------------------------------------------------------------------------------- CSM-2000 CyberSecure 2000, includes HybridWare + SW $15,000 - ------------------------------------------------------------------------------------------------------------------------------- SUG-2000 Software Upgrade from Series 2000 ELS to full Series 2000 $500 - ------------------------------------------------------------------------------------------------------------------------------- Commercial PoP Equip. Available From Hybrid - ------------------------------------------------------------------------------------------------------------------------------- OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) $8,700 - ------------------------------------------------------------------------------------------------------------------------------- OCM-160 C6M Modulator/Upconverter (USA Spec) $2,140 - ------------------------------------------------------------------------------------------------------------------------------- OCM-165 C6MP Modulator/Upconverter (USA Spec) $2,950 - ------------------------------------------------------------------------------------------------------------------------------- OCM-260 C6U Modulator/Upconverter (USA and International) $2,950 - ------------------------------------------------------------------------------------------------------------------------------- ORK-719 7-foot, 19-inch rack $940 - ------------------------------------------------------------------------------------------------------------------------------- CKT-201 Baseline One-Way Cable/Telephone System Cabling Kit $100 - ------------------------------------------------------------------------------------------------------------------------------- CKT-221 Baseline Two-Way Cable (FSK) System Cabling Kit $200 - ------------------------------------------------------------------------------------------------------------------------------- DKT-030 Monitor and Keyboard (both rackmount for CMD and CMU) $925 - -------------------------------------------------------------------------------------------------------------------------------
Page 6 [HYBRID LETTERHEAD] - ------------------------------------------------------------------------------------------------------------------------------- OCS-016 16-way Splitter $0 - ------------------------------------------------------------------------------------------------------------------------------- ODF-260 Diplex Filter $0 - ------------------------------------------------------------------------------------------------------------------------------- OPS-030 Power Strip $130 - ------------------------------------------------------------------------------------------------------------------------------- OLP-330 Termianl Server (Portmaster) 30 Port $3,700 - ------------------------------------------------------------------------------------------------------------------------------- OEX-020-7 Upstream Demodulator Shelf (supports 7 FSK cards) $2,200 - ------------------------------------------------------------------------------------------------------------------------------- OEC-021 FSK Upstream Demodulator Card $965 - -------------------------------------------------------------------------------------------------------------------------------
SPARE PART - ------------------------------------------------------------------------------------------------------------------------------- LAC-010 10/100 BaseT LAN Interface Card $690 - ------------------------------------------------------------------------------------------------------------------------------- HSB-210-S Secure Encryption Card (SBUS) $895 - ------------------------------------------------------------------------------------------------------------------------------- Hybrid Client Cable Modems* - maybe superceded by VPA - ------------------------------------------------------------------------------------------------------------------------------- CCM-201 Client Cable Modem (multi-user) $795 - ------------------------------------------------------------------------------------------------------------------------------- CCM-201-S Client Cable Modem (multi-user), encryption support (DES) $895 - ------------------------------------------------------------------------------------------------------------------------------- CCM-221 Client Cable Modem $845 - ------------------------------------------------------------------------------------------------------------------------------- CCM-221-S Client Cable Modem, encryption support (DES) $945 - ------------------------------------------------------------------------------------------------------------------------------- N-201 Client Cable Modem (single-user) $440 - ------------------------------------------------------------------------------------------------------------------------------- N-201-S Client Cable Modem (single-user),encryption support (DES) $540 - ------------------------------------------------------------------------------------------------------------------------------- N-221 Client Cable Modem (single-user) $495 - ------------------------------------------------------------------------------------------------------------------------------- N-221-S Client Cable Modem (single-user),encryption support (DES) $595 - ------------------------------------------------------------------------------------------------------------------------------- Commerical Cable Modem Accessories - ------------------------------------------------------------------------------------------------------------------------------- OTM-001 V.34 28.8 Phone Modem (typically US Robotics) $125 - ------------------------------------------------------------------------------------------------------------------------------- OEH-005 Ethernet Hub (5-port support for five computers) $80 - ------------------------------------------------------------------------------------------------------------------------------- CBL-001 RS-232 Modem Cable (see Note 5) $8 - ------------------------------------------------------------------------------------------------------------------------------- Hybrid Technical Support and Training - ------------------------------------------------------------------------------------------------------------------------------- TRN-201-4 One-Way Cable (64QAM) Training Program $6,000 - ------------------------------------------------------------------------------------------------------------------------------- TRN-201-1 One-Way Cable (64QAM) Training Program/Per Student $1,500 - ------------------------------------------------------------------------------------------------------------------------------- TRN-221-4 Two-Way Cable (64QAM) Training Program $7,500 - ------------------------------------------------------------------------------------------------------------------------------- TRN-221-1 Two-Way Cable (64QAM) Training Program/Per Student $1,875 - ------------------------------------------------------------------------------------------------------------------------------- TRN-240-4 Secure Router Training Program $3,000 - ------------------------------------------------------------------------------------------------------------------------------- TRN-240-1 Secure Router Training Program/Per Student $750 - ------------------------------------------------------------------------------------------------------------------------------- SRV-100 System Integration per day $1,500 - -------------------------------------------------------------------------------------------------------------------------------
Page 7 [HYBRID LETTERHEAD] ADDENDUM B VOLUME DISCOUNT LEVELS ALL PRICE IN U.S. DOLLARS
MULTIPLE PC MODEM PRICES - TELEPHONE RETURN ------------------------------------------- LEVEL CABLE MODEM QTY PRICE - ----- ----------- --- ----- 1 CCM-201 0-1,000 $795 2 CCM-201 1,001-3,000 $745 3 CCM-201 3,001-5,000 $695 4 CCM-201 5,001- 10,000 $595 5 CCM-201 10,001- 25,000 $570 6 CCM-201 25,001 AND GREATER $540
NOTE: for DES encryption add $100 per modem
SINGLE PC MODEM PRICES - TELEPHONE RETURN ----------------------------------------- LEVEL CABLE MODEM QTY PRICE - ----- ----------- --- ----- 1 N-201 0-1,000 $440 2 N-201 1,001-3,000 $395 3 N-201 3,001-5,000 $375 4 N-201 5,001- 10,000 $345 5 N-201 10,001-25,000 $320 6 N-201 25,001 AND GREATER $295
NOTE: - for internal phone modem add $50.00 per modem (future release) - for DES encryption add $100 per modem
MULTIPLE PC MODEM PRICES - CABLE RETURN --------------------------------------- LEVEL CABLE MODEM QTY PRICE - ----- ----------- --- ----- 1 CCM-221 0-1,000 $845 2 CCM-221 1,001-3,000 $795 3 CCM-221 3,001-5,000 $745 4 CCM-221 5,001- 10,000 $645 5 CCM-221 10,001- 25,000 $620 6 CCM-221 25,001 AND GREATER $595
NOTE: for DES encryption add $100 per modem
SINGLE PC MODEM PRICES - CABLE RETURN ------------------------------------- LEVEL CABLE MODEM QTY PRICE - ----- ----------- --- ----- 1 N-221 0-1,000 $495 2 N-221 1,001-3,000 $470 3 N-221 3,001-5,000 $440 4 N-221 5,001- 10,000 $420 5 N-221 10,001-25,000 $370 6 N-221 25,001 AND GREATER $345
NOTE: - for internal phone modem add $50.00 per modem (future release) - for DES encryption add $100 per modem Page 8 [HYBRID LETTERHEAD] ADDENDUM C SYSTEM & SOFTWARE SUPPORT MEDIA WARRANTY Hybrid Networks warrants that the media on which the Hybrid Networks product is recorded will be free from defects in material and workmanship under normal use and service for a period of 90 days from shipment. Defective media will be replaced through the Hybrid Networks RMA process. INITIAL 90 DAY SYSTEM SUPPORT Initial 90-day support for all head ends "launched", telephone support, maintenance releases, enhancement releases, system monitoring, technical bulletins, and access to the electronic bulletin board. SOFTWARE SUPPORT For each site initial software support period begins from the date of Hybrid Networks shipment of the first application software purchase of a particular product type for each site. The support period also applies to all Hybrid Networks software and firmware products containing application code. For the duration of the contract, Hybrid will provide the following software support: Definitions When used in this booklet: a. "Site or Site Location" - refers to physical customer location usually associated with a single address, including the floors of a single building or adjoining buildings, and which has a single network administrative authority. b. "Software" - refers to those computer program products, including Maintenance Releases, in object code form which the customer has licensed from Hybrid Networks. c. "Maintenance Release" - refers to new version levels of software, periodically distributed for the purpose of correcting problems in previous releases. d. "Enhancement Release" - is defined as new versions of the product which include significant changes and/or additions to functionality. Software Support coverage will be provided free of charge for the initial 90-days and is renewable on an annual basis at a price of $1,000 PER CYBERMANAGER-TM- PER MONTH. The coverage provides for telephone support through the Hybrid Networks Support Center and for active software products; maintenance releases and enhancement Page 9 [HYBRID LETTERHEAD] releases occurring during the contract term. All software support customers will receive all relevant Technical Bulletins that are released during their contract term and access to the WWW on-line support. Telephone support will consist of access to the Hybrid Networks Solution Center during the normal Hybrid Networks hours of coverage (6am - 5pm Pacific Time, Monday through Friday, excluding Hybrid Networks observed holidays). The support group will provide responses to software related issues such as installations, configuration and problem solving. Maintenance releases and enhancement releases occurring during the contract period will be automatically sent to contract customers at no additional charge. The release quantities will be shipped in the same manner as the contract was purchased. For example, single unit contracts will receive a "one-for-one" update kit and site contracts will receive one master update kit per site. The classification of a given release as "maintenance" or "enhancement" is solely at Hybrid Networks discretion. Both types of releases will be issued on standard media and will include all relevant technical documentation. New software that comprises a new product model, versus an enhancement of an existing model, will require a separate software support agreement. The distinction between new product models and enhancements of existing models is at Hybrid Networks' discretion. For customers whose initial support or contract term has lapsed without renewal, telephone support and new releases will be available on a chargeable, per incident basis. In general, these charges will amount to substantially more than an annual support contract. Those wishing to initiate or reinstate their contract status must first be running the current released software version prior to the effective date of the contract. This prerequisite may require the purchase of a maintenance or enhancement release. Page 10 [HYBRID LETTERHEAD] ADDENDUM D TROUBLE TICKET PROCESS & CLEARING STEP 1: SERVICE REQUEST (IR) PROCESS Call placed to Hybrid Support Center (800)516-9315 or (408)342-4299 - - 7am - 6pm Pacific Time - - Call Logged using Customer Severity Level - - IR is created or updated normally - - Escalating an IR is initiated by entering date and time - - Current and pending status will be updated daily STEP 2: RETURN MATERIAL AUTHORIZATION (RMA) PROCESS Call placed to Hybrid Support Center (800)516-9315 or (408)342-4299 - - 7am - 6pm Pacific Time - - Customer Provide Information to Hybrid - - Name, Company, address, and telephone number - - Model and serial number of equipment - - Detail statement giving the reason for replacement and/or repair (also sent with returned equipment) - - Warranty returns will be repaired with a 10-business day turnaround - - Products diagnosed by the Support Center as "our-of-the-box" failures, or which fail within the first 30 days of usage at the customer site, will generally be replaced by the next business day Page 11 [HYBRID LETTERHEAD] ADDENDUM E ESCALATION PROCEDURES NET OPS ESCALATION PROCEDURE CHART:
1 2 3 Escalated Escalated Other Emergency Significant Limited by to Advisories - ----------------------------------------------------------------------------------------------------------- Escalation level: 1- Net Ops Director Dir Eng Net Ops Tech TO + 4 hrs TO + 8 hrs TO + 5 days Dir/Net Ops Support Staff Tech. Support Net Ops Salesman -------------------------------------------------------------------------------------- TO + 48 hrs TO + 96 hrs TO + 14 days Director Net Ops 2- Net Ops Director Director VP Operations Team/Operations Net Ops Eng VP Eng VP Sales -------------------------------------------------------------------------------------- 3 - Engineering TO + 5 days TO + 14 days TO + 30 days Eng Exec VP Staff -------------------------------------------------------------------------------------- 4 - Exec Staff -Emergency meeting for decision and contingency planning n/a n/a n/a - -----------------------------------------------------------------------------------------------------------
- - Times indicated are total elapsed clock hours from initial call - - Times apply equally to domestic and international calls - - TO Times for Headquarters Technical Support Engineers include one hour telephone response time - - Action plan supersedes the time frames - - Times are flexible in that escalation can occur faster - - Net Ops owns the "problem" and escalation tracking - - Escalation table incidents are not limited to hardware and software bugs, but can include enhancements for marketing or quality issues for manufacturing - - Escalation for severity 1 & 2 which go past Net Ops level will be raised at the weekly bug status meeting - - Action plan supersedes the time frames Page 12 [HYBRID LETTERHEAD] ADDENDUM F ACCEPTANCE TEST PROCEDURES ACCEPTANCE TEST PROCEDURES SCOPE OF ACCEPTANCE TEST This acceptance test is designed to determine the functional status of the equipment which Hybrid Networks has proposed, trained and has assisted with installation. The test will demonstrate that the system meets requirements as specified in the Hybrid Networks' specifications. All findings of the test will be reported to the customer upon completion of testing. CONNECTIVITY TEST: Customer will randomly select one (1) Client Cable Modem (CCM) on the Customer's network. Workstation (PC with Windows 95 End Node) to System's network connectivity will be established and verified by a user's CCM being logged onto the network . PING TEST: Once the user is network attached, the Customer and Hybrid will conduct Ping testing. See Windows 95 DOS Ping command listed below. LOCAL PING TEST: With the Ping command, you can send a ping request to the local CCM to verify that it is receiving information. Enter the IP address of the CCM in the destination-list field. From the Windows 95 DOS prompt enter "ping (CCM IP Address)". REMOTE PING TEST: With the Ping command, you can send a ping request to the Hybrid CyberManager to verify that it is receiving information. Enter the IP address of the CyberManager in the destination-list field. From the Windows 95 DOS prompt enter "ping (CyberManager IP Address)". This step will verify the complete network operation of the Hybrid Networks' System and the CCM. CYBERMANAGER FTP TEST: Once the user is network attached, the Customer and Hybrid will conduct FTP testing. Using Hybrid's CableTest, run the FTP test to the CyberManager. File transfer ability will be proven. WWW TEST: (OPTIONAL) Access the World Wide Web (WWW) using Microsoft Internet Explorer 3.0 (or better), Netscape, Mosaic or equivalent. This test can only be performed if the Customer has provide an Internet Access which has been configured. TEST REPORT Page 13 [HYBRID LETTERHEAD] A complete test report detailing how the above tests were performed, the exact configuration of the network, and the results of the tests will be generated. This test report will be presented to Customer at test completion. NOTES 1. Failure of Customer to accept or reject the Network within a period of thirty (30) days of notification of certification as provided for herein shall be deemed System Acceptance. 2. If Customer uses any portion of the Hybrid System for production purposes, the System shall be deemed accepted by Customer. 3. Windows 95 DOS Ping Command Syntax. WINDOWS 95 DOS PING COMMAND: - ------------------------------------------------------------------------------- C:\WINDOWS>ping Usage: ping [-t] [-a] [-n count] [-l size] [-f] [-i TTL] [-v TOS] [-r count] [-s count] [[-j host-list] | [-k host-list]] [-w timeout] destination-list Options: -t Ping the specified host until interrupted. -a Resolve addresses to hostnames. -n count Number of echo requests to send. -l size Send buffer size. -f Set Don't Fragment flag in packet. -i TTL Time To Live. -v TOS Type Of Service. -r count Record route for count hops. -s count Timestamp for count hops. -j host-list Loose source route along host-list. -k host-list Strict source route along host-list. -w timeout Timeout in milliseconds to wait for each reply. - ------------------------------------------------------------------------------- Page 14 [HYBRID LETTERHEAD] CERTIFICATION OF ACCEPTANCE Customer Name:_____________________________ Contract Number:____________________________ Contract Date:_______________________________ Site Location:_______________________________ Scope of Work: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ - ------------------------------------------------------------------------- TEST COMPLETED - ------------------------------------------------------------------------- CONNECTIVITY TEST: / / - ------------------------------------------------------------------------- PING TEST: / / - ------------------------------------------------------------------------- LOCAL PING TEST: / / - ------------------------------------------------------------------------- REMOTE PING TEST: / / - ------------------------------------------------------------------------- CYBERMANAGER FTP TEST: / / - ------------------------------------------------------------------------- WWW TEST: (OPTIONAL) / / (Only if Internet Access is configured) - ------------------------------------------------------------------------- I hereby certify that the work represented by the contract described above has been completed by Hybrid Networks and was given final inspection and acceptance on ______________________. _________________________________ __________________ Sign - Customer Date _________________________________ Print _________________________________ __________________ Sign - Hybrid Networks Date _________________________________ Print Page 15 [HYBRID LETTERHEAD] ADDENDUM G SYSTEM DESCRIPTION See "Hybrid Series 2000 System Description" document number 018-00003-01 Page 16 [HYBRID LETTERHEAD] ADDENDUM H RECOMMENDED 3RD PARTY EQUIPMENT COMPATABLE WITH HYBRID POP EQUIPMENT - - LAN CARDS (CLIENT SIDE): - 3COM 3C509, 3C9xx - Megahertz (PCMCIA) - Intel Pro 10/100 - Motorola (PCMCIA) - Intel Pro 10 - Xircom (PCMCIA) - SMC - 3COM (PCMCIA) NOTE: Most Ethernet cards that follow the Ethernet standard should function w\the Hybrid CCMs. - - UPSTREAM DEVICES: - Hybrid Networks CMU - Livingston PortMaster 2 NOTE: Hybrid Networks is working on validating other 3rd party upstream devices. The first 3 that Hybrid will be working on validating are: Ascend MAX, USR TotalControl, & Livingston PortMaster 3. We are also looking at Cisco ASN5200 and Microcom ISPort as possible units to be validated. - - ROUTER: - Cisco (Model depending on configuration) - - ETHERNET SWITCH: - Cisco (14xx, 28xx, 5000) (Model depending on configuration) - - CSU/DSU: - RAD FC1 - ADC/Kentronix - - TELEPHONE MODEM: - USR 14.4k External - Mortorola V.3400 - USR 28.8k External - Microcom DeskPorte 28.8P - USR 33.6k External - Hayes Accura 28.8 FAX/Modem - USR 28.8 -- WORKS - Zoom/FAX Modem V.34X Model 470 - USR Couier V.Everything - Practical Peripherals PM288MT 11 V.34 NOTE: Most Modems that follow the Hayes "AT" standards should function with the Hybrid CCMs. - - TRANSMITTERS: - ITS - Comwave Note: Support Digital series of above vendors, analog series requires modifications Page 17 EX-10.26 7 EXHIBIT 10.26 - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT by and between PACIFIC MONOLITHICS, INC. and COAST BUSINESS CREDIT, a division of Southern Pacific Bank Dated as of November 14, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Account Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Borrower's Address . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Change of Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Deposit Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Dollars or $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Early Termination Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Eligible Foreign Receivables . . . . . . . . . . . . . . . . . . . . . . 1 "Eligible Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Eligible Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Equipment Acquisition Loans. . . . . . . . . . . . . . . . . . . . . . . 3 "Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "General Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Inventory Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Investment Property. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 -i- TABLE OF CONTENTS (CONTINUED) PAGE ---- "Letter of Credit Sublimit. . . . . . . . . . . . . . . . . . . . . . . . 4 "Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Material Adverse Effect. . . . . . . . . . . . . . . . . . . . . . . . . 4 "Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Maximum Dollar Amount. . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Minimum Monthly Interest . . . . . . . . . . . . . . . . . . . . . . . . 4 "Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Permitted Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Receivable Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Renewal Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Renewal Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Solvent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Term Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 "Other Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Status of Accounts at Closing . . . . . . . . . . . . . . . . . . . 7 5.2 Minimum Availability. . . . . . . . . . . . . . . . . . . . . . . . 7 -ii- TABLE OF CONTENTS (CONTINUED) PAGE ---- 5.3 Landlord Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.4 Intentionally Deleted . . . . . . . . . . . . . . . . . . . . . . . 7 5.5 Executed Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 7 5.6 Opinion of Borrower's Counsel . . . . . . . . . . . . . . . . . . . 7 5.7 Priority of Coast's Liens . . . . . . . . . . . . . . . . . . . . . 7 5.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.9 Borrower's Existence. . . . . . . . . . . . . . . . . . . . . . . . 7 5.10 Organizational Documents. . . . . . . . . . . . . . . . . . . . . . 7 5.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.12 Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.13 Other Documents and Agreements. . . . . . . . . . . . . . . . . . . 8 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER . . . . . . . . 8 6.1 Existence and Authority . . . . . . . . . . . . . . . . . . . . . . 8 6.2 Name; Trade Names and Styles. . . . . . . . . . . . . . . . . . . . 8 6.3 Place of Business; Location of Collateral . . . . . . . . . . . . . 8 6.4 Title to Collateral; Permitted Liens. . . . . . . . . . . . . . . . 8 6.5 Maintenance of Collateral . . . . . . . . . . . . . . . . . . . . . 9 6.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.7 Financial Condition, Statements and Reports . . . . . . . . . . . . 9 6.8 Tax Returns and Payments; Pension Contributions . . . . . . . . . . 9 6.9 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . 9 6.10 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.11 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7. RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 7.1 Representations Relating to Receivables . . . . . . . . . . . . . .10 7.2 Representations Relating to Documents and Legal Compliance. . . . .10 7.3 Schedules and Documents relating to Receivables . . . . . . . . . .10 7.4 Collection of Receivables . . . . . . . . . . . . . . . . . . . . .10 -iii- TABLE OF CONTENTS (CONTINUED) PAGE ---- 7.5 Remittance of Proceeds. . . . . . . . . . . . . . . . . . . . . . .10 7.6 Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 7.7 Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 7.8 Verification. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 7.9 No Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 8. ADDITIONAL DUTIES OF THE BORROWER . . . . . . . . . . . . . . . . . . . .11 8.1 Financial and Other Covenants . . . . . . . . . . . . . . . . . . .11 8.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 8.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 8.4 Access to Collateral, Books and Records . . . . . . . . . . . . . .12 8.5 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . .12 8.6 Litigation Cooperation. . . . . . . . . . . . . . . . . . . . . . .12 8.7 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . .13 9. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 9.1 Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . .13 9.2 Early Termination . . . . . . . . . . . . . . . . . . . . . . . . .13 9.3 Payment of Obligations. . . . . . . . . . . . . . . . . . . . . . .13 10. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . .13 10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . .13 10.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 10.3 Standards for Determining Commercial Reasonableness . . . . . . . .16 10.4 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .16 10.5 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . .17 10.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . .18 11. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .18 11.1 Interest Computation. . . . . . . . . . . . . . . . . . . . . . . .18 11.2 Application of Payments . . . . . . . . . . . . . . . . . . . . . .18 11.3 Charges to Accounts . . . . . . . . . . . . . . . . . . . . . . . .18 11.4 Monthly Accountings . . . . . . . . . . . . . . . . . . . . . . . .18 -iv- TABLE OF CONTENTS (CONTINUED) PAGE ---- 11.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 11.6 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . .19 11.7 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 11.8 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 11.9 No Liability for Ordinary Negligence. . . . . . . . . . . . . . . .19 11.10 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 11.11 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . .19 11.12 Attorneys Fees, Costs and Charges . . . . . . . . . . . . . . . . .19 11.13 Benefit of Agreement. . . . . . . . . . . . . . . . . . . . . . . .20 11.14 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 11.15 Paragraph Headings; Construction. . . . . . . . . . . . . . . . . .20 11.16 Governing Law; Jurisdiction; Venue. . . . . . . . . . . . . . . . .20 11.17 Mutual Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . .20
-v- THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025, and the borrower(s) named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 1 below.) 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable or General Intangible. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Audit" means to inspect, audit and copy Borrower's books and records and the Collateral. "Borrower" has the meaning set forth in the introduction to this Agreement. "Borrower's Address" has the meaning set forth in the introduction to this Agreement. "Business Day" means a day on which Coast is open for business. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) (other than the current holders of the ownership interests in any Borrower) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, as a result of any single transaction, of more than twenty percent (20%) of the total voting power of all classes of stock or other ownership interests then outstanding of any Borrower normally entitled to vote in the election of directors or analogous governing body. "Closing Date" date of the initial funding under this Agreement. "Coast" has the meaning set forth in the introduction to this Agreement. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 4 hereof. "Credit Limit" means the maximum amount of Loans that Coast may make to Borrower pursuant to the amounts and percentages shown on the Schedule. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "Dollars or $" means United States dollars. "Early Termination Fee" means the amount set forth on the Schedule that Borrower must pay Coast if this Agreement is terminated by Borrower or Coast pursuant to Section 9.2 hereof. "Eligible Foreign Receivables" means Receivables arising from Borrower's customers located outside the United States which Coast otherwise approves for borrowing in its sole and absolute discretion. Without limiting the foregoing, Coast will consider the following in determining the eligibility of such receivables: (i) whether the Borrower's goods are shipped backed by an irrevocable letter of credit satisfactory to Coast (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Coast and is directly drawable by Coast, or (ii) whether the Borrower's customer is a large or rated company having a -1- verifiable credit history, or (iii) whether Borrower's customer is a foreign subsidiary of a customer of Borrower that is a company that was formed and has its primary place of business within the United States, or (iv) whether Borrower's customer is a large foreign corporation, or (v) whether Borrower's customer is a foreign company with a Dun & Bradstreet rating of 3A2 or better, or (vi) whether Borrower's goods are shipped to a company that has credit insurance acceptable in the discretion of Coast. "Eligible Inventory" means Inventory which Coast, in its sole judgment, deems eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of Coast's discretion, Inventory which does not meet the following requirements will not be deemed to be Eligible Inventory: Inventory which (i) consists of finished goods or raw material, in good, new and salable condition which is not perishable, not obsolete or unmerchantable, and is not comprised of work in process, packaging materials or supplies; (ii) meets all applicable governmental standards; (iii) has been manufactured in compliance with the Fair Labor Standards Act; (iv) conforms in all respects to the warranties and representations set forth in this Agreement; (v) is at all times subject to Coast's duly perfected, first priority security interest; and (vi) is situated at a one of the locations set forth on the Schedule. "Eligible Receivables" means Receivables and Eligible Foreign Receivables arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Coast, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Eligible Receivables shall not include the following: (a) Receivables that the Account Debtor has failed to pay within 60 days of due date not to exceed 120 days of invoice date; (b) Receivables owed by an Account Debtor or its Affiliates where twenty five percent (25%) or more of all Receivables owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Receivables with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; (d) Receivables with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Receivables, other than Eligible Foreign Receivables, that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Receivable is supported by an irrevocable letter of credit satisfactory to Coast (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Coast and is directly drawable by Coast, or (z) the Receivable is covered by credit insurance in form and amount, and by an insurer, satisfactory to Coast; (f) Receivables with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31 U.S.C. " 3727), or (ii) any State of the United States (exclusive, however, of Receivables owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (g) Receivables with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Receivables; (h) Receivables with respect to an Account Debtor whose total obligations owing to Borrower exceed twenty five percent (25%) (30% in the case of Comband S.A.) of all Eligible Receivables, to the extent of the obligations owing by such Account Debtor in excess of such percentage. In order to exceed the above referenced limits, Borrower must obtain the prior written approval of Coast, which approval shall be in Coast's discretion, reasonably exercised, on an Account Debtor by Account Debtor basis; (i) Receivables with respect to which the Account Debtor is subject to any reorganization, bankruptcy, insolvency, arrangement, -2- readjustment of debt, dissolution or liquidation proceeding, or becomes insolvent, or goes out of business; (j) Receivables the collection of which Coast, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (k) Receivables with respect to which the goods giving rise to such Receivable have not been shipped and billed to the Account Debtor, the services giving rise to such Receivable have not been performed and accepted by the Account Debtor, or the Receivable otherwise does not represent a final sale; (l) Receivables with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and (m) Receivables that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Equipment" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Equipment Acquisition Loans" means the Loans described in Section 2(d) of the Schedule. "Event of Default" means any of the events set forth in Section 10.1 of this Agreement. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Inventory Loans" means the Loans described in Section [2(b)] of the Schedule. "Investment Property" has the meaning set forth in Section 9115 of the Code as in effect as of the date hereof. -3- "Letter of Credit" has the meaning set forth in Section 2.2 hereof. "Letter of Credit Sublimit" has the meaning set forth in Section 2.2 hereof. "Loan Documents" means this Agreement, the agreements and documents listed on Section 5 of the Schedule, and any other agreement, instrument or document executed in connection herewith or therewith. "Loans" has the meaning set forth in Section 2.1 hereof. "Material Adverse Effect" means a material adverse effect on (i) the business, assets, condition (financial or otherwise) or results of operations of Borrower or any subsidiary of Borrower or any guarantor of any of the Obligations, (ii) the ability of Borrower or any guarantor of any of the Obligations to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due) or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "Maturity Date" means the date that this Agreement shall cease to be effective, as set forth on the Schedule, subject to the provisions of Section 9.1 and 9.2 hereof. "Maximum Dollar Amount" has the meaning set forth in Section 2 of the Schedule. "Minimum Monthly Interest" has the meaning set forth in Section 3 of the Schedule. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Coast, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Coast. "Permitted Liens" means the following: (a) purchase money security interests in specific items of Equipment or loans on the specific Equipment set forth on Exhibit "1" attached hereto; (b) leases of specific items of Equipment; (c) liens for taxes not yet payable; (d) additional security interests and liens consented to in writing by Coast, in Coast's discretion, reasonably exercised; (e) security interests being terminated substantially concurrently with this Agreement, including, without limitation, the security interests in favor of Comerica Bank; (f) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (g) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (a) or (b) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (h) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (d) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower -4- agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the applicable month, as the base rate on corporate loans at large U.S. money center commercial banks. "Receivable Loans" means the Loans described in Section 2(a) of the Schedule. "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Renewal Date" shall mean the Maturity Date if this Agreement is renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that this Agreement is renewed pursuant to Section 9.1 hereof. "Renewal Fee" means the fee that Borrower must pay Coast upon renewal of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the Schedule. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Tangible Net Worth" means consolidated Owner's equity plus subordinated debt otherwise permitted hereunder, less, goodwill, patents, trademarks, copyrights, franchises, formulas, leasehold interests, leasehold improvements, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items and any other assets of Borrower that would be treated as intangible assets on Borrower's balance sheet prepared in accordance with GAAP. "Term Loan" means the Loans described in Section 2(c) of the Schedule. "Other Terms" All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. CREDIT FACILITIES. 2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and in percentages to be determined by Coast in its good faith discretion, up to the Credit Limit, provided no Default or Event of Default has occurred and is continuing. In addition, Coast may create reserves against or reduce its advance rates based upon Eligible Receivables or Eligible Inventory without declaring a Default or an Event of Default if it determines that there has occurred a Material Adverse Effect. -5- 2.2 LETTERS OF CREDIT. At the request of Borrower, Coast may, in its sole discretion, arrange for the issuance of letters of credit for the account of Borrower (collectively, "Letters of Credit"), by issuing guarantees to the issuer of the letter of credit or by other means. All Letters of Credit shall be in form and substance satisfactory to Coast in its sole discretion. The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder. Borrower shall pay all bank charges for the issuance of Letters of Credit. Any payment by Coast under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty (30) days prior to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast harmless from any loss, cost, expense, or liability, including payments made by Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of or in connection with any Letters of Credit, excluding losses, costs, expenses or liabilities resulting from the willful misconduct of Coast. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Coast and opened for Borrower's account or by Coast's interpretations of any Letter of Credit issued by Coast for Borrower's account, and Borrower understands and agrees that Coast shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto, excluding however the willful misconduct of Coast. Borrower understands that Letters of Credit may require Coast to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect to any loss, cost, expense, or liability incurred by Coast under any Letter of Credit as a result of Coast's indemnification of any such issuing bank. The provisions of this Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Coast relating to Letters of Credit are cumulative. 3. INTEREST AND FEES. 3.1 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Coast's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Coast Minimum Monthly Interest during the term of this Agreement with respect to the Receivable Loans and the Inventory Loans in the amount set forth on the Schedule. 3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Coast and are deemed fully earned and are nonrefundable. 4. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Coast a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, Investment Property, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral") 5. CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the sole discretion of Coast, at or prior to the first advance of funds hereunder, of each, every and all of the following conditions: 5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and unpaid sixty (60) days past its due date or 105 days past invoice date, except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided, unless otherwise permitted in the discretion of Coast. 5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability immediately -6- following the initial funding in the amount set forth on the Schedule. 5.3 LANDLORD WAIVER. Coast shall have received duly executed (a) landlord waivers and access agreements in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all leased locations where Borrower maintains any inventory or equipment. (b) Intentionally Deleted (c) warehouse waivers in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all warehouse locations where Borrower maintains any inventory or equipment. 5.4 INTENTIONALLY DELETED. 5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly executed and in form and substance satisfactory to Coast in its sole and absolute discretion. 5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion of Borrower's counsel, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of "of record" searches satisfactory to Coast in its sole and absolute discretion, reflecting its Uniform Commercial Code filings against Borrower indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens. 5.8 INSURANCE. Coast shall have received copies of the insurance binders or certificates evidencing Borrower's compliance with Section 8.2 hereof, including lender's loss payee endorsements. 5.9 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's articles or certificate of incorporation and all amendments thereto, and a Certificate of Good Standing, each certified by the Secretary of State of the state of Borrower's organization, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for Borrower from the Secretary of State of each state wherein the failure to be so qualified could have a Material Adverse Effect. 5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of Borrower's By-laws and all amendments thereto, and Coast shall have received copies of the resolutions of the board of directors of Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of Borrower to execute the same on behalf of Borrower, in each case certified by the Secretary or other acceptable officer of Borrower as of the Closing Date. 5.11 TAXES. Coast shall have received evidence from Borrower that Borrower has complied with all tax withholding and Internal Revenue Service regulations, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.12 DUE DILIGENCE. Coast shall have completed its due diligence with respect to Borrower. 5.13 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other agreements, instruments and documents as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's sole and absolute discretion, and in form for filing in the appropriate filing office, including, but not limited to, those documents listed in Section 5 of the Schedule. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Coast to enter into this Agreement and to make Loans, Borrower represents and warrants to Coast as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by Borrower of -7- this Agreement, and all other documents contemplated hereby (a) have been duly and validly authorized, (b) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (c) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (d) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Coast thirty (30) days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Coast at least thirty (30) days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, such waivers and subordinations as Coast shall specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, subject to normal wear and tear in the ordinary course of business, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Coast in writing of any material loss or damage to the Collateral. 6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with GAAP (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Borrower is now and will continue to be Solvent. 6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and -8- conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, the Fair Labor Standards Act, and those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and environmental matters. 6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in a Material Adverse Effect. Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving an amount set forth on the Schedule. 6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 7. RECEIVABLES. 7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to Coast as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed bona fide existing unconditional obligation of the Account Debtor (subject to the Account Debtor's right to make a warranty claim under any written warranty given by Borrower in the ordinary course of its business and disclosed to Coast prior to the creation of the Receivable), created by the sale, delivery and acceptance of goods or the rendition of services in the ordinary course of Borrower's business. 7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Coast via facsimile, unless otherwise directed by Coast, at such locations and at such intervals as Coast may request, transaction reports and loan requests, schedules of Receivables, and schedules of collections, all on Coast's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of Borrower's Receivables, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 10:30 A.M. Los Angeles, California time, will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence -9- of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall request. In addition, Borrower shall deliver to Coast the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Coast with copies of all credit memos promptly after the creation thereof. 7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrower shall deliver all such payments and proceeds to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a blocked account agreement in such form as Coast may specify. Coast or its designee may, at any time, notify Account Debtors that Coast has been granted a security interest in the Receivables. 7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (a) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Coast on the regular reports provided to Coast; (b) no Default or Event of Default has occurred and is continuing; and (c) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast may, at any time after the occurrence of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Coast considers advisable in its reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan account with only the net amounts received by Coast in payment of any Receivables. 7.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (a) hold the returned Inventory in trust for Coast, (b) segregate all returned Inventory from all of Borrower's other property, (c) conspicuously label the returned Inventory as subject to Coast's security interest, and (d) immediately notify Coast of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Coast's request deliver such returned Inventory to Coast. 7.8 VERIFICATION. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. 7.9 NO LIABILITY. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve -10- Coast from liability for its own gross negligence or willful misconduct. 8. ADDITIONAL DUTIES OF THE BORROWER. 8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 8.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrower shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a lender's loss payee endorsement in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than the amount set forth in Section 8 of the Schedule, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast copies of all reports made to insurance companies. 8.3 REPORTS. Borrower, at its expense, shall provide Coast with the written reports set forth in Section 8 of the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not less frequently than quarterly and on one (1) Business Day's notice, Coast, or its agents, shall have the right to perform Audits. Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The Audits shall be at Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same), plus reasonable out-of-pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same rights with respect to access to books and records and related rights as Coast has under this Loan Agreement. 8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written consent, do any of the following: (a) merge or consolidate with another entity, except in a transaction in which (i) the owners of the Borrower hold at least fifty percent (50%) of the ownership interest in the surviving entity immediately after such merger or consolidation, and (ii) the Borrower is the surviving entity; (b) acquire any assets, except (i) in the ordinary course of business, or (ii) in a transaction or a series of transactions not involving the payment of an aggregate amount in excess of the amount set forth in Section 8 of the Schedule; (c) enter into any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (e) store any Inventory or other Collateral with any warehouseman or other third party, except for Inventory stored at Sun Denki; (f) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (g) make any loans of any money or other assets, except (i) advances to customers or suppliers in the ordinary course of business, (ii) travel advances, employee relocation -11- loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower; (h) incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; (i) guarantee or otherwise become liable with respect to the obligations of another party or entity; (j) pay or declare any dividends or distributions on the ownership interests in Borrower (except for dividends or distributions payable solely in stock form of ownership interests in Borrower); (k) make any change in Borrower's capital structure which would have a Material Adverse Effect; or (l) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default is continuing or would occur as a result of such transaction. 8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to Borrower, Borrower shall, so long as the interests of Borrower and Coast in such proceeding or suit are not adverse, without expense to Coast, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary or useful in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 9. TERM. 9.1 MATURITY DATE. This Agreement shall continue in effect until the Maturity Date; provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than one hundred twenty (120) days prior to the Maturity Date or the next Renewal Date, that such party elects to terminate this Agreement effective on the Maturity Date or such next Renewal Date. If this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the Renewal Date and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 9.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrower, effective three (3) Business Days after written notice of termination is given to Coast; or (b) by Coast at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount shown in Section 3 of the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, the Renewal Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Coast or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Coast, then on such date Borrower shall provide to Coast cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and costs due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Coast's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further -12- Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Coast immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading and results in a Material Adverse Effect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver the proceeds of Collateral to Coast as provided in Section 7.5 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 8.4 above, or shall breach any negative covenant set forth in Section 8.5 above; or (e) Borrower shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (f) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five (5) Business Days after the date due; or (g) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (h) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or (j) Dissolution, termination of existence, or insolvency of Borrower or any guarantor of any of the Obligations; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is (i) not timely controverted, or (ii) not cured by the dismissal thereof within thirty (30) days after the date commenced; or (l) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (n) Borrower or any guarantor of any of the Obligations makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations, other than as -13- permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) Except as permitted under Section 8.5(a), Borrower shall suffer or experience any Change of Control without Coast's prior written consent, which consent shall be in the discretion of Coast in the exercise of its reasonable business judgment; or (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) there shall be any Material Adverse Effect. Coast may cease making any Loans or extending any credit hereunder during any of the above cure periods. 10.2 REMEDIES. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Coast seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Coast is hereby granted a license or other right 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 Borrower's rights under all licenses and all franchise agreements shall inure to Coast's benefit; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any -14- Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's discretion reasonably exercised, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast (including attorneys' fees and expenses incurred in connection with bankruptcy) with respect to the foregoing shall be due from the Borrower to Coast on demand. Coast may charge the same to Borrower's loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Receivable Loans. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least five (5) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five (5) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non-specific terms; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m Los Angeles, California time; (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, but solely to enforce Coast's rights and remedies hereunder or in connection with the preservation, protection or collection of any of the Collateral, in Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, -15- materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast (including attorneys' fees and expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrower's loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Receivable Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each of its officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person hereunder with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. -16- 10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Coast shall have all the other rights and remedies accorded a secured party in equity, under the Code, and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been indefeasibly paid and performed. 11. GENERAL PROVISIONS. 11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations three (3) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 10:30 AM Los Angeles, California time, on any day shall be deemed received on the next Business Day. Coast shall be entitled to charge Borrower's account for such three (3) Business Days of "clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on all checks, wire transfers and other items received by Coast, regardless of whether such three (3) Business Days of "clearance" or "float" actually occur, and shall be deemed to be the equivalent of charging three (3) Business Days of interest on such collections. This across-the-board three (3) Business Day clearance or float charge on all collections is acknowledged by the parties to constitute an integral aspect of the pricing of Coast's financing of Borrower. Coast shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's loan account for the amount of any item of payment which is returned to Coast unpaid. 11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan account, in which event they will bear interest from the date due to the date paid at the same rate applicable to the Loans. 11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrower notifies Coast in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. 11.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, facsimile or certified mail return receipt requested, addressed to Coast or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, faxed (at time of confirmation of transmission), or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 11.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 11.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Coast and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN -17- AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH. 11.8 WAIVERS. The failure of Coast at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any Default shall not waive or affect any other Default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for its own gross negligence or willful misconduct. 11.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Coast. 11.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for all attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy) and all filing, recording, search, title insurance, appraisal, audit, and other costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any attorneys' fees and costs (including attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrower. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its costs and attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy), including (but not limited to) attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrower shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorneys' fees, costs and charges (including attorneys' fees and expenses incurred pursuant to bankruptcy) and other fees, costs and charges to which Coast may be entitled pursuant to this Agreement may be charged by Coast to Borrower's loan account and shall thereafter bear interest at the same rate as the Receivable Loans. 11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Coast; PROVIDED, HOWEVER, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrower from its liability for the Obligations. Coast may assign its rights and delegate its duties hereunder by the sale of assignment or participation interests, all without the consent of Borrower. 11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue appropriate press -18- releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Coast acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. 11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by the internal laws of the State of California, without regard to its conflicts of law principles. As a material part of the consideration to Coast to enter into this Agreement, Borrower (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (b) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL OF THE FOREGOING -19- CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: PACIFIC MONOLITHICS, INC. By /s/ Richard B. Gold ----------------------------------------------- President or Vice President COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Bank By ----------------------------------------------- Title: ------------------------------------------- -20- EXHIBIT "1" (See attached exhibit) -1- [LOGO] SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: PACIFIC MONOLITHICS ADDRESS: 1308 MOFFET PARK DRIVE SUNNYVALE, CALIFORNIA 94089 DATE: NOVEMBER____, 1997 This Schedule forms an integral part of the Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Bank, and the above-borrower of even date. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECTION 2 - CREDIT FACILITIES SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time outstanding not to exceed the lesser of a total of Eight Million Dollars ($8,000,000) at any one time outstanding (the "Maximum Dollar Amount"), or the sum of (a), (b) and (c) below: (a) Receivable Loans in an amount not to exceed 85% of the amount of Borrower's Eligible Receivables (as defined in Section 1 of the Agreement), so long as dilution of the Eligible Receivables (as determined by Coast in its discretion reasonably exercised) does not exceed 5%. If dilution exceeds 5%, the advance rate against Eligible Receivables shall not exceed 80% but may be further reduced in the discretion of Coast, reasonably exercised. Notwithstanding the foregoing, advances against Eligible Foreign Receivables which are otherwise uninsured shall be up to 80% or which are insured by insurance other than CEFO or EXIM but otherwise acceptable to Coast, advances against Eligible Foreign Receivables which are insured by CEFO or EXIM shall be up to 90% of the net insured amount (provided all credit insurance shall have been assigned to Coast), and advances against Eligible Foreign Receivables which are backed by a letter of credit assigned to and otherwise acceptable to Coast in its discretion shall be up to 90%, plus (b) Inventory Loans in an amount not to exceed the lesser of: (1) up to 45% of the value of Borrower's Eligible Inventory (as defined in Section 1 of the Agreement), located at Borrower's Sunnyvale facility, calculated at the lower of cost or market value and determined on a first in, first out basis. -21- COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Notwithstanding the foregoing, advances against Eligible Inventory will be determined on a category basis and the advance rate up to 45% will apply only to MMDS finished goods, MMDS/special finished goods and against Capitalized Overhead of the MMDS category. Advances against other specific categories of Inventory will be less than 45% as determined by Coast and, in any event, no advance against Inventory shall exceed 80% of the orderly liquidation value of the Eligible Inventory based on an appraisal in form and substance acceptable in the discretion of Coast, or (2) Two Million Dollars ($2,000,000) increasing to $3,000,000 if no Event of Default has occurred and is continuing and Borrower has been in compliance (and continues in compliance) for at least two consecutive fiscal quarters with all of the terms and conditions herein including, without limitation, all financial covenants and has achieved for two consecutive fiscal quarters and maintained a Tangible Net Worth of at least $7,500,000; provided that in no event shall the outstanding Inventory Loans exceed the outstanding Receivable Loans, plus (c) Equipment Acquisition Loans in minimum advances of One Hundred Thousand Dollars ($100,000) in a total amount not to exceed the lesser of: (1) eighty percent (80%) of the cost of new Equipment (after subtracting taxes and installation charges), or up to eighty (80%) of the appraised forced liquidation value of used Equipment acquired by Borrower (after subtracting taxes and installation charges); and (2) Seven Hundred Fifty Thousand Dollars ($750,000). Each draw hereunder shall be repayable over the lesser of 48 months or the useful life of the Equipment. No advances shall be available hereunder unless Borrower has achieved and maintains at the time of the advance a EBITDA Debt Service Coverage Ratio (as defined below) of at least 1.20:1. "EBITDA Debt Service Coverage Ratio" shall mean for any period, the quotient of (x) EBITDA, DIVIDED BY (y) the sum of (A) all principal, interest and other payments made or required to be made by Borrower on indebtedness during such period, including any fees and charges owed by Borrower in connection with any such indebtedness, (B) all capital expenditures permitted hereunder and actually made, except any portion thereof financed through indebtedness permitted hereunder, (C) all taxes paid during such period, and (D) all capitalized lease payments made or required to be made by Borrower during such period. "EBITDA" shall mean, for any period, the net income for such period of Borrower determined in accordance with GAAP (excluding any extraordinary income items, including, without limitation, gain on sale of assets, income relating to foreign 22 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- exchange, swap or other derivative transactions and changes in GAAP), PLUS the following items, to the extent deducted from the revenues of Borrower in the calculation of net income or loss: (i) depreciation, (ii) amortization of intangibles and any other non-cash items, (iii) cash interest expense (excluding any interest paid-in-kind) and (iv) tax expense. SECTION 2.2 - LETTER OF CREDIT Sublimit: Five Hundred Thousand Dollars ($500,000) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION 3 - INTEREST AND FEES SECTION 3.1 - INTEREST A rate equal to the Prime Rate plus 2.25% per RATE: annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The rate shall be reduced to Prime Rate plus 1.75% if Borrower achieves and maintains a Tangible Net Worth of a least $8,500,000 for at least two consecutive fiscal quarters and no Event of Default has occurred and is continuing. The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for each month shall be based on the highest Prime Rate in effect during the prior month, but in no event shall the rate of interest charged on any Loans in any month be less than 9% per annum. SECTION 3.1 - MINIMUM forty percent (40%) of the Maximum Dollar Amount MONTHLY based on a daily average INTEREST: SECTION 3.2 - LOAN FEE: .75% of the Maximum Dollar Amount shall be payable on the Closing Date. An additional .50% of the Maximum Dollar Amount shall be due and payable of the first anniversary of the Closing Date and an additional .25% of the Maximum Dollar Amount shall be due and payable on the second anniversary of the Closing Date. All fees hereunder shall be deemed earned on the Closing Date and shall not be refundable for any reason whatsoever. SECTION 3.2 - FACILITY $2,200 per calendar quarter, payable on the Closing FEE: Date (prorated for any partial quarter at the beginning of the term of this Agreement) and continuing on the first day of each subsequent quarter thereafter. SECTION 3.2 - LETTER OF .50% of all outstanding Letters of Credit per CREDIT FEES: calendar month, plus bank charges and fees. SECTION 9.1 - RENEWAL FEE: .50% of the Maximum Dollar Amount per year. SECTION 9.2 - EARLY An amount equal to three percent (3%) of the TERMINATION Maximum Dollar Amount (as defined in the Schedule), FEE: if termination occurs on or before the first anniversary of the effective date of this Agreement; two percent (2%) of the Maximum Dollar Amount, if termination occurs after the first anniversary and on or before the second anniversary of the effective date of this Agreement; and one percent (1%) of the Maximum Dollar Amount, if termination occurs after the second anniversary of this Agreement. 23 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION 5 - CONDITIONS PRECEDENT SECTION 5.2 - MINIMUM $250,000 at funding AVAILABILITY: SECTION 5.13 - OTHER 1. UCC-1 financing statements, fixture filings DOCUMENTS and termination statements; and AND AGREEMENTS: 2. Security Agreements (including those covering copyrights, patents and trademarks). OTHER CONDITIONS PRECEDENT 1. All taxes shall be current. 2. All remittances and collections shall be received through a blocked account in form and substance acceptable to Coast in its discretion. 3. All shareholder and other subordinated notes shall be subordinated to Coast, in form and substance satisfactory to Coast, as reflected in the Intercreditor and Subordination Agreement forms delivered by Coast to Borrower. 4. Coast shall have received and approved, in its discretion, an inventory appraisal by an appraiser chosen by Coast. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 6.2 - PRIOR NAMES OF None BORROWER: SECTION 6.2 - PRIOR TRADE NAMES None OF BORROWER: SECTION 6.2 - EXISTING TRADE NAMES None OF BORROWER: SECTION 6.3 - OTHER LOCATIONS AND None ADDRESSES: SECTION 6.10 - MATERIAL ADVERSE Claim of Praegitzer Corporation for LITIGATION: approximately $140,000. SECTION 6.10 - FUTURE CLAIMS AND Borrower will promptly inform Coast in LITIGATION: writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of Fifty Thousand Dollars ($50,000) or more, or involving One Hundred Thousand Dollars ($100,000) or more in the aggregate. 24 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION 8 - ADDITIONAL DUTIES OF BORROWER SECTION 8.1 - OTHER PROVISIONS: NET WORTH COVENANT: Borrower shall maintain at all times Tangible Net Worth which has been subordinated to Coast pursuant to a subordination agreement executed by the creditor and Coast, of not less than $5,750,000. SECTION 8.2 - INSURANCE: Subject to the limitations set forth in Section 8.2 of the Agreement, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than Fifty Thousand Dollars ($50,000). SECTION 8.3 - REPORTING: Borrower shall provide Coast with the following: 1. Monthly Receivable agings, aged by invoice and due date, within ten (10) days after the end of each month. 2. Monthly accounts payable agings, aged by invoice and due date, and outstanding or held check registers within ten (10) days after the end of each month. 3. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory reports as are reasonably requested by Coast, all within ten (10) days after the end of each month. 4. Monthly internally prepared financial statements, as soon as available, and in any event within thirty (30) days after the end of each month. 5. Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower. 6. Quarterly customer lists, including customer name, address, and phone number. 7. Annual financial statements, as soon as available, and in any event within ninety (90) days following the end of Borrower's fiscal year, containing the unqualified opinion of, and certified by, an independent certified public accountant acceptable to Coast. 8. Weekly inventory/borrowing base reporting in form requested by Coast. SECTION 8.5 - NEGATIVE COVENANTS Fifty Thousand Dollars ($50,000) (ACQUIRED ASSETS): 25 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION 9 - TERM SECTION 9.1 - MATURITY DATE: November 30, 2000 subject to automatic renewal as provided in Section 9.1 of the Agreement, and early termination as provided in Section 9.2 of the Agreement. 26 EX-10.27 8 EXHIBIT 10.27 EXHIBIT 10.27 EMPLOYMENT AGREEMENT This Employment Agreement (this "AGREEMENT") is entered into as of March 31, 1998 between HYBRID NETWORKS, INC., a Delaware corporation (the "Company"), and RICHARD B. GOLD ("Gold"). The parties hereby agree as follows: 1. TERM OF EMPLOYMENT; POSITION. Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ Gold on a full-time basis as the Company's President and Chief Operating Officer during the two year period commencing on the "CLOSING DATE" (as defined in the Agreement and Plan of Reorganization dated March 19, 1998, by and among the Company, Pacific Monolithics, Inc. and HN Acquisition Corp.) and expiring on the second anniversary of the Closing Date (such time period is hereinafter called the "EMPLOYMENT TERM") unless Gold's employment and the Employment Term are sooner terminated in accordance with the provision of Section 4 below. Gold hereby agrees to such employment. 2. GOLD'S DUTIES; NONCOMPETITION. Gold will be responsible for serving the Company as its President and Chief Operating Officer in accordance with the Company's Bylaws and subject to the direction of the Company's Chairman and CEO. His office will be in the Company's headquarters building. During the Employment Term, Gold will not, without the prior written consent of the Company, engage in, or provide services to, any organization, association or business that is in competition with or detrimental to the business of the Company. 3. COMPENSATION AND BENEFITS. 3.1 SALARY AND BONUSES. During the Employment Term, the Company will pay Gold, in equal semi-monthly installments, a salary at the rate of $240,000 per year. In addition, Gold will be eligible each year of the Employment Term for a target bonus of $120,000, based on targeted personal and Company performance. 3.2 EMPLOYEE BENEFITS. Gold will be entitled to participate in all benefit programs that the Company establishes and makes available to its employees generally. 3.3 WITHHOLDING. The Company will withhold from all payments of salary and other compensation to Gold, payroll withholding taxes and other amounts that the Company is required to withhold from such payments under applicable law. 4. TERMINATION. During the Employment Term, the Company will not terminate Gold's employment other than for Cause (as defined in Section 4.2). Notwithstanding anything herein to the contrary, the Employment Term, the employment of Gold by the Company and this Agreement may be terminated in accordance with the following: 4.1 EXPIRATION. Immediately, upon expiration of the Employment Term in accordance with Section 1 hereof. 4.2 FOR CAUSE. By the Company, immediately for Cause (as defined in this Section 4.2). For the purposes of this Agreement, the term "CAUSE" will be deemed to exist upon: (a) a good faith finding by the Company that Gold has willfully failed to perform his lawful assigned duties for the Company or abandoned his employment with the Company in any manner; (b) a good faith finding by the Company of dishonesty, gross negligence or intentional misconduct on the part of Gold (including but not limited to misappropriation of intellectual property of the Company or of others); or (c) the conviction of Gold of any felony (other than a felony involving the operation of a motor vehicle). 4.3 VOLUNTARY TERMINATION. Immediately, upon Gold's resignation from the Company or any other voluntary termination by Gold of his employment with the Company (a "VOLUNTARY TERMINATION"). 4.4 DEATH. Immediately, upon the death of Gold. 4.5 DISABILITY. By the Company, immediately after 30 days' notice, upon the disability of Gold. As used in this Agreement, the term 'DISABILITY" will mean the material inability of Gold, due to a physical or mental disability, to perform the services and duties of Gold contemplated by this Agreement for a period of at least 90 days (whether or not such 90 days are consecutive) during any twelve-month period. The Company will promptly notify Gold in writing if it determines that Gold's employment has been terminated due to disability. 5. EFFECT OF TERMINATION. 5.1 TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. If the Company terminates Gold's employment for Cause or if Gold effects a Voluntary Termination, then the Company will pay to Gold the salary and benefits accrued and otherwise payable to him under Section 3.1 and Section 3.2 through the effective date of such termination. 5.2 TERMINATION NOT FOR CAUSE. If the Company terminates Gold's employment other than for Cause, then the Company will pay Gold the salary and benefits accrued and otherwise payable to him under Section 3.1 and Section 3.2 through the remainder of the Employment Term, including a pro rata portion of the target bonus, if any, that becomes payable at the end of the reporting period in which such termination becomes effective. 5.3 SURVIVAL. Notwithstanding anything to the contrary in this Agreement, all obligations of the Company and Gold under this Agreement which, according to the terms of this Agreement are required to be performed after termination or expiration or this Agreement, will survive termination or expiration of this Agreement, and such surviving obligations of a party will remain enforceable against that party. 6. PROPRIETARY INFORMATION AGREEMENT. Nothing in this Agreement will affect or modify the terms of Gold's Employment Proprietary Information and Inventions Agreement with the Company, which will remain in full force and effect. 7. MISCELLANEOUS. 7.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior or concurrent agreements, understandings, representations or warranties, whether written or oral, between the Company and Gold. 7.2 AMENDMENT. This Agreement may be amended or modified only by a written instrument executed by both the Company and Gold. 7.3 GOVERNING LAW; SEVERABILITY. This Agreement will be construed, interpreted and enforced in accordance with the laws of the State of California as applied to agreements entered into in California by California residents without reference to principles of conflict of laws or choice of law. In case any provision of this Agreement will be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions will in no way be affected or impaired thereby. 7.4 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets of business; PROVIDED, HOWEVER, that the obligations of Gold hereunder are personal and will not be assigned by him. 7.5 WAIVER. No delay or omission by the Company in exercising any right under this Agreement will operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion will be effective only in that instance and will be construed as a bar or wavier of any right on any other occasion. 7.6 CAPTIONS. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 7.7 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, and all of which together will be one instrument. 8. ADVISE TO SEEK COUNSEL. GOLD ACKNOWLEDGES TO THE COMPANY THAT HE HAS BEEN ADVISED BY THE COMPANY TO RETAIN AN INDEPENDENT ATTORNEY TO ADVISE HIM REGARDING HIS RIGHTS, OBLIGATIONS AND INTERESTS UNDER THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first set forth above. HYBRID NETWORKS, INC. GOLD a Delaware corporation By: /s/ Carl S. Ledbetter By: /s/ Richard B. Gold --------------------------- ---------------------------- Carl S. Ledbetter Richard B. Gold President and Chief Executive Officer [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT] EX-10.28 9 EXHIBIT 10.28 EXHIBIT 10.28 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (this "AGREEMENT") is made this 31st day of March, 1998 by and between Hybrid Networks, Inc., a Delaware corporation ("HYBRID"), and Richard B. Gold, a California resident ("EMPLOYEE"). RECITALS WHEREAS, Employee has been an officer of Pacific Monolithics, Inc., a California corporation ("PACIFIC"), and is the owner of shares of capital stock of Pacific; and WHEREAS, Pacific is a party to an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT") dated March 19, 1998 by and among Hybrid, Pacific and HN Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Hybrid ("NEWCO"), pursuant to which Newco is to merge with and into Pacific (the "MERGER"); and WHEREAS, the parties hereto recognize that Employee has unique knowledge and experience regarding Pacific's business, and the Hybrid desires to be assured that confidential information pertaining to Pacific's business and the goodwill of Pacific will be preserved and protected and will inure to the benefit of Hybrid; and WHEREAS, execution and delivery of this Agreement is a condition precedent to the closing of the transactions contemplated by the Reorganization Agreement (the "CLOSING"); NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties contained herein, and further as an inducement to Hybrid to enter into the Reorganization Agreement, the parties hereto hereby agree as follows: 1. COVENANT NOT TO COMPETE. (a) For the two (2) year period following the "CLOSING DATE" as defined in the Reorganization Agreement, Employee shall not, anywhere in the world, including without limitation counties in the State of California listed in Exhibit A hereto: (i) (A) engage, directly or indirectly, in any business activity as a sole proprietor, partner, beneficial shareholder, officer, director, employee, agent, or consultant of, for, or with, (B) work for, consult, found, or enter into any license agreement with, or (C) be involved in any way with, any entity or person engaged in the design, research, development, marketing, sale, or licensing of any wireless or wired cable modems product, including any product similar to the Downconverter or the CypherPoint lines of products, created, distributed, or known by Employee to be under development by Pacific prior to the termination of Employee's employment with Hybrid (a "COMPETITIVE BUSINESS"); and (ii) actively solicit for employment any Pacific employees who continue to be employed by Hybrid or Pacific after the Closing. (b) Notwithstanding the foregoing, Employee may own, directly or indirectly, up to 2% of any class of "publicly traded securities," and up to 5% of the outstanding securities that are not "publicly traded securities," of any Competitive Business. For the purposes of this Section 1, the term "publicly traded securities" shall mean securities that are traded on a national securities exchange or listed on the Nasdaq National Market. 2. CONSIDERATION; AGREEMENT REASONABLE. Employee acknowledges and agrees that (a) this Agreement is being entered into as a condition to the consummation of the Reorganization Agreement; (b) as a shareholder of Pacific, he is receiving a substantial benefit for the consummation of the Reorganization Agreement, including shares of unregistered Hybrid Common Stock, which benefit constitutes adequate consideration for the covenants set forth in this Agreement, and (c) the covenants provided for in this Agreement, including without limitation the term and scope of the covenant not to compete, are necessary and reasonable in order to protect Hybrid in the conduct of its business. 3. ENFORCEABILITY OF RESTRICTION. The foregoing restriction may be enforced throughout the world. The foregoing restriction shall be deemed to be a series of separate covenants as to increasing degrees of scope and duration. If any of such covenants shall be held invalid or unenforceable by reason of being unreasonably broad as to duration, geographic scope, or otherwise, such covenants shall be deemed eliminated to that extent and the remaining covenants shall be enforced to the broadest extent deemed reasonable. The parties hereto expressly agree that the restrictions as so amended shall be valid and binding as though such invalid or unenforceable covenant had not been included herein. 4. REFORMATION. In the event that the provisions of this Agreement should ever be deemed to exceed the scope, time, geographic, or other limitations of applicable law regarding covenants not to compete, then such provisions shall be reformed to the maximum scope, time, geographic, or other limitations, as the case may be, permitted by applicable laws. 5. DAMAGES. In the event that Employee breaches any covenant or agreement set forth in this Agreement, it is expressly agreed between the parties that monetary damages would be inadequate to compensate Hybrid for any such breach. Accordingly, Employee acknowledges and agrees that any such violation or threatened violation will cause irreparable injury to Hybrid and that, in addition to any other remedies which may be available, Hybrid shall be entitled to obtain injunctive relief against the threatened breach of the covenant or agreement set forth in this Agreement or the continuation of any such breach. 6. ASSIGNMENT. This Agreement and the rights and obligations hereunder shall not be assignable by any party without the written consent of the other party, other than an assignment from Hybrid to any subsidiary, its parent, or any subsidiary of its parent. The rights and obligations of each party under this Agreement shall inure to the benefit of and shall be binding upon the successors and permitted assigns of such party. 7. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to the transactions contemplated hereby. It may not be changed orally but only by an agreement in writing, signed by the party against which or whom enforcement of any waiver, change, modification, extension, or discharge is sought. 8. APPLICABLE LAW. This Agreement shall be interpreted in accordance with the laws of the State of California, without regard to such State's conflicts of law rules. 9. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which together shall constitute one instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have entered into this Noncompetition Agreement as of the date first written above. HYBRID NETWORKS, INC. By: /s/ Carl S. Ledbetter ------------------------------------ Carl S. Ledbetter President and Chief Executive Officer EMPLOYEE /s/ Richard B. Gold ---------------------------------------- Richard B. Gold SIGNATURE PAGE TO NONCOMPETITION AGREEMENT EXHIBIT A CALIFORNIA COUNTIES 1. Alameda 2. Alpine 3. Amador 4. Butte 5. Calaveras 6. Colusa 7. Contra Costa 8. Del Norte 9. El Dorado 10. Fresno 11. Glenn 12. Humboldt 13. Imperial 14. Kern 15. Kings 16. Lake 17. Lassen 18. Los Angeles 19. Madera 20. Marin 21. Mariposa 22. Mendocino 23. Merced 24. Modoc 25. Mono 26. Monterey 27. Napa 28. Nevada 29. Orange 30. Placer 31. Plumas 32. Riverside 33. Sacramento 34. San Benito 35. San Bernadino 36. San Diego 37. San Francisco 38. San Joaquin 39. San Luis Obispo 40. San Mateo 41. Santa Barbara EX-10.29 10 EXHIBIT 10-29 PACIFIC MONOLITHICS, INC. 1986 INCENTIVE STOCK OPTION PLAN (AS LAST AMENDED MARCH 15, 1994) 1. PURPOSES OF THIS PLAN. The purposes of this 1986 Incentive Stock Option Plan are to attract and retain the best available personnel, to provide additional incentive to the Employees of the Company, to promote the success of the Company's business and to enable the Employees to share in the growth and prosperity of the Company by providing them with an opportunity to purchase stock in the Company. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written stock option agreement. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" shall mean the Board of Directors of the Company. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" shall mean the Common Stock of the Company, without par value. (d) "COMPANY" shall mean Pacific Monolithics, Inc., a California corporation. (e) "COMMITTEE" shall mean the Committee appointed by the Board in accordance with Section 4 of this Plan, if one is appointed. (f) "CONTINUOUS EMPLOYMENT" or "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence of any interruption or termination of employment or service as an Employee or to the Company or any Parent or Subsidiary of the Company which now exists or is hereafter organized or acquired by or acquires the Company. Continuous Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Board or in the event of transfers between locations of the Company or between the Company, its Parent, any of its Subsidiaries or its successors. (g) "DISABILITY" shall mean the inability of the Optionee to engage in employment with the Company by reason of any medically determinable physical or mental impairment. (h) "DISINTERESTED PERSON" shall mean a director who is a "disinterested person," as such term is defined pursuant to Rule 16b-3(c)(2)(i) promulgated pursuant to the Exchange Act and any applicable releases and opinions or the Securities and Exchange 1 Commission. (i) "EMPLOYEE" shall mean any person, including officers directors, employed by the Company, its Parent, any of its Subsidiaries or its successors; or, for purposes of eligibility for Nonstatutory Stock Options, any person employed by the Company, including officers and directors, or any consultant to, or director of, the Company, or any Parent or Subsidiary of the Company, whether or not such consultant or director is an employee of such entities. (j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor legislation. (k) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (1) "NONSTATUTORY STOCK OPTION" shall mean an Option which is not an Incentive Stock Option. (m) "OPTION" shall mean a stock option granted pursuant to this Plan. (n) "OPTION AGREEMENT" shall mean a written agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, evidencing an Option. (o) "OPTIONED STOCK" shall mean the Common Stock subject to an Option. (p) "OPTIONEE" shall mean an Employee who is granted an Option. (q) "PARENT" shall mean a "parent corporation," whether now or hereafter existing, as de fined in Sections 425(e) and (g) of the Code. (r) "PLAN" shall mean this 1986 Stock Option Plan. (s) "REGISTRATION DATE" shall mean the effective date of the first registration statement which is filed by the Company and declared effective pursuant to Section 12(g) of the Exchange Act; with respect to any class of the Company's securities. (t) "SHARE" or "SHARES" shall mean the Common Stock, as adjusted in accordance with Section 11 of this Plan. (u) "STOCK PURCHASE AGREEMENT" shall mean an agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, which is to be executed as a condition of purchasing Optioned Stock upon exercise of an Option. 2 (v) "SUBSIDIARY" shall mean a subsidiary corporation, whether now or hereafter existing, as defined in Sections 425(f) and (g) of the Code. 3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of Section 11 of this Plan, the maximum aggregate number of Shares which may be optioned and sold under this Plan is Three Million Five Hundred Thousand (3,500,000) Shares. The Shares may be authorized, but unissued or reacquired Shares other than reacquired shares delivered pursuant to Section 7(c)(iv) hereof as payment of consideration in the exercise of an option. If (a) an Option should expire or become unexercisable for any reason without having been exercised in full or (b) if the Company repurchases Shares from the Optionee pursuant to the terms of a Stock Purchase Agreement (provided that the Optionee did not receive benefits of ownership, such as dividends, which would destroy the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act), the unpurchased Shares or repurchased Shares, respectively, which were subject thereto shall, unless this Plan shall have been terminated, return to this Plan and become available for other Options under this Plan. The Company intends that as long as it is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and is not an investment company registered or required to be registered under the Investment Company Act of 1940, as amended, all offers and sales of Options and Common Stock issuable upon exercise of any Option shall be exempt from registration under the provisions of Section 5 of the Securities Act, and this Plan shall be administered in such a manner so as to preserve such exemption. The Company intends for this Plan to constitute a written compensatory benefit plan within the meaning of Rule 701(b) of 17 CFR Section 230.701 ("Rule 701") promulgated by the Securities and Exchange Commission pursuant to such Act. Unless otherwise designated by the Committee at the time an Option is granted, all options granted under this Plan by the Company, and the issuance of any Shares upon exercise thereof, are intended to be granted in reliance on Rule 701. 4. ADMINISTRATION OF THIS PLAN. (a) PROCEDURE. This Plan shall be administered by the Board. The Board may appoint a Committee consisting of two (2) or more members of the Board (or such greater number as is required to qualify for the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act) to administer this Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members of the Board thereto, remove members (with or without cause) and appoint new members of the Board in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and, thereafter, directly administer this Plan. Members of the Board or Committee who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of this Plan or the grant of Options pursuant to this Plan, except that no such member shall act upon the granting of an Option to such person nor 3 shall any such members presence at a meeting of the Board of Directors establish the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of an Option to him. (b) PROCEDURE AFTER REGISTRATION DATE. Notwithstanding the provisions of subsection (a), after the Registration Date this Plan shall be administered either by: (i) the full Board, provided that at all times each member of the Board is a Disinterested Person; or (ii) a Committee which at all times consists solely of Board members who are Disinterested Persons. After the Registration Date, the Board shall take all action necessary to administer this Plan in accordance with the then-effective provisions of Rule 16b-3 promulgated under the Exchange Act, provided that any amendment to this Plan required for compliance with such provisions shall be made in accordance with Section 13 of this Plan. (c) POWERS OF THE BOARD AND/OR COMMITTEE. Subject to the provisions of this Plan, the Committee or the Board, as appropriate, shall have the authority, in its discretion: (i) to grant Incentive Stock Options and Nonstatutory Stock Options; (ii) to determine, upon review of relevant information and in accordance with Section 7 of this Plan, the fair market value per Share; (iii) to determine the exercise price of the Options, which exercise price and type of consideration shall be determined in accordance with Section 7 of this Plan; (iv) to determine the Employees to whom, and the time or times at which, Options shall be granted, and the number of Shares to be subject to each Option; (v) to prescribe, amend and rescind rules and regulations relating to this Plan; (vi) to determine the terms and provisions of each Option Agreement and each Stock Purchase Agreement (each of which need not be identical with the terms of other Option Agreements and Stock Purchase Agreements) and, with the consent of the holder thereof, to modify or amend each Option Agreement and Stock Purchase Agreement; (vii) to determine whether a stock repurchase agreement or other agreement will be required to be executed by any Employee as a condition to the exercise of an Option, and to determine the terms and provisions of any such agreement (which need not be identical with the terms of any other such agreement) and, with the consent of the Optionee, to amend any such agreement; (viii) to interpret this Plan, the Option Agreements, the Stock Purchase Agreements or any agreement entered into with respect to the grant or exercise of Options; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board or to take such other actions as may be necessary or appropriate with respect to the Company's rights pursuant to Options or agreements relating to the grant or exercise thereof; and (x) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of this Plan. (d) EFFECT OF THE BOARD'S OR COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Board or the Committee shall be final and binding on all Optionees and any other holders of Options. 5. ELIGIBILITY. Options may be granted only to Employees. An Employee who has been granted an Option may, if such Employee is otherwise eligible, be granted additional Options. 4 6. TERM OF PLAN. This Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by vote of a majority of the outstanding shares of the Company's capital stock entitled to vote on the adoption of this Plan. This Plan shall continue in effect for a term of ten (10) years unless sooner terminated in accordance with the terms and provisions of this Plan. 7. OPTION PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The exercise price per Share for the Shares to be issued pursuant to the exercise of an Option shall be such price as is determined by the Board; PROVIDED, HOWEVER, that such price shall in no event be less than eighty-five percent (85%) with respect to Nonstatutory Stock Options, and one hundred percent (100%) with respect to Incentive Stock Options, of the fair market value per Share on the date of grant. In the case of an Option granted to an Employee who, at the time the Option is granted, owns stock (as determined under Section 425(d) of the Code) constituting more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, the exercise price per Share shall be no loss than one hundred ten percent (110%) of the fair market value per Share on the date of grant. (b) FAIR MARKET VALUE. The fair market value per Share on the date of grant shall be determined by the Board in its sole discretion, exercised in good faith; PROVIDED, HOWEVER, that where there is a public market for the Common Stock, the fair market value per Share shall be the average of the closing bid and asked prices of the Common Stock on the date of grant, as reported in THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotations ("NASDAQ") System), or, in the event the Common Stock is listed on a stock exchange or on the NASDAQ System, the fair market value per Share shall be the closing price on the exchange or on the NASDAQ System as of the date of grant of the Option, as reported in THE WALL STREET JOURNAL. (c) PAYMENT OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory notes, Shares held by the Optionee for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes which have a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment. Subject to subparagraphs (i) through (iv) hereto, utilization of Shares as the method of payment may be completed by the tender of Shares then held by the Optionee. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration is deemed to be such as may be reasonably expected to benefit the Company. (i) If the consideration for the exercise of an Option is a promissory note, it shall be a full recourse promissory note executed by the Optionee, bearing interest at a rate which shall be sufficient to preclude the imputation of interest under the applicable provisions of the Code. Until such time as the promissory note has been paid in full, the 5 Company may retain the Shares purchased upon exercise of the Option in escrow as security for payment of the promissory note. (ii) If the consideration for the exercise of an Option is the surrender of previously acquired and owned Shares, the Optionee will be required to make representations and warranties satisfactory to the Company regarding his title to the Shares used to effect the purchase, including, without limitation, representations and warranties that the Optionee has good and marketable title to such Shares free and clear of any and all liens, encumbrances, charges, equities, claims, security interests, options or restrictions and has full power to deliver such Shares without obtaining the consent or approval of any person or governmental authority other than those which have already given consent or approval in a form satisfactory to the Company. The value of the Shares used to effect the purchase shall be the fair market value of those Shares as determined by the Board in its sole discretion, exercised in good faith. (iii) If the consideration for the exercise of an Option is to be paid through a broker-dealer sale and remittance procedure, the Optionee shall provide (1) irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and to remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (2) written instructions to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Notwithstanding the foregoing, Optionees subject to the short-swing profit limitation of Section 16 of the Exchange Act shall have the right to deliver irrevocable written instructions to effect the exercise of an option through the foregoing broker-dealer sale arid remittance procedure (a) six months or more prior to the date such transaction is to be effected" and/or (b) prior to the date such transaction is to be effected and within a "window period" specified in Rule 16b-3(3)(iii) promulgated pursuant to the Exchange Act. (iv) If an Optionee is permitted to exercise an Option by delivering shares of the Company's Common Stock, the option agreement covering such Option may include provisions authorizing the Optionee to exercise the Option, in whole or in part, by delivering whole shares of the Company's Common Stock previously owned by such Optionee (whether or not acquired through the prior exercise of a stock option) having a fair market value equal to the option price. Shares of the Company's Common Stock so delivered or withheld shall be valued at their fair market value on the date of exercise of the Option, as determined by the Committee and/or the Board, as appropriate. Any balance of the exercise price shall be paid in cash or by check or a promissory note, each in accordance with the terms of this Section 7. 8. OPTIONS. (a) TERMS AND PROVISIONS OF OPTIONS. As provided in Section 4 of this Plan and subject to any limitations specified herein, the Board and/or Committee shall have the authority to determine the terms and provisions of any Option granted under this Plan or any agreement required to be executed in connection with the grant or exercise of an Option. Each 6 Option grants pursuant to this Plan shall be evidenced by an Option Agreement. Options granted pursuant to this Plan are conditioned upon the Company obtaining any required permit or order from appropriate governmental agencies authorizing the Company to issue such Options and Shares issuable upon exercise thereof. (b) TERM OF OPTION. The term of each Option may be up to ten (10) years from the date of grant thereof as determined by the Board upon the grant of the Option and specified in the Option Agreement, except that the term of an Option granted to an Employee who, at the time the Option is granted, owns stock comprising more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. (c) EXERCISE OF OPTION. (i) PROCEDURE FOR EXERCISE: RIGHTS AS A SHAREHOLDER. Any Option shall be exercisable at such times, in such installments and under such conditions as may be determined by the Board and specified in the Option Agreement, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of this Plan. An Option may be exercised in accordance with the provisions of this Plan as to all or any portion of the Shares then exercisable under an Option, from time to time during the term of the Option. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company at its principal business office in accordance with the terms of the Option Agreement by the person entitled to exercise the Option and, except when the broker-dealer sale and remittance procedure described in Section 7(c)(iii) hereto is used, full payment for the Shares with respect to which the Option is exercised has been received by the Company, accompanied by an executed Stock Purchase Agreement and any other agreements required by the terms of this Plan and/or the Option Agreement. Full payment may consist of such consideration and method of payment allowable under Section 7 of this Plan. Until the Option is properly exercised in accordance with the terms of this paragraph, no right to vote or receive dividends or any other rights as a stockholder exist with respect to the Optioned Stock. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Option is exercised, except as provided in Section 11 of this Plan. As soon as practicable after any proper exercise of an Option in accordance with the provisions of this Plan, the Company shall, without transfer or issue tax to the Optionee, deliver to the Optionee at the principal executive office of the Company or such other place as shall be mutually agreed upon between the Company and the Optionee, a certificate or certificates representing the Shares for which the Option shall have been exercised. The time of issuance and delivery of the certificate(s) representing the Shares for which the Option shall have been exercised may be postponed by the Company for such period as may be required by the 7 Company, with reasonable diligence, to comply with any applicable listing requirements of any national or regional securities exchange or any law or regulation applicable to the issuance or delivery of such Shares. No Option may be exercised unless this Plan has been duly approved by the shareholders of the Company in accordance with applicable law. Notwithstanding anything to the contrary herein, the terms of a Stock Purchase Agreement required to be executed and delivered in connection with the exercise of an Option may require the certificate or certificates representing the Shares purchased upon exercise of an Option to be delivered and deposited with the Company as security for the Optionee's faithful performance of the terms of his Stock Purchase Agreement. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) TERMINATION OF STATUS AS AN EMPLOYEE. If an Optionee ceases to serve as an Employee for any reason other than death or Disability and thereby terminates his Continuous Status as an Employee, such Optionee shall have the right to exercise the Option at any time within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board at the time of granting the Option), following the date such Optionee ceases his Continuous Status as an Employee of the Company to the extent that such Optionee was entitled to exercise the Option at the date of such termination; PROVIDED, HOWEVER, that no Option shall be exercisable after the expiration of the term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise such Option (which such Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (iii) DEATH OR DISABILITY OF OPTIONEE. If an Optionee ceases to serve as an Employee due to death or Disability and thereby terminates his Continuous Status as an Employee, the Option may be exercised at any time within six (6) months following the date of death or termination of employment due to Disability, in the case of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, or, in the case of Disability, by the Optionee, but in any case only to the extent the Optionee was entitled to exercise the Option at the date of his termination of employment by death or Disability; PROVIDED, HOWEVER, that no Option shall be exercisable after the expiration of the Option term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise such Option at the date of his termination of employment by death or Disability or if such Option is not exercised (to the extent it could be exercised) within the time specified herein, the Option shall terminate. (iv) EXTENSION OF TIME TO EXERCISE. Notwithstanding anything to the contrary in this Section 8, the Board may at any time and from time to time prior to the termination of a Nonstatutory Stock Option, with the consent of the Optionee, extend the period of time during which the Optionee may exercise his Nonstatutory Stock Option following the date the Optionee ceases such Optionee's Continuous Status as an Employee; PROVIDED, HOWEVER, that (1) the maximum period of time during which a Nonstatutory Stock Option shall be exercisable 8 following such termination date shall not exceed an aggregate of six (6) months, (2) the Nonstatutory Stock Option shall not become exercisable after the expiration of the term of such Option as set forth in the Option Agreement as a result of such extension, and (3) notwithstanding any extension of time during which the Nonstatutory Stock Option may be exercised, such Option, unless otherwise amended by the Board, shall only be exercisable to the extent to which the Optionee was entitled to exercise it on the date Optionee ceased Continuous Status as an Employee. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise an Option which Optionee was entitled to exercise within the time specified herein, the Option shall terminate. 9. LIMIT ON VALUE OF OPTIONED STOCK. No Incentive Stock Option may be granted to an Employee if, as a result of such grant, the aggregate fair market value (determined at the time an Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year under all incentive stock option plans of the Company, its Parents or its Subsidiaries, if any, exceeds One Hundred Thousand Dollars ($100,000). 10. NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. (a) Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option or repurchase of shares front an Optionee upon termination of employment or service, as well as the exercise or purchase price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, combination or reclassification of the Common Stock, or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company (other than stock bonuses to Employees, including, without limitation, officers and directors); PROVIDED, HOWEVER, that the conversion of any convertible securities of the Company shall not be deemed to have been effected without the receipt of consideration. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to this Plan or an Option. (b) In the event of the merger, consolidation or reorganization of the Company with or into another corporation as a result of which the Company is not the surviving 9 corporation or as a result of which the outstanding Shares are exchanged for or converted into cash or property or securities not of the Company, the Board may (i) make provision for the assumption of all outstanding Options by the successor corporation or a Parent or a Subsidiary thereof, or (ii) declare that outstanding Options shall terminate as of a date fixed by the Board which is at least thirty (30) days after the notice thereof to the Optionee, unless such thirty (30) day period is waived by the Optionee. In the event of a dissolution or liquidation of the Company or the sale of all or substantially all of the assets of the Company, the Company's outstanding Options shall terminate as to an Optionee upon termination of Continuous Status as an Employee. (c) No fractional shares of Common Stock shall be issuable on account of any action described in this Section, and the aggregate number of shares into which Shares then covered by the Option, when changed as the result of such action, shall be reduced to the largest number of whole shares resulting from such action, unless the Board, in its sole discretion, shall determine to issue scrip certificates in respect to any fractional shares, which scrip certificates, in such event, shall be in a form and have such terms and conditions as the Board in its discretion shall prescribe. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall be the date on which the Board makes the determination granting such Option; PROVIDED, HOWEVER, that if the Board determines that such grant shall be as of some future date, the date of grant shall be such future date. Notice of the determination shall be given to each Employee to whom an Option is so granted within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THIS PLAN. (a) AMENDMENT AND TERMINATION. The Board may amend or terminate this Plan from time to time in such respects as the Board may deem advisable and shall make any amendments which may be required so that Options intended to be Incentive Stock Options shall at all times continue to be Incentive Stock Options for the purpose of the Code, except that, without approval of the holders of a majority of the outstanding shares of the Company's capital stock, no such revision or amendment shall: (i) Increase the number of Shares subject to this Plan, other than in connection with an adjustment under Section 11 of this Plan; (ii) Materially change the designation of the class of Employees eligible to be granted Options; (iii) Remove the administration of this Plan from the Board (other than to the Committee); (iv) Materially increase the benefits accruing to participants under this Plan; or 10 (v) Extend the term of this Plan. (b) EFFECT OF AMENDMENT OR TERMINATION. Except as otherwise provided in Section 11, any amendment or termination of this Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. (a) Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, applicable state securities laws, the rules and regulations promulgated thereunder, and the requirement of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Option, the Board may require the person exercising such Option to execute an agreement with, and/or may require the person exercising such Option to make any representation and warranty to, the Company as may in the judgment of counsel to the Company be required under applicable law or regulation, including but not limited to a representation and warranty that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is appropriate under any of the aforementioned relevant provisions of law. 15. RESERVATION OF SHARES. The Company, during the term of this Plan, at all times shall reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The Company, during the term of this Plan, shall use diligent efforts to seek to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain the requisite authorization(s) deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder, or the inability of the Company to confirm to its satisfaction that any issuance and sale of any Shares hereunder will meet applicable legal requirements, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. STOCK OPTION AND STOCK PURCHASE AGREEMENTS. Options shall be evidenced by written stock option agreements in such form or forms as the Board shall approve from time to time. Upon the exercise of an Option, the Optionee shall sign and deliver to the Company a Stock Purchase Agreement (if required to be executed and delivered to the Company by an 11 Optionee as a condition to the exercise of an Option) in such form or forms as the Board shall approve from time to time. 17. SHAREHOLDER APPROVAL. Continuance of this Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date this Plan is adopted by the Board. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company entitled to vote thereon. All Options granted prior to shareholder approval of this Plan are subject to such approval, and if such approval is not obtained within twelve (12) months before or after the date this Plan is adopted by the Board all such Options shall expire and shall be of no further force or effect. 18. TAXES, FEES, EXPENSES AND WITHHOLDING OF TAXES. (a) The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of Options and/or the issue and transfer of Shares pursuant to the exercise thereof, and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use diligent efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto. (b) The grant of Options hereunder and the issuance of Shares pursuant to the exercise thereof is conditioned upon the Company's reservation of the right to withhold, in accordance with any applicable law, from any compensation payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of such Option or the sale of the Shares issued upon exercise thereof. To the extent that compensation or other amounts, if any, payable to the Optionee are insufficient to pay any taxes required to be so withheld, the Company may, in its sole discretion, require the Optionee, as a condition of the exercise of an Option, to pay in cash to the Company an amount sufficient to cover such tax liability or otherwise to make adequate provision for the Company's satisfaction of its withholding obligations under federal and state law. (c) The Board or any Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 and interpretations thereof by the staff of the Securities and Exchange Commission) provide any or all holders of outstanding option grants under this Plan with the election (a "Withholding Election") to have the Company withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, one or more of such shares with an aggregate fair market value equal to the designated percentage (any multiple of 5% specified by the optionee) of the Federal and State income taxes ("Taxes") incurred in connection with the acquisition of such Shares. In lieu of such direct withholding, one or more optionees may also be granted the right to deliver shares of Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes (the "Tax Date") or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3. Notwithstanding the foregoing, Optionees 12 subject to the short-swing profit limitations of Section 16 of the Exchange Act shall have the right to elect to deliver previously owned stock or make a Withholding Election: (a) six months or more prior to the Tax Date and/or (b) prior to the Tax Date and within a "window period": specified in Rule 16(b)-3(e)(iii) promulgated pursuant to the Exchange Act. 19. LIABILITY OF COMPANY. The Company, its Parent or any Subsidiary which is in existence or hereafter comes into existence shall not be liable to an Optionee or other person if it is determined for any reason by the Internal Revenue Service or any court having jurisdiction that any Options intended to be Incentive Stock Options granted hereunder do not qualify as incentive stock options within the meaning of Section 422 of the Code. 20. INFORMATION TO OPTIONEE. The Company shall provide without charge at least annually to each Optionee during the period his Option is outstanding a balance sheet and income statement of the Company. In the event that the Company provides annual reports or periodic reports to its shareholders during the period in which an Optionee's Option is outstanding, the Company shall provide to each Optionee a copy of each such report. 21. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, as first class, registered or certified mail, with postage and fees prepaid and addressed (i) if to the Company, at its principal place of business, attention: Secretary, or (ii) if to the Optionee at his address as set forth on the signature page of his Option Agreement, or at such other address as either party may from time to time designate in writing to other. It shall be the obligation of each Optionee and each transferee holding Shares purchased upon exercise of an Option to provide the Secretary of the Company, by letter mailed as provided hereinabove, with written notice of his direct mailing address. 22. NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is purely voluntary on the part of the Company, and the continuance of this Plan shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for or a condition of the employment or service of any Employee. Nothing contained in this Plan shall be deemed to give any Employee the right to be retained in the employ or service of the Company, its Parent, Subsidiary or a successor corporation, or to interfere with the right of the Company or any such corporations to discharge or retire any Employee at any time with or without cause and with or without notice. No Employee shall have any right to or interest in Options authorized hereunder prior to the grant thereof to such Employee, and upon such grant such Employee shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Articles of Incorporation, as the same may be amended from time to time. 23. LEGENDS ON CERTIFICATES. (a) FEDERAL LAW. Unless an appropriate registration statement is filed pursuant to the Securities Act of 1933, as amended, with respect to the Options and Shares issuable under this Plan, each document or certificate representing such Options or Shares shall 13 be endorsed thereon with a legend substantially as follows: "THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." (b) CALIFORNIA LEGEND. If required by the California Commissioner of Corporations, each document or certificate representing the Options or Shares issuable under this Plan shall be endorsed thereon with a legend substantially as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." (c) ADDITIONAL LEGENDS. Each document or certificate representing the Options or Shares issuable under this Plan shall also contain legends as may be required under applicable blue sky laws or by any Stock Purchase Agreement or other agreement the execution of which is a condition to the exercise of an Option under this Plan. 24. AVAILABILITY OF PLAN. A copy of this Plan shall be delivered to the Secretary of the Company and shall be shown by him to any eligible person making reasonable inquiry concerning it. 25. COMPLIANCE WITH EXCHANGE ACT RULE 16b-3. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3, promulgated pursuant to the Exchange Act, or its successors. To the extent any provision of this Plan or action by the Board or any Committee fails so to comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board or any Committee. 14 26. INVALID PROVISIONS. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein. 27. APPLICABLE LAW. This Plan shall be governed by and construed in accordance with the laws of the State of California. 15 EX-10.30 11 EXHIBIT 10.30 PACIFIC MONOLITHICS, INC. 1996 EQUITY INCENTIVE PLAN As Adopted March 25, 1996 1. PURPOSE. The purpose of the Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 24. 2. SHARES SUBJECT TO THE PLAN. 2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to the Plan shall be 3,000,000 Shares. Subject to Sections 2.2 and 18, Shares shall again be available for grant and issuance in connection with future Awards under the Plan that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option, (b) are subject to an Award granted hereunder but are forfeited, or (c) are subject to an Award that otherwise terminates without Shares being issued. 2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under the Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards shall be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; PROVIDED, HOWEVER, that fractions of a Share shall not be issued but shall either be paid in cash at Fair Market Value or shall be rounded up to the nearest Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All Awards may be granted to employees, officers, directors, consultants and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; PROVIDED such consultants and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under the Plan. 4. ADMINISTRATION. 4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of the Plan, and to the direction of the Board, the Committee shall have full power to implement and carry out the Plan. The Committee shall have the authority to: (a) construe and interpret the Plan, any Award Agreement and any other agreement or document executed pursuant to the Plan; (b) prescribe, amend and rescind rules and regulations relating to the Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination, in tandem with, in replacement of, or as alternatives to, other Awards under the Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of the Plan. 4.2 COMMITTEE DISCRETION. Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under the Plan to Participants who are not Insiders of the Company. 4.3 EXCHANGE ACT REQUIREMENTS. If the Company is subject to the Exchange Act, the Company will take appropriate steps to comply with the disinterested director requirements of Section 16(b) of the Exchange Act, including but not limited to, the appointment by the Board of a Committee consisting of not less than two persons (who are members of the Board), each of whom is a Disinterested Person. -2- 5. OPTIONS. The Committee may grant Options to eligible persons and shall determine whether such Options shall be Incentive Stock Options within the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 FORM OF OPTION GRANT. Each Option granted under the Plan shall be evidenced by an Award Agreement which shall expressly identify the Option as an ISO or NQSO ("STOCK OPTION AGREEMENT"), and be in such form and contain such provisions (which need not be the same for each Participant) as the Committee shall from time to time approve, and which shall comply with and be subject to the terms and conditions of the Plan. 5.2 DATE OF GRANT. The date of grant of an Option shall be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of the Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 EXERCISE PERIOD. Options shall be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement; PROVIDED, HOWEVER, that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted, and provided further that no Option granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") shall be exercisable after the expiration of five (5) years from the date the Option is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number or percentage as the Committee determines. 5.4 EXERCISE PRICE. The Exercise Price shall be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that (i) the Exercise Price of an ISO shall be not less than 100% of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any Option granted to a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of the Plan. 5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. -3- 5.6 TERMINATION. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option shall always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event, no later than the expiration date of the Options. (b) If the Participant is terminated because of death or Disability (or the Participant dies within three months of such termination), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event no later than the expiration date of the Options; PROVIDED, HOWEVER, that in the event of termination due to Disability other than as defined in Section 22(e)(3) of the Code, any ISO that remains exercisable after 90 days after the date of termination shall be deemed a NQSO. 5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under the Plan or under any other incentive stock option plan of the Company or any Affiliate, Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, the Options for the first $100,000 worth of Shares to become exercisable in such calendar year shall be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year shall be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of the Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be automatically incorporated herein and shall apply to any Options granted after the effective date of such amendment. 5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of Participant, impair any of -4- Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; PROVIDED, HOWEVER, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of the Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 NO DISQUALIFICATION. Notwithstanding any other provision in the Plan, no term of the Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee shall determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"), the restrictions to which the Shares shall be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a Restricted Stock Award made pursuant to the Plan shall be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. The offer of Restricted Stock shall be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer shall terminate, unless otherwise determined by the Committee. 6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant to a Restricted Stock Award shall be determined by the Committee and shall be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price shall be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of the Plan. 6.3 RESTRICTIONS. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. 7.1 AWARDS OF STOCK BONUSES. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent, Subsidiary -5- or Affiliate of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent, Subsidiary or Affiliate of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS AGREEMENT") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent, Subsidiary or Affiliate and/or individual performance factors or upon such other criteria as the Committee may determine; PROVIDED, HOWEVER, that performance-based bonuses shall be restricted to individuals earning at least $60,000 per year and of adequate sophistication and sufficiently empowered to achieve the performance goals. 7.2 TERMS OF STOCK BONUSES. The Committee shall determine the number of Shares to be awarded to the Participant and whether such Shares shall be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee shall determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "PERFORMANCE PERIOD") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 FORM OF PAYMENT. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine. 7.4 TERMINATION DURING PERFORMANCE PERIOD. If a Participant is Terminated during a Performance Period for any reason, then such Participant shall be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee shall determine otherwise. 8. PAYMENT FOR SHARE PURCHASES. -6- 8.1 PAYMENT. Payment for Shares purchased pursuant to the Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of Shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such Shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; PROVIDED, HOWEVER, that Participants who are not employees of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (d) by waiver of compensation due or accrued to Participant for services rendered; (e) by tender of property; (f) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from Participant and an NASD Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; -7- or (g) by any combination of the foregoing. 8.2 LOAN GUARANTEES. The Committee may help the Participant pay for Shares purchased under the Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under the Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under the Plan, payments in satisfaction of Awards are to be made in cash, such payment shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE"). All elections by a Participant to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Committee and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, then except as provided below, the election shall be irrevocable as to the particular Shares as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day -8- following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the exercise occurs, but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 10. PRIVILEGES OF STOCK OWNERSHIP. 10.1 VOTING AND DIVIDENDS. No Participant shall have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant shall be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; PROVIDED, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company shall be subject to the same restrictions as the Restricted Stock. 10.2 FINANCIAL STATEMENTS. The Company shall provide financial statements to each Participant prior to such Participant's purchase of Shares under the Plan, and to each Participant annually during the period such Participant has Awards outstanding; PROVIDED, HOWEVER, the Company shall not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under the Plan, and any interest therein, shall not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award shall be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party. 13. CERTIFICATES. All certificates for Shares or other securities delivered under the Plan shall be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed. -9- 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares that are not Vested (as defined in the Award Agreement), the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated (provided, however, that such Shares may be retained in escrow so long as such Shares secure any debts to the Company), and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under the Plan shall be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; PROVIDED, HOWEVER, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company shall have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant shall be required to execute and deliver a written pledge agreement in such form as the Committee shall from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a prorata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant shall agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in the Plan, the Company shall have no obligation to issue or deliver certificates for Shares under the Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company shall have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted under the Plan shall confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary -10- or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the event of (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company and the Awards granted under the Plan are assumed or replaced by the successor corporation, which assumption shall be binding on all Participants), (b) a dissolution or liquidation of the Company, (c) the sale of substantially all of the assets of the Company, or (d) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the shareholders of the Company give up all of their equity interest in the Company (EXCEPT for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company), any or all outstanding Awards may be assumed or replaced by the successor corporation (if any), which assumption or replacement shall be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards shall expire on such transaction at such time and on such conditions as the Board shall determine. 18.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under the Plan in substitution of such other company's award, or (b) assuming such award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award shall remain unchanged (EXCEPT that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than -11- assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). The Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve months before or after the Effective Date. Upon the Effective Date, the Board may grant Awards pursuant to the Plan; PROVIDED, HOWEVER, that: (a) no Option may be exercised prior to initial shareholder approval of the Plan; (b) no Option granted pursuant to an increase in the number of Shares approved by the Board shall be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Award shall be cancelled and any purchase of Shares hereunder shall be rescinded. After the Company becomes subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN. The Plan will terminate ten (10) years from the Effective Date or, if earlier, the date of shareholder approval. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend the Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to the Plan; PROVIDED, HOWEVER, that the Board shall not, without the approval of the shareholders of the Company, amend the Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board, the submission of the Plan to the shareholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in the Plan, the following terms shall have the following meanings: "AFFILIATE" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. "AWARD" means any award under the Plan, including any Option, Restricted Stock or Stock Bonus. -12- "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer the Plan, or if no committee is appointed, the Board. "COMPANY" means Pacific Monolithics, Inc., a corporation organized under the laws of the State of California, or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "DISINTERESTED PERSON" means a director who has not, during the period that person is a member of the Committee and for one year prior to service as a member of the Committee, been granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any Parent, Subsidiary or Affiliate of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its last reported sale price on the Nasdaq National Market or, if no such reported sale takes place on such date, the average of the closing bid and asked prices; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on such date, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading; -13- (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on such date, as reported by The Wall Street Journal, for the over-the-counter market; or (d) if none of the foregoing is applicable, by the Board of Directors of the Company in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OPTION" means an award of an option to purchase Shares pursuant to Section 5. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under the Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under the Plan. "PLAN" means this Pacific Monolithics, Inc. 1996 Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 15, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of the Plan with respect to a Participant, that the Participant has ceased to provide services as an employee, director, consultant or adviser, to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee, PROVIDED, that such leave is for a period of not more than ninety (90) days, or -14- reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee shall have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). -15- EX-10.31 12 EXHIBIT 10.31 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LEASE AGREEMENT by and between AETNA LIFE INSURANCE COMPANY, as Landlord and PACIFIC MONOLITHICS, INC., as Tenant Dated as of June 12, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LEASE AGREEMENT BASIC LEASE INFORMATION
Lease Date: June 12, 1995 Landlord: AETNA LIFE INSURANCE COMPANY, a Connecticut corporation Landlord's Address: c/o Aetna Investment Group 1740 Technology Drive, Suite 600 San Jose, California 95110 Tenant: Pacific Monolithics, Inc. a California corporation Tenant's Address: PRIOR TO COMMENCEMENT DATE: 245 Santa Ana Court Sunnyvale, California 94086 FROM AND AFTER COMMENCEMENT DATE: 1308 Moffett Park Drive Sunnyvale, California 94089 Premises: Premises located at 1308 Moffett Park Drive, Sunnyvale, California, containing approximately seventy five thousand five hundred forty-eight (75,548) rentable square feet Months of Term: Sixty (60) months Monthly Base Rent: Monthly Months Rent ------ ---------- 1-12 $43,800.00 13-36 $56,661.00 37-48 $58,188.00 49-60 $60,438.00 Prepaid Rent: Forty Three Thousand Eight Hundred Dollars ($43,800.00) i MONTH TO WHICH PREPAID RENT FIRST (1ST) MONTH OF TERM APPLIED: Security Deposit: Sixty Thousand Four Hundred Thirty-Eight Dollars ($60,438.00) Permitted Use: General office use and engineering, manufacturing and warehousing of electronic products Broker(s): CPS Cornish & Carey Commercial Tenant Improvements One Million Five Hundred Ten Thousand Nine Allowance: Hundred Sixty Dollars ($1,510,960.00) Tenant Improvements Loan: Not to exceed Three Hundred Seventy Seven Thousand Seven Hundred Forty Dollars ($377,740.00) Exhibits: Exhibit A Diagram of the Premises Exhibit B Tenant Improvements Exhibit B-1 Final Plans and Specifications for Tenant Improvements Exhibit C Commencement Date Memorandum
ii LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("Basic Lease Information") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "Lease". 1. DEMISE: In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the "Premises"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES: The Premises demised by this Lease is the building specified in the Basic Lease Information (the "Building"), which Building contains the square footage specified in the Basic Lease Information. The location and dimensions of the Premises are depicted on EXHIBIT A which is attached hereto and incorporated herein by this reference. Tenant shall have the non-exclusive right to use the parking and other common areas on the real property on which the Premises are situated (the "Property"). No easement for light or air is incorporated in the Premises. The Premises demised by this Lease shall also include the Tenant Improvements (as that term is defined in EXHIBIT B, attached hereto and incorporated herein by this reference) to be constructed by Landlord within the interior of the Premises. Landlord shall construct the Tenant Improvements on the terms and conditions set forth in EXHIBIT B. Landlord and Tenant agree to and shall be bound by the terms and conditions of EXHIBIT B. 3. TERM: The term of this Lease (the "Term") shall be for the period of months specified in the Basic Lease Information, commencing on the earliest to occur of the following dates (the "Commencement Date"): (a) The date the Tenant Improvements are approved by the appropriate governmental agency as being in accordance with its building code and the building permit issued for such improvements, as evidenced by the issuance of a final building inspection approval; or (b) The date Landlord's architect and general contractor have both certified in writing to Tenant that the Tenant Improvements have been substantially completed in accordance with the plans and specifications therefor; provided, however, that if the date determined pursuant to Paragraph 3 (a) above or this Paragraph 3 (b) falls within the period commencing on September 16, 1995 and continuing through and including September 30, 1995, then subject to Paragraph 3(c) below, the Commencement Date shall be automatically extended to, and shall be deemed to be, October 1, 1995; or 1 (c) The date Tenant commences occupancy of the Premises; provided, however, that Tenant shall not be deemed to have commenced occupancy of the Premises if Tenant enters upon the Premises solely for the purpose of installing its telephone equipment and preparing the Premises for occupancy in accordance with Paragraph 7(c) below; when the Commencement Date has been determined pursuant to the foregoing, Landlord and Tenant shall promptly execute a Commencement Date Memorandum in the form attached hereto as EXHIBIT C. The date on which the Term of this Lease expires shall be referred to herein as the "Expiration Date." 4. RENT: (a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without offset or deduction, the monthly installments of rent specified in the Basic Lease Information (the "Base Rent"). Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent specified in the Basic Lease Information to be applied toward Base Rent for the month of the Term specified in the Basic Lease Information. (b) ADDITIONAL RENT. This Lease is intended to be a net Lease; and subject to Paragraph 12(c) below, the Rent owing hereunder is to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership of the Property and the Building. The provisions of this Paragraph 4(b) for the payment of Expenses (as hereinafter defined) by Tenant are intended to pass on to Tenant all such costs and expenses. In addition to the Base Rent, Tenant shall pay to Landlord, in accordance with this Paragraph 4, all costs and expenses paid or incurred by Landlord in connection with the management, operation, maintenance and repair of the Property and the Building (the "Expenses"), including, without limitation, all the following items related to the Building, the Property, and/or theOutside Areas (as defined in Paragraph 4(b)(3)) (the "Additional Rent"): (1) TAXES AND ASSESSMENTS. All real estate taxes and assessments. Real estate taxes and assessments shall include any form of assessment, license, fee, tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is (i) determined by the area of the Premises or the Property, or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of Rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Premises or the Property, or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises or the Property; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises or the Property, whether or not now customary or within the contemplation of the parties; or (v) surcharged against the parking area; provided, however, that all special assessments which can 2 be paid by Landlord in installments shall be paid by Landlord in the maximum number of installments permitted by law and shall not be included within the definition of real property taxes except the installment shall be included in the calendar year in which such installment is actually paid. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to Proposition 13 or any other cause are to be included within the definition of real property taxes for purposes of this Lease. Notwithstanding anything herein to the contrary, subject to the prior written consent of Landlord, which consent shall not be unreasonably withheld, Tenant shall have the right to contest or object to the amount of any real estate taxes and assessments assessed against the Premises by appropriate legal proceedings so long as (A) Tenant notifies Landlord of Tenant's intent to contest such real estate taxes and assessments, (B) Tenant furnishes Landlord with security reasonably satisfactory to Landlord to pay such contested real estate taxes and assessments, and (C) upon any final determination of such contest which is not appealable or is not being appealed by Tenant, Tenant pays such real estate taxes and assessments then due. Tenant acknowledges and agrees that, among other reasons, it shall be reasonable for Landlord to withhold its consent to Tenant's contest rights if Landlord elects to conduct such contest on its own. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all cost, loss or liability resulting from any such contest undertaken by or on behalf of Tenant. (2) INSURANCE. All insurance premiums, including premiums for "all risk" fire and extended coverage (including earthquake and flood endorsements) insurance for the Premises, public liability insurance, other insurance as Landlord deems necessary, and any deductibles paid under policies of any such insurance. (3) OUTSIDE AREAS EXPENSES. All costs to maintain, repair, replace, supervise, insure (including provision of public liability insurance) and administer the areas outside of the Premises ("Outside Areas"), including parking areas, landscaping (including maintenance contracts), sprinkler systems, sidewalks, driveways, curbs, lighting systems, and utilities for Outside Areas. (4) PARKING CHARGES. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority or insurer in connection with the use or occupancy of the Premises, the Outside Areas and/or the Property. (5) MAINTENANCE AND REPAIR OF PREMISES. Except for the costs which are the responsibility of Landlord pursuant to Paragraph 12(c) below, all costs to maintain, repair, and replace the Premises, including, without limitation, the structural portions of the roof, the roof coverings, the foundation, the floor slab, the load bearing walls, and the exterior walls (including the painting thereof) of the Premises, the heating, ventilation, and air conditioning ("HVAC") systems 3 serving the Premises (including the cost of maintenance contracts), and all costs to maintain, repair and replace all utility and plumbing systems, fixtures and equipment serving the Premises but which are located in the Outside Areas. Notwithstanding anything to the contrary contained in this Lease, with respect to :all sums payable by Tenant as Additional Rent hereunder (including, without limitation, Outside Area expenses and costs to maintain and repair the Premises pursuant to Paragraph 12 hereof) for the repair or replacement of any item in connection with the physical operation of the Premises (i.e., HVAC, roof membrane or coverings, plumbing, electrical and utility systems and parking area) which is a capital item the repair or replacement of which property would be capitalized under generally accepted accounting principles consistently applied, Tenant shall be required to pay only the prorata share of the cost of the item falling due within the term (including any Renewal Term) based upon the amortization of the same over the useful life of such item, as reasonably determined by Landlord in accordance with generally accepted accounting principles consistently applied. (6) MANAGEMENT AND ADMINISTRATION. All costs for management and administration of the Premises and the Property, including a property management fee, accounting, auditing, billing, postage, employee benefits, payroll taxes, etc. Notwithstanding anything to the contrary contained in this Section 4(b), "Expenses" shall not include any of the following costs: (1) LOSSES CAUSED BY LANDLORD. Costs occasioned by the gross negligence or willful misconduct of Landlord or Koll Management Services, Inc. ("Koll"); (2) REIMBURSABLE EXPENSES. Costs for which Landlord is separately reimbursed in full by third parties; (3) RESERVES. Reserves established by Landlord to fund future capital or operating expenses; (4) MORTGAGES. Debt service payments on mortgages and deeds of trust encumbering the Property and/or the Building, and rental payments under ground leases affecting the Property; (5) HAZARDOUS MATERIALS. Costs incurred to investigate the presence of, and to remediate or remove from the Property Hazardous Materials brought on, released or otherwise introduced on to the Property by any person other than Tenant or its Agents (as hereinafter defined); (6) VIOLATION OF LAWS. Penalties (as opposed to costs of compliance) assessed against Landlord as a result of the intentional violation by Landlord of any laws applicable to the Premises that are regularly being enforced by the City of Sunnyvale or other appropriate governmental agencies; and 4 (7) CONSTRUCTION DEFECTS Costs incurred by Landlord correcting or remedying defects in the construction of the Tenant Improvements, but solely to the extent that such costs are actually covered by construction warranties held by Landlord. (c) PAYMENT OF ADDITIONAL RENT. (1) Upon commencement of this Lease, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the period between the Commencement Date and the following December 31 and Tenant shall pay such estimated Additional Rent on a monthly basis concurrently with the payment of the Base Rent. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. By March 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement (the "Expense Statement") showing the actual Additional Rent due to Landlord for the prior calendar year, prorated from the Commencement Date during the first year. If the total of the monthly payments of Additional Rent that Tenant has made for the prior calendar year is less than the actual Additional Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within twenty (20) days after receipt of such statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent next due, or, if the overpayment is calculated after termination of this Lease, promptly returned by Landlord to Tenant. (2) The actual Additional Rent for the prior calendar year shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above, except that in any year in which resurfacing of the parking area or material roof repairs are planned, then subject to (A) the last sentence of Paragraph 4(b)(5) and (B) the repair and maintenance obligations of Landlord under Paragraph 12(c) which pursuant to such Paragraph 12(c) are the sole responsibility and expense of Landlord and are not reimbursable by Tenant, Landlord may include the estimated cost of such work in the estimated monthly Additional Rent. Landlord shall make the final determination of Additional Rent for the year in which this Lease terminates as soon as possible after termination of such year. Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment, even though the Term has expired and Tenant has vacated the Premises. Failure of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. (d) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder are referred to as the "Rent". All Rent shall be paid without deduction, offset or abatement in lawful money of the United States of America. Checks are to be made payable to Koll Management Services, Inc. and shall be mailed to: Koll Management Services, Inc., Agents for Sunnyvale Pension, Dept. No. 66169, El Monte, California 91735, or to such other person or place as Landlord may, from time to time, designate to Tenant in writing. Rent for any partial month during the Term shall be prorated for the portion thereof falling due within the Term. 5 (e) RIGHT TO AUDIT. Notwithstanding anything in Paragraph 4(c) above to the contrary, following the delivery by Landlord of each Expense Statement, Tenant shall have a period of ninety (90) days to review and audit Landlord's books and records regarding such Expense Statement, such review or audit to take place during normal business hours in Landlord's offices and to be completed within seven (7) days after the commencement thereof. If Tenant does not so review or audit Landlord's books and records, Landlord's Expense Statement shall be final and binding upon Tenant. In the event that Tenant determines on the basis of its review of Landlord's books and records that the amount of Expenses paid by Tenant pursuant to this Paragraph 4 for the period covered by such Expense Statement is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or Landlord shall promptly refund any excess payment to Tenant, as the case may be; provided, however, that if Landlord disagrees with the results of Tenant's audit, the dispute shall be submitted to an independent nationally recognized accounting firm mutually agreed upon by Landlord and Tenant and the determination of such accounting firm shall be binding upon the parties. If the independent accounting firm determines that the amount of Tenant's payments of Expenses for such period is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or Landlord shall promptly refund any excess payment to Tenant, as the case may be. Tenant shall pay the cost of its audit of Landlord's books, and records. The costs of any independent accounting firm shall be paid by Tenant unless such firm determines that the overpayment of Expenses by Tenant, if any, equals five percent (5%) or more of the actual Expenses payable by Tenant for the period covered by the audit, in which case Landlord shall pay the costs of such independent accounting firm. 5. LATE CHARGE: Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within ten (10) days after their due date, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount, plus any attorneys, fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. Initials: Landlord /s/ JEG Tenant /s/ CJW -------------- ------------- 6. SECURITY DEPOSIT: Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord the Security Deposit specified in the Basic Lease Information as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy Tenant's default in the payment of any Rent, (b) to repair damage to the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse 6 Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option,of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said deposit, within ten (10) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit. 7. POSSESSION: (a) TENANT'S RIGHT OF POSSESSION. Subject to Paragraph 7(b), Tenant shall be entitled to possession of the Premises upon commencement of the Term. (b) DELAY IN DELIVERING POSSESSION. If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant at the commencement of the Term, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents, be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The expiration date of the Term shall be extended by the same number of days that Tenant's possession of the Premises was delayed. (c) EARLY ACCESS. Notwithstanding anything to the contrary contained in Paragraph 7(a), Tenant shall have the right to enter upon the Premises at such times as shall be acceptable to Landlord during the thirty (30) day period preceding the Commencement Date to install telephones in the Premises and to otherwise prepare the Premises for Tenant's occupancy, provided, however, that Landlord shall not be liable to Tenant or its employees or agents for any loss or damage to property, or injury to person, arising from or related to the construction of the Tenant Improvements. Tenant shall take all reasonable precautions to protect against such loss, damage or injury during the construction of the Tenant Improvements, and shall not interfere with such construction. Tenant shall cooperate with all reasonable directives of Landlord in order to minimize any disruption or delay in completion of the Tenant Improvements. Tenant's entry upon the Premises pursuant to this Paragraph 7(c) shall be subject to all of the terms and conditions of this Lease, excepting only the covenant to pay Rent. 8. USE OF PREMISES: (a) PERMITTED USES. The Premises shall be used for the Permitted Uses specified in the Basic Lease Information and for no other use. The Premises shall not be used to create any 7 nuisance or trespass, for any illegal purpose, for any purpose not permitted by applicable laws and regulations, or for any purpose that would vitiate the insurance or increase the premiums for insurance on the Premises. Tenant agrees not to overload the floor(s) of the Premises. (b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at Tenant's expense, faithfully observe and comply with all municipal, state and federal statutes, rules, regulations, ordinances, requirements, and orders, now in force or which may hereafter be in force pertaining to the Premises or Tenant's use thereof, whether substantial in cost or otherwise, and all recorded covenants, conditions and restrictions affecting the Property ("Private Restrictions") now in force or which may hereafter be in force; provided, however, that Tenant shall not be required to make structural changes to the Premises (including, without limitation installing fire sprinkler systems, reinforcing the Premises to seismic standards or removing asbestos) not related to Tenant's specific use of the Premises unless the requirement for such changes is imposed as a result of any improvements or additions made or proposed to be made at Tenant's request. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such rule, regulation, ordinance, statute or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. 9. ACCEPTANCE OF PREMISES: By entry hereunder, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Notwithstanding the foregoing, Tenant's acceptance of the Premises or submission of a "punch list" shall not be deemed a waiver of Tenant's right to have defects in the Tenant Improvements or the Premises repaired by the Contractor (as defined in EXHIBIT B hereto). 10. SURRENDER: Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by Acts of God, fire, casualty, condemnation, and normal wear and tear excepted), but with all interior walls painted or cleaned so they appear painted, any carpets cleaned, and with all floors cleaned and waxed, together with all Alterations (as hereinafter defined) which may have been made in or on the Premises; except that Tenant shall remove trade fixtures put in at the expense of Tenant and any Alterations as to which Landlord has requested removal in an Advice Notice (as hereinafter defined) given pursuant to Paragraph 11(c) below or as to which Landlord otherwise requests removal at the expiration or termination of this Lease in accordance with said Paragraph 11(c); and (b) otherwise in accordance with Paragraph 32(f). Tenant shall repair all damage caused by such removal and otherwise restore the Premises in accordance with the preceding sentence at Tenant's sole cost and expense. On or before the expiration or sooner termination of this Lease, Tenant shall remove all of Tenant's personal property from the Premises. All property of Tenant not so removed, unless such non- removal is consented to by Landlord, shall be deemed abandoned by Tenant, provided that in such event Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. If the Premises are not surrendered at 8 the end of the Term or sooner termination of this Lease, and in accordance with the provisions of this Paragraph 10 and of Paragraph 32(f), Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to succeeding tenants, together with, in each case, actual attorneys, fees and costs. 11. ALTERATIONS AND ADDITIONS: (a) Tenant shall not make, or permit to be made, any alteration or addition (collectively, "Alteration") to the Premises, or any part thereof, without the prior written consent of Landlord, such consent not to be unreasonably withheld or delayed. Notwithstanding the foregoing, Tenant shall have the right without the consent of Landlord to make nonstructural and nonmechanical Alterations: not exceeding Five Thousand Dollars ($5,000) in cost on an individual basis or Ten Thousand Dollars ($10,000) in the aggregate in any calendar year (collectively, "Permitted Alterations"), provided that (A) Tenant shall not move or alter any walls in the Premises in connection with the making of such Permitted Alterations, (B) such Permitted Alterations shall not affect the HVAC, plumbing, electrical, fire protection, life safety, security and other mechanical, electrical and communications systems of the Building, and (C) such Permitted Alterations shall not be visible from the exterior of the Premises. (b) Any Alteration (including, without limitation, any Permitted Alteration) to the Premises shall be at Tenant's sole cost and expense, in compliance with all applicable laws and requirements requested by Landlord, and, except for any Permitted Alterations, in accordance with plans and specifications approved in writing by Landlord. (c) In the event Tenant requests Landlord's consent to a proposed Alteration, Tenant shall concurrently request in writing that Landlord advise Tenant in writing (any such writing shall be herein referred to as an "Advice Notice") whether or not such proposed Alteration shall be required to be removed at the expiration or termination of this Lease. If Tenant fails to request such advice in writing from Landlord, or if Tenant makes a Permitted Alteration without the consent of Landlord in accordance with Paragraph 11(a) above, then Landlord shall have the right at the end of the Term, or on the sooner termination of this Lease, to either require Tenant to remove such Alteration (or Permitted Alteration) from the Premises or to surrender such Alteration (or Permitted Alteration) to Landlord with the Premises, without compensation to Tenant, at the expiration or termination of this Lease. All Alterations, including, but not limited to, heating, lighting, electrical, air conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Premises, shall at once be and become the property of Landlord, and shall not be deemed trade fixtures. (d) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until five (5) days after Tenant's receipt of such consent (or, in the 9 case of Permitted Alterations, five (5) days after Tenant's written notice to Landlord of its intent to make such Permitted Alterations) in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. 12. MAINTENANCE OF PREMISES: (a) MAINTENANCE BY TENANT. Subject to the provisions of Paragraphs 22 and 23, throughout the Term, Tenant shall, at its sole expense, (1) keep and maintain in good order and condition, repair, and replace the Premises, and every part thereof, including glass, windows, window frames, skylights, interior and exterior doors and door frames, and the interior of the Premises, (excepting only those portions of the Premises to be maintained by Landlord, as provided in Paragraph 12(c) below), (2) keep and maintain in good order and condition, repair, and replace all utility and plumbing systems, fixtures and equipment, including without limitation, electricity, gas, water, and sewer, located in or on the Premises, and furnish all expendables, including light bulbs, paper goods and soaps, used in the Premises, (3) repair all damage to the Premises or the Outside Areas caused by the negligence or willful misconduct of Tenant or its agents, employees, contractors or invitees. Tenant shall not do anything to cause any damage, deterioration or unsightliness to the Premises and the Outside Areas. (b) LANDLORD'S RIGHT TO MAINTAIN AND REPAIR AT TENANT'S EXPENSE. Notwithstanding the foregoing, in the event Tenant fails to maintain the Premises in accordance with Paragraph 12(a) above and further fails to cure such default prior to the expiration of any applicable notice and cure periods provided under this Lease (except in the case of an emergency, in which event no notice or cure period shall be required) , Landlord shall have the right, but not the obligation, at Tenant's expense, to enter the Premises and perform Tenant's maintenance, repair and replacement work. Within twenty (20) days after invoice therefor from Landlord, Tenant shall pay all costs and expenses incurred by Landlord in connection with such maintenance, repair and replacement work. (c) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs 12(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for the cost and expense of the following items, and further subject to the limitations set forth in the last sentence of Paragraph 4(b)(5), Landlord agrees to repair and maintain the following items: subject to Paragraph 1 of EXHIBIT B hereto, the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings); the HVAC systems serving the Premises; the utility and plumbing systems, fixtures, and equipment located outside the Premises; and the parking areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Outside Areas. Subject to the provisions of Paragraphs 12(a), 22 and 23, Landlord, at its own cost and expense, and without the obligation of Tenant to reimburse Landlord pursuant to Paragraph 4, agrees to repair and maintain the following items: the structural portions of the roof, provided that Tenant installs no additional air conditioning or other equipment on the roof that damages structural portions of the roof (and specifically excluding the roof coverings), the foundation, the footings, the floor slab, the load bearing walls, and the exterior walls (excluding any glass therein) of the Premises. Landlord shall not be 10 required to repair or maintain conditions created due to any act, negligence or omission of Tenant or its agents, contractors, employees or invitees. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition. (d) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(l), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 13. LANDLORD'S INSURANCE: Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Premises in an amount deemed prudent by Landlord in its sole discretion. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises of any insurer necessary for the maintenance of reasonable fire and public liability insurance, covering the Premises and appurtenances. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. 14. TENANT'S INSURANCE: (a) PUBLIC LIABILITY INSURANCE. Tenant shall, at Tenant's expense, secure and keep in force a "broad form" public liability insurance and property damage policy covering the Premises and the Outside Areas, insuring Tenant, and naming Landlord and its lenders as additional insureds against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all Outside Areas. The minimum limit of coverage of such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Three Million Dollars ($3,000,000.00). The limit of any insurance shall not limit the liability of Tenant hereunder. No policy shall be cancellable or subject to reduction of coverage without at least ten (10) days' prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's reasonable approval. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry, by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A: IX or better in Best's Key Rating Guide. A copy of said policy or a certificate evidencing to Landlord's reasonable satisfaction that such insurance is in effect shall be 11 delivered to Landlord upon commencement of the Term, and thereafter whenever Landlord shall reasonably request. (b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and effect on all of its fixtures, equipment, machinery and personal property on the Premises (collectively, "Tenant's Property"), a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereof. Such insurance shall include, without limitation, a policy or policies of flood insurance covering Tenant's Property. During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of Tenant's Property so insured. Landlord shall have no interest in the insurance upon Tenant's Property and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance, including, without limitation, flood insurance, on Tenant's Property. Tenant shall furnish Landlord with a certificate evidencing to Landlord's reasonable satisfaction that such insurance is in effect, and whenever required, shall satisfy Landlord that such policy is in full force and effect. Tenant understands and acknowledges that Federal Emergency Management Agency has designated significant portions of Santa Clara County to be in a flood plain. 15. INDEMNIFICATION: (a) OF LANDLORD. Except to the extent caused by the gross negligence or willful misconduct of Landlord or its Agents, Tenant shall indemnify and hold harmless Landlord and agents, employees, partners, shareholders, directors, invitees, and independent contractors (collectively "Agents") of Landlord against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (1) Tenant's use of the Premises or from any activity done, permitted or suffered by Tenant in or about the Premises or the Property, and (2) any act, neglect, fault, willful misconduct or omission of Tenant, or Tenant's Agents or from any breach or default in the terms of this Lease by Tenant, and (3) any action or proceeding brought on account of any matter in items (1) or (2). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord,Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material pArt of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause whatsoever (except to the extent caused by the gross negligence or willful misconduct by Landlord or its Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), and Tenant hereby waives all claims in respect thereof against Landlord. The obligations of Tenant under this Paragraph 15 shall survive any termination of this Lease. Nothing contained in this Paragraph 15(a) shall be deemed a waiver of any rights Tenant might hereafter have against Koll resulting from or arising out of the gross negligence or willful misconduct of Koll. (b) OF TENANT. Landlord shall indemnify and hold harmless Tenant and its Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from the (1) gross 12 negligence or willful misconduct of Landlord, and (2) failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure, and (3) any action or proceeding brought on account of any matter in items (1) and (2). If any action or proceeding is brought against Tenant by reason of any such claim, upon notice from Tenant, Landlord shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. (c) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. 16. SUBROGATION: Landlord and Tenant hereby mutually waive any claim against the other during the Term for any injury to person or loss or damage to any of their property located on or about the Premises or the Property that is caused by or results from perils covered by insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such injury, loss or damage, whether or not due to the negligence of the other party or its agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 17. ABANDONMENT: Tenant shall not abandon the Premises at any time during the Term; provided, however, that the Premises shall not be deemed abandoned if vacant for less than fifteen (15) consecutive days. In the event of abandonment, combined with Tenant's failure to pay Rent, the rights and remedies of Tenant and Landlord shall be determined in accordance with the applicable California statutes in effect at the time of abandonment. 18. FREE FROM LIENS: Tenant shall keep the Premises and the Property free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. 19. ADVERTISEMENTS AND SIGNS: Tenant shall not place or permit to be placed in, upon, or about the Premises or the Property any signs, advertisements or notices without obtaining Landlord's prior written consent, which consent shall not be unreasonably withheld, or without complying with applicable law and Landlord's signage program for the Property, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Property. Tenant shall remove any sign, advertisement or notice placed on the Premises by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises or the Property caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage or injury to the Premises or the Property at Tenant's sole cost and expense. 13 20. UTILITIES: Tenant shall pay for all water, gas, heat, light, power, telephone service and all other materials and services supplied to the Premises. If Tenant fails to pay for any of the foregoing when due, Landlord may pay the same and add such amount to the Rent. 21. ENTRY BY LANDLORD: Tenant shall permit Landlord and its Agents to enter into and upon the Premises at all reasonable times, upon twenty-four (24) hours' prior notice (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter, improve, maintain and repair the Premises as required or permitted of Landlord under the terms hereof, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the negligence or willful misconduct of Landlord or its Agents); and Tenant shall permit Landlord to post notices of nonresponsibility and ordinary "for sale" or "for lease" signs, provided that Landlord may post such "for lease" signs and exhibit the Premises to prospective tenants only during the six (6), months prior to termination of this Lease. No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. Tenant shall have the right to have an employee accompany Landlord or its Agents at all times that Landlord or its Agents are present on the Premises. 22. DESTRUCTION AND DAMAGE: (a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option: (1) In the event of total destruction (which shall mean destruction or damage in excess of thirty-three percent (33%) of the full insurable value thereof) of the Premises, elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full forte and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the occurrence of such destruction. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (2) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding thirty-three percent (33%) of the full insurable value thereof) of the Premises for which Landlord will actually receive insurance proceeds sufficient to covet the cost to repair and restore such partial destruction (or for which Landlord would have actually received insurance proceeds sufficient to cover the cost to repair and restore such partial destruction but for Landlord's intentional failure to maintain the insurance required to be carried pursuant to Paragraph 13 above) and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the date of such destruction, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the 14 insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall terminate; provided, however, that if the insurance proceeds actually collected by Landlord, if any, are not sufficient to cover the cost of repair and restoration solely due to the intentional failure of Landlord to maintain the insurance required to be carried under Paragraph 13 above, and if Landlord would have actually collected sufficient insurance proceeds to cover such repair and restoration if Landlord had maintained such insurance in accordance with Paragraph 13, then for purposes of this Paragraph 22(a)(2), Landlord shall be deemed to have received sufficient insurance proceeds to cover the cost of repair and restoration. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the destruction occurs. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction. (3) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, Landlord may elect to terminate this Lease by written notice of such election given to Tenant within thirty (30) days after the damage occurs. (b) If the Premises are damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the occurrence of such damage. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability, in Tenant's reasonable opinion, to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. (c) In the event of repair and restoration as herein provided, the monthly installments of Base Rent and Additional Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, to the extent of rental abatement insurance proceeds received by Landlord. Tenant shall not be entitled to any compensation or damages for loss of use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (d) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only those portions of the Premises which were originally provided at Landlord's expense, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's expense, Tenant's fixtures, improvements, alterations and additions in and to the Premises which were not provided at Landlord's expense. 15 (e) Notwithstanding anything to the contrary contained in this Section 22, if the Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to its terms, then as soon as reasonably practicable, Landlord shall furnish Tenant with a written opinion of Landlords architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the option to terminate the Lease in the event any of the following occurs, which option may be exercised by delivery to Landlord of a written notice of election to terminate within ten (10) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (i) the Premises, with reasonable diligence, cannot be substantially repaired by Landlord within two hundred seventy (270) days after the damage or destruction, or (ii) if the Premises are damaged by any peril within the last twelve (12) months of the Term. (f) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22 shall govern exclusively in case of such destruction. 23. CONDEMNATION: If thirty-three percent (33%) or more of the Premises or the parking area for the Premises is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "Condemnation"), Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If the Premises after any Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. Tenant shall not because of such taking assert any claim against Landlord. Landlord shall be entitled to receive the proceeds of all Condemnation awards, and Tenant hereby assigns to Landlord all of its interest in such awards. Notwithstanding the foregoing, Tenant shall be entitled to all sums separately awarded by the condemning authority to cover Tenant's moving costs, relocation expenses, good will or the unamortized cost of any Alterations installed at Tenant's cost. If less than thirty-three percent (33%) of the Premises or the parking area is taken, Landlord at its option may terminate this Lease. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent and Additional Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, and any other applicable law now or hereafter enacted, are hereby waived by Landlord and Tenant. 16 24. ASSIGNMENT AND SUBLETTING: (a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees, agents and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be withheld unreasonably. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide current financial statements for the proposed assignee or subtenant prepared in accordance with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within ten (10) days of receipt of the foregoing, to (1) cancel this Lease as of the commencement date stated in the proposed sublease or assignment, (2) acquire from Tenant the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, provided that Tenant shall be released from its obligations under this Lease with respect to the interest acquired by Landlord, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, providing that such consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, if Landlord notified Tenant of its intent to exercise its cancellation or termination rights, Tenant may withdraw its request for assignment or subletting within ten (10) days thereafter, and this Lease shall continue in full force and effect. (b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord may take into account the reputation and credit worthiness of the proposed assignee or subtenant, the character of the business proposed to be conducted in the Premises or portion thereof sought to be subleased, and the potential impact of the proposed assignment or sublease on the economic value of the Premises. In any event, Landlord may withhold its consent to any assignment or sublease, if (1) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 8(a) or (b) above, or (2) the proposed assignment or sublease requires alterations, improvements or additions to the Premises or portions thereof; provided, however, that if the actual use proposed to be conducted in the Premises conflicts with the provisions of Paragraph 8(a) above, Landlord will not unreasonably withhold its consent to such proposed use, provided that such use is consistent with other R&D uses in Moffett Park, will not lead or foreseeably lead in the future to a violation of Paragraph 32 below, and will not result or foreseeably result in the future in a diminution in value of the Premises, all as reasonably determined by Landlord; and, provided further, that if the proposed assignment or sublease requires alterations, improvements or additions to the Premises, Landlord will not unreasonably withhold its consent to such alterations, improvements or additions, provided that (i) the same (A) are generally consistent with alterations and improvements made to and then existing in Comparable Buildings (as hereinafter defined), and (B) will not result or foreseeably result in the future in a diminution in value of the Premises, in each case as reasonably determined by Landlord, and (ii) notwithstanding anything to the 17 contrary contained in this Lease, the proposed assignee or subtenant expressly agrees in writing that, upon the request of Landlord given at any time prior to the scheduled expiration of the assignment or sublease, it shall, upon such expiration or termination date, remove such alterations, improvements or additions from the Premises and restore the Premises to the condition existing on the date of such assignment or sublease. (c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of the difference, if any, between (1) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (2) the rent and any additional rent payable by the assignee or sublessee to Tenant, after deducting the costs incurred by Tenant in connection with any such assignment or sublease. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. (d) Tenant shall pay Landlord's reasonable fees (including, without limitation, the reasonable fees of Landlord's counsel) incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease, not to exceed One Thousand Five Hundred Dollars ($1,500.00) per request. (e) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 24 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof. (f) Notwithstanding anything to the contrary contained in this Paragraph 24, Tenant, without Landlord's prior written consent, may sublet the Premises or assign this Lease to (i) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action, or (ii) a purchaser of substantially all of Tenant's assets, so long as, in either event, the successor corporation or purchaser has (A) a net worth, calculated in accordance with 18 generally accepted accounting principles, substantially equal to or greater than the net wroth of Tenant on the date of this Lease or at the time of the sublease or assignment, whichever is higher, and (B) sufficient business experience in the industry in which it operates and reasonable financial prospects, as reasonably determined by Landlord in its good faith business judgment. For the purpose of this Lease, a sale of a noncontrolling portion of Tenant's capital stock through any public exchange shall not be deemed an assignment, subletting or other transfer of this Lease or the Premises requiring Landlord's consent. No sublease or assignment entered into by Tenant pursuant to this Paragraph 24(f) shall release Tenant from any liability under this Lease. 25. TENANT'S DEFAULT: The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("Default"): (a) The abandonment of the Premises by Tenant for a period in excess of fourteen (14) days, while Tenant fails to pay Rent; (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of three (3) days after the same is due; (c) A general assignment by Tenant for the benefit of creditors; (d) The filing of a voluntary petition in bankruptcy by Tenant, the filing of a voluntary petition for an arrangement, the filing of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by Tenant's creditors, said involuntary petition remaining undischarged for a period of sixty (60) days; (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof; (f) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraph 30 or 31 or 42; (g) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (h) Failure of Tenant to restore the Security Deposit to the amount and within the time period provided in Paragraph 6 above; (i) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in other Paragraphs of this Paragraph 25, which shall be governed by such other Paragraphs), which failure continues for thirty (30) days after written notice thereof from Landlord to Tenant provided that, if Tenant has exercised 19 reasonable diligence to cure such failure and such failure cannot be cured within such thirty (30) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph unless Tenant fails thereafter diligently and continuously to prosecute the cure to completion; and (j) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "Chronic delinquency" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3) days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during any twelve (12) month period. In the event of a Chronic Delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance. Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(i) or (j) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 26. LANDLORD'S REMEDIES: (a) TERMINATION. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus 20 (5) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to ten percent (10%) per annum, or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. (b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations). (c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) RELETTING. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 26(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; (4) to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as 21 ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) TERMINATION. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 26 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity. (g) NO SURRENDER. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. 27. ATTORNEY'S FEES: If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment. 28. TAXES: Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against personal property and trade or business fixtures of Tenant. If any alteration, addition or improvement installed by Tenant pursuant to Paragraph 11, or any personal property, trade fixture or other property of Tenant, is assessed and taxed with the Property, Tenant shall pay such taxes to Landlord within twenty (20) days after delivery to Tenant of a statement therefor, but in any event prior to delinquency. 29. EFFECT OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the owner for the time being of the Property containing the Premises, so that, in the event of any 22 sale of the Property or the Premises, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing from and after the transfer, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Property or the Premises has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. Notwithstanding anything in this Paragraph 29 to the contrary, Landlord shall not be relieved of its obligations under this Lease unless and until any assignee of or successor to Landlord's interest in this Lease or in the Building assumes in writing the obligations of Landlord accruing on and after the effective date of the assignment. 30. TENANT'S ESTOPPEL CERTIFICATE: From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of Rent and the date to which such Rent has been paid; (d) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises (or specifying such other agreements, if any); (f) that all obligations under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received (or stating exceptions thereto); (h) that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that no Rent or other sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating exceptions thereto); (j) that security has been deposited with Landlord, stating the amount thereof; and (k) any other matters evidencing the status of this Lease that reasonably may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Premises or by a purchaser of the Premises. Any such certificate delivered pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within ten (10) business days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. 31. SUBORDINATION: Landlord shall have the right to cause this Lease to be and remain subject and subordinate to any and all mortgages, deeds of trust and ground leases, if any ("Encumbrances") that are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such ground lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, the holder thereof ("Holder") shall agree to 23 recognize in writing, upon terms and conditions reasonably acceptable to Tenant ("Nondisturbance Agreement"), Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) business days after Landlord's written request, Tenant shall execute, acknowledge and deliver any and all reasonable documents required by Landlord or the Holder to effectuate such subordination. If Tenant fails to do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance, provided only that if this Lease had been subordinate to such Encumbrance prior to such sale or proceeding, then on or before the date of such sale or proceeding, the holder of such Encumbrance shall have delivered to Tenant a Nondisturbance Agreement. 32. ENVIRONMENTAL COVENANTS: (a) As used in this Lease, the term "Hazardous Materials" shall mean and include any substance that is or contains (a) any "hazardous substance" as now or hereafter defined in Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.) or any regulations promulgated under CERCLA; (b) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 ET SEQ.) or any regulations promulgated under RCRA; (c) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 ET SEQ.) or any regulations promulgated under TSCA; (d) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and asbestos-containing material, in any form, whether friable or non- friable; (f) polychlorinated biphenyls; (g) lead and lead-containing materials; or (h) any additional substance, material or waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent property, or (iii) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws. (b) As used in this Lease, the term "Environmental Laws" shall mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (i) pollution, (ii) the protection or regulation of human health, natural resources or the environment, (iii) the treatment, storage or disposal of Hazardous Materials, or (iv) the emission, discharge, release or threatened release of Hazardous Materials into the environment. (c) Tenant agrees that during its use and occupancy of the Premises it will (a) not (i) permit Hazardous Materials to be present on or about the Premises except in a manner and quantity necessary for the ordinary performance of Tenant's business and except for normal office products (such as cleaning solvents and toner fluid for copy machines) stored and used on the 24 Premises in full compliance with Environmental Laws, or (ii) release, discharge or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises or the Property; (b) comply with all Environmental Laws relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage in or permit others to engage in any activity at the Premises in violation of any Environmental Laws; and (c) immediately notify Landlord of (i) any inquiry, test, investigation or enforcement proceeding by any governmental agency or authority against Tenant, Landlord or the Premises relating to any Hazardous Materials or under any Environmental Laws or (ii) the occurrence of any event or existence of any condition that would cause a breach of any of the covenants set forth in this Paragraph 32. (d) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises or the Property, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full compliance with (a) the requirements of (i) all Environmental Laws and (ii) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (b) any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises or the Property. (e) Upon reasonable notice to Tenant, Landlord may inspect the Premises for the purpose of determining whether there exists on the Premises any Hazardous Material or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. Tenant will supply to Landlord such historical and operational information regarding the Premises as may be reasonably requested to facilitate any such inspection and will make available for meetings appropriate personnel having knowledge of such matters. Tenant agrees to give Landlord at least sixty (60) days, prior notice of its intention to vacate the Premises so that Landlord will have an opportunity to perform such an inspection prior to such vacation. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. Any such inspection shall be at Landlord's sole cost and expense, provided that if such inspection reveals the presence of Hazardous Materials released, discharged or disposed of in, on or about the Premises by Tenant or its Agents, or any other condition or activity caused by or on the part of Tenant or its Agents that is in violation of the requirements of this Lease or any Environmental Laws, then Tenant shall pay the costs and expenses of such inspection. (f) Landlord shall have the right, but not the obligation, prior or subsequent to a Default by Tenant under this Lease, without in any way limiting Landlord's other rights and remedies under this Lease, to enter upon the Premises, or to take such other actions as it deems necessary or advisable, to investigate, clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials present on, in, at, under, or emanating from, the Premises or the Property in violation of Tenant's obligations under this Lease or under any Environmental Laws. Notwithstanding any other provision of this Lease, Landlord shall also have the right, at its election, in its own name or as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action taken or order issued by any governmental agency or authority with regard to any such 25 Hazardous materials or contamination by Hazardous Materials. All costs and expenses paid or incurred by Landlord in the exercise of the rights set forth in this Subsection 32(f) shall be payable by Tenant upon demand. (g) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on or about the Premises by Tenant or its agents, employees, contractors or invitees, and in a condition which complies with all Environmental Laws. (h) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, losses (including, without limitation, loss in value of the Premises or the Property, liabilities and expenses (including attorney's fees) sustained by Landlord attributable to (i) any Hazardous Materials placed on or about the Premises by Tenant or its agents, employees, contractors or invitees or (ii) Tenant's breach of any provision of this Paragraph 32. (i) Nothing contained in this Paragraph 32 shall be deemed or construed to require Tenant to remediate or clean up any Hazardous Materials which are brought on, released or otherwise introduced on to the Property by any person other than Tenant or its Agents. (j) The provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. 33. NOTICES: All notices and demands which may or are to be required or permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at the address for such addressee as specified in the Basic Lease Information, or to such other place as such party may from time to time designate in a notice to the other party given as provided herein, or by telex or telecopy at the number therefor designated by the addressee in a written notice given as provided herein. Notice shall be deemed given upon the earlier of actual receipt or the third day following deposit in the United States mail in the manner described above. 34. WAIVER: The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord on any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 35. HOLDING OVER: Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at 26 a rental rate of one hundred twenty-five percent (125%) of the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as applicable. 36. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 37. TIME: Time is of the essence of this Lease and each and every term, condition and provision herein. 38. BROKERS: Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. Landlord shall be responsible for the commission, if any is due, payable to CPS in connection with this Lease pursuant to the terms of a separate written agreement between Landlord and CPS. CPS shall be responsible for the payment of any commission owed to Cornish & Carey Commercial in connection with this Lease. 39. LIMITATION OF LIABILITY: Tenant agrees that, in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord (a) Tenant shall look solely to the estate and property of Landlord or any a successor in interest in the Property and the Premises, for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (b) no other property or assets of Landlord, its partners, shareholder, officers, directors or any successor in interest shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal liability shall at any time be asserted or enforceable against Landlord's partners or successors in interest (except to the extent permitted in (a) above), or against Landlord's shareholders, officers or directors, or their respective partners, shareholders, officers, directors or successors in interest; and (d) no judgment will be taken against any partner, shareholder, officer or director of Landlord. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. 40. FINANCIAL STATEMENTS: Within thirty (30) days after Landlord's request (which request shall not be made more than one (1) time during each calendar year prior to a Default by Tenant hereunder), Tenant shall deliver to Landlord the then current financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. Any financial statements supplied to Landlord pursuant to 27 this Paragraph 40 shall be kept confidential by Landlord, provided that Landlord shall have the right to disclose such financial statements to Landlord's accountants, attorneys and other professional advisors and to current and prospective lenders and purchasers of the property, and otherwise as required by legal process or applicable law. 41. RULES AND REGULATIONS: Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operating of the Premises and parking and other common areas, provided that such rules do not materially and adversely interfere with Tenant's use of the Premises. Such rules may include but shall not be limited to the following: (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said rules and regulations. 42. MORTGAGEE PROTECTION: (a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing for the Premises or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to such modifications, provided such modifications do not materially adversely affect Tenant's rights or increase Tenant's obligations under this Lease. (b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage holder ("Holder") , by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that prior to such notice Tenant has been notified, in writing, (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 42(b)), whichever shall last occur, within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 43. ENTIRE AGREEMENT: This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. Any modification to this Lease shall be effective only if contained in a written amendment executed by both parties. 28 44. INTEREST: Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within ten (10) days from when the same is due shall bear interest from such tenth (10th) day until paid at an annual rate equal to the maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 45. CONSTRUCTION: This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 46. REPRESENTATIONS AND WARRANTIES OF TENANT: Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (3) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6) made an offer of settlement, extension or composition to its creditors generally. 47. RENEWAL OPTION. Tenant shall have one (1) option (the "Renewal Option") to extend the Term for an additional period of three (3) years beyond the Expiration Date (the "Renewal Term"). The Renewal Option shall be effective only if Tenant is not in Default under this Lease, nor has any event occurred which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, either at the time of exercise of the Renewal Option or the time of commencement of the Renewal Term. The Renewal option must be exercised, if at all, by written notice from Tenant to Landlord given not more than nine (9) months nor less than four (4) months 29 prior to the expiration of the initial Term. Any such notice given by Tenant to Landlord shall be irrevocable. If Tenant fails to exercise the Renewal Option in a timely manner as provided for above, the Renewal Option shall be void. The Renewal Term shall be upon the same terms and conditions as the initial Term, except that (i) the annual Base Rent during the Renewal Term shall be equal to the higher of (A) the Base Rent payable hereunder immediately prior to the Expiration Date, or (B) the prevailing market rate for space in well located, high visibility buildings in Moffett Park comparable to the Premises in size, condition, quality and type, and with a comparable landlord (taking into account, among other things, the availability of tenant improvement dollars) (collectively, "Comparable Buildings"), at the commencement of the Renewal Term, and (ii) Tenant shall pay to Landlord in monthly installments throughout the Renewal Term Tenant's prorata share of the HVAC Costs (as defined in EXHIBIT B hereto) falling due within the Renewal Term, as calculated under Paragraph 8(f) of said EXHIBIT B. As used herein, the term "prevailing market rate" shall mean the base annual rental for such comparable space, taking into account any additional rental and all other payments and escalations payable hereunder and by tenants under leases of such comparable space. If Tenant disputes Landlord's determination of the prevailing market rate, Tenant shall so notify the Landlord within ten (10) days following Landlord's notice to Tenant of the prevailing market rate and such dispute shall be resolved as follows: (a) Within twenty (20) days following Tenant's notice to Landlord of Tenant's dispute of Landlord's determination of the prevailing market rate, Landlord and Tenant shall meet no less than two (2) times, at a mutually agreeable time and place, to attempt to resolve any such disagreement. (b) If within this twenty (20) day period Landlord and Tenant cannot reach agreement as to the prevailing market rate, they shall each select one appraiser to determine the prevailing market rate. Each such appraiser shall arrive at a determination of the prevailing market rate and submit his conclusions to Landlord and Tenant within twenty (20) days of the expiration of the twenty (20) day consultation period described in paragraph (a) above. (c) If only one appraisal is submitted within the requisite time period, it shall be deemed to be the prevailing market rate. If both appraisals are submitted within such time period, and if the two appraisals so submitted differ by less than ten (10) percent of the higher, of the two, the average of the two shall be the prevailing market rate. If the two appraisals differ by more than ten (10) percent of the higher of the two, then the two appraisers shall immediately select a third appraiser who will within twenty (20) days of his selection make a determination of the prevailing market rate and submit such determination to Landlord and Tenant. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be the prevailing market rate. (d) All appraisers specified pursuant hereto shall be licensed real estate brokers in the State of California with not less than five (5) years' experience appraising commercial and industrial properties in the County of Santa Clara, provided that no appraiser selected pursuant to this Paragraph 47 shall be the listing broker for the Premises. Each party shall pay the cost of the 30 appraiser selected by such party and one-half (1/2) of the cost of the third appraiser plus one-half (1/2) of any other costs incurred in connection with the appraisal. 48. PRIMARILY EXPANSION OPTION. (a) Tenant shall have a one time option (the "Primary Expansion Option") to lease the adjacent building commonly known as 1309 Moffett Park Drive, consisting of approximately 35,026 rentable square feet (the "Primary Expansion Building"), subject, however, to the rights of the existing tenant (the "Existing Tenant") of the Primary Expansion Building. Subject to Paragraph 48(b) below, the Primary Expansion Option shall be exercised, if at all, by written notice (the "Primary Expansion Notice") from Tenant to Landlord given no later than June 13, 1997. In the event Tenant fails to exercise the Primary Expansion Option in a timely manner as provided herein, the Primary Expansion option shall be null and void and of no further force or effect. If Tenant exercises the Primary Expansion Option, then (i) subject to Paragraphs 48(b) and (c) below, possession of the Primary Expansion Building shall be delivered to Tenant on October 14, 1997 (the "Primary Expansion Commencement Date"), (ii) Tenant's lease of the Primary Expansion Building shall be coterminus with the expiration or sooner termination of this Lease (including any Renewal Term), and (iii) the Primary Expansion Building shall be leased to Tenant upon the same terms and conditions as contained in this Lease, except that the economic terms applicable to the lease of the Primary Expansion Building (including, without limitation, the annual Base Rent for the Primary Expansion Building and the Tenant Improvement Allowance, if any, to be provided to Tenant) shall be equal to the then prevailing market terms being offered by landlords of Comparable Buildings. Landlord shall give Tenant written notice of Landlord's determination of such prevailing market terms reasonably promptly after Landlord's receipt of the Primary Expansion Notice. In the event Tenant disputes Landlord's determination of such prevailing market terms, then Landlord and Tenant shall have a period of twenty (20) days (the "Negotiation Period") to attempt to agree upon the prevailing market terms for the Primary Expansion Building, such agreement to be evidenced by a letter of intent executed by Landlord and Tenant; if Landlord and Tenant fail to agree on such prevailing market terms within the Negotiation Period, then the provisions of Paragraphs 47(a) through (d) shall apply. Any Primary Expansion Notice given by Tenant to Landlord pursuant to this Paragraph 48 shall be irrevocable. Following Tenant's exercise of the Primary Expansion Option and the determination of the prevailing market terms as provided above, the parties shall immediately execute an amendment to this Lease reflecting the lease by Tenant of the Primary Expansion Building. Notwithstanding the foregoing, if a Default (or an event which with the giving of notice or the passage of time, or both, would constitute a Default hereunder) exists either at the time Tenant delivers the Primary Expansion Notice or at any time thereafter prior to the Primary Expansion Commencement Date, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Primary Expansion Option by written notice to Tenant. (b) Notwithstanding anything to the contrary contained in Paragraph 48(a) above, in the event the Existing Tenant consummates a buyout of its lease (the "Existing Lease") prior to the scheduled expiration date thereof (the "Scheduled Expiration Date") or otherwise agrees with Landlord to an early termination of the Existing Lease, then with respect to the exercise of the 31 Primary Expansion option and the timing of the Primary Expansion Commencement Date, the terms of this Paragraph 48 (b) shall control: (i) Landlord shall apply the Termination Consideration (as hereinafter defined), if any, actually received by Landlord from the Existing Tenant against the installments of base rent which would have come due under the Existing Lease from and after the early termination date (the "Early Termination Date") through the Scheduled Expiration Date, such Termination Consideration to be applied against such installments in the order in which they accrue until the Termination Consideration has been fully applied as aforesaid. The date on which the Termination Consideration has been fully applied against the installments of base rent as provided herein shall be hereinafter referred to as the "Final Application Date." Landlord shall give Tenant reasonable advance notice of the Final Application Date. As used herein, "Termination Consideration" means the sum, if any, paid by the Existing Tenant to Landlord as consideration for the early termination of the Existing Lease. (ii) Provided that the Termination Consideration is sufficient, when applied in the manner described in clause (i) above, to cover at least four (4) monthly installments of base rent coming due after the Early Termination Date, then notwithstanding anything to the contrary contained in Paragraph 48(a) above, Tenant shall have the right to exercise the Primary Expansion Option, if at all, only by delivering a Primary Expansion Notice to Landlord on or before the date (the "Alternate Notice Date") that is four (4) months before the Final Application Date. In the event Tenant delivers a Primary Expansion Notice to Landlord in accordance with this clause (ii), then (A) Landlord shall promptly notify Tenant of the prevailing market terms for the Primary Expansion Building and, if Tenant disputes Landlord's determination, the prevailing market terms shall be determined, if at all, in the manner described in Paragraph 48(a) above, and (B) the Primary Expansion Commencement Date shall be the date which is forty five (45) days after Landlord provides written notice of such initial determination to Tenant, provided, however, that if the prevailing market terms include the construction of tenant improvements by Landlord in the Primary Expansion Building, then the Primary Expansion Commencement Date shall be the earlier of the date on which such tenant improvements have been substantially completed (as determined in accordance with Paragraphs 3(a) and (b) above) or the date Tenant commences occupancy of the Premises. (iii) If the Termination Consideration is not sufficient, when applied in the manner described in clause (i) above, to cover at least four (4) monthly installments of base rent coming due after the Early Termination Date, then promptly upon the consummation of a buyout of the Existing Lease by the Existing Tenant as contemplated under this Paragraph 48(b), Landlord shall notify Tenant of the availability of the Primary Expansion Building and of the prevailing market terms for the Primary Expansion Building. In the event Landlord provides such notice to Tenant, then notwithstanding anything to the contrary contained in Paragraphs 48 (a) or 48 (b) (ii) above, Tenant shall have the right to exercise the Primary Expansion Option, if at all, only by delivering a Primary Expansion Notice to Landlord within seven (7) days after Tenant's receipt of Landlord's notice. If Tenant exercises the Primary Expansion Option in a timely manner as aforesaid and if Tenant disputes Landlord's determination of such prevailing market terms, the prevailing market terms shall be determined, if at all, in the manner described in Paragraph 48 (a) above. If Landlord and Tenant 32 mutually agree on the prevailing market terms, the Primary Expansion Commencement Date shall be the date which is forty five (45) days after Landlord provides written notice of such initial determination to Tenant, provided, however, that if the prevailing market terms include the construction of tenant improvements by Landlord in the Primary Expansion Building, then the Primary Expansion Commencement Date shall be the earlier of the date on which such tenant improvements have been substantially completed (as determined in accordance with Paragraphs 3(a) and (b) above) or the date Tenant commences occupancy of the Premises. (c) If for any reason whatsoever, Landlord cannot deliver possession of the Primary Expansion Building to Tenant on the Primary Expansion Commencement Date, (i) this Lease shall not be void or voidable, (ii) the Expiration Date shall not be extended, and (iii) neither Landlord nor Landlord's agents shall be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent attributable to the Primary Expansion Building until Landlord delivers possession of the Primary Expansion Building to Tenant. (d) Notwithstanding anything to the contrary contained in this Paragraph 48, Landlord (as opposed to Landlord's Agents or real estate brokers) shall not initiate or actively solicit a buyout of the Existing Lease from the Existing Tenant. Promptly following the execution of this Lease by Landlord and Tenant, Landlord shall notify the current listing agent and property manager of the Premises in writing of the terms of this Paragraph 48(e) and shall instruct the listing agent and property manager not to initiate or actively solicit a buyout of the Existing Lease, provided, however, that Landlord shall not be liable or responsible for any failure of such listing agent or property manager to comply with such instructions. 49. SECONDARY EXPANSION OPTION. (a) In the event the Existing Tenant consummates a buyout of the Existing Lease or otherwise agrees with Landlord to an early termination of the Existing Lease prior to the Scheduled Expiration Date in accordance with Paragraph 48(b) above, and if Tenant elects not to exercise the Primary Expansion Option at the time the Primary Expansion Option becomes available in accordance with Paragraph 48(b); then Tenant shall have a one-time option (the "Secondary Expansion Option") to lease the building commonly known as 395 Java Drive, Sunnyvale, California (the "Secondary Expansion Building"), upon the expiration or sooner termination of the lease (the "Java Lease") presently covering such Secondary Expansion Building. Upon the earlier of (i) the date which is ninety (90) days prior to the scheduled expiration of the Java Lease, or (ii) the date the tenant under the Java Lease (the "Java Tenant") notifies Landlord of its election (the "Termination Election") to exercise the termination option contained in the Java Lease, Landlord shall notify Tenant in writing of the availability of the Secondary Expansion Building and of the prevailing market terms (determined as described below) for the lease of the Secondary Expansion Building (such written notice being herein referred to as the "Availability Notice"). Tenant shall thereafter have the right to exercise the Secondary Expansion option by written notice (the "Secondary Expansion Notice") to Landlord given not later than ten (10) days after Tenant's receipt of the Availability Notice. 33 (b) In the event Tenant fails to exercise the Secondary Expansion Option in a timely manner as provided herein, the Secondary Expansion option shall be null and void and of no further force or effect. If Tenant exercises the Secondary Expansion Option, then (i) Tenant's lease of the Secondary Expansion Building shall commence on the date (the "Secondary Expansion Commencement Date") which is one hundred (100) days after Tenant's receipt of the Availability Notice, provided, however, that if the prevailing market terms include the construction of tenant improvements by Landlord in the Secondary Expansion Building, then the Secondary Expansion Commencement Date shall be the earlier of the date on which such tenant improvements have been substantially completed (as determined in accordance with Paragraphs 3(a) and (b) above) or the date Tenant commences occupancy of the Secondary Expansion Building, (ii) Tenant's lease of the Secondary Expansion Building shall be coterminus with the expiration or sooner termination of this Lease (including any Renewal Term), and (iii) the Secondary Expansion Building shall be leased to Tenant upon the same terms and conditions as contained in this Lease, except that the economic terms applicable to the lease of the Secondary Expansion Building (including, without limitation, the annual Base Rent for the Secondary Expansion Building and the Tenant Improvement Allowance, if any, to be provided to Tenant) shall be equal to the then prevailing market terms being offered by landlords of Comparable Buildings. In the event Tenant exercises the Secondary Expansion Option as aforesaid but disputes Landlord's determination of such prevailing market terms, then Tenant shall so notify Landlord in writing concurrently with the delivery of the Secondary Expansion Notice and the prevailing market terms shall be determined in accordance with the provisions of Paragraphs 47(a) through (d) above. Except as expressly provided herein to the contrary, any Secondary Expansion Notice given by Tenant to Landlord pursuant to this Paragraph 49 shall be irrevocable. Following Tenant's exercise of the Secondary Expansion Option and the determination of the prevailing market terms as provided above, the parties shall immediately execute an amendment to this Lease reflecting the lease by Tenant of the Secondary Expansion Building. Notwithstanding the foregoing, if a Default (or an event which with the giving of notice or the passage of time, or both, would constitute a Default hereunder) exists either at the time Tenant delivers the Secondary Expansion Notice or at any time thereafter prior to the Secondary Expansion Commencement Date, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Secondary Expansion Option by written notice to Tenant. (c) If for any reason whatsoever, Landlord cannot deliver possession of the Secondary Expansion Building to Tenant on the Secondary Expansion Commencement Date, (i) this Lease shall not be void or voidable, (ii) the Expiration Date shall not be extended, and (iii) neither Landlord nor Landlord's agents shall be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent attributable to the Secondary Expansion Building until Landlord delivers possession of the Secondary Expansion Building to Tenant. (d) Notwithstanding anything herein to the contrary, the Secondary Expansion Option granted hereunder is expressly made subject to the prior sale of the Secondary Expansion Building by Landlord. In the event Landlord sells or otherwise transfers or conveys the Secondary Expansion Building to a third party prior to Tenant's exercise of the Secondary Expansion option, then the Secondary Expansion Option shall thereafter be null and void and of no further force or effect. 34 Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in the Basic Lease Information. LANDLORD: TENANT: AETNA LIFE INSURANCE COMPANY, PACIFIC MONOLITHICS, INC., a Connecticut corporation a California corporation By: /s/ Joseph E. Gaukler By: /s/ Christopher J. Weseloh --------------------------------- ----------------------------------- Print Print Name: Joseph E. Gaukler Name: Christohper J. Weseloh Its: Asst. Vice President Its: President & CEO -------------------------------- ---------------------------------- By: ----------------------------------- Print Name: --------------------------------- Its: ---------------------------------- 35 EXHIBIT A DIAGRAM OF THE PREMISES EXHIBIT B TENANT IMPROVEMENTS This exhibit, entitled "Tenant Improvements", is and shall constitute EXHIBIT B to the Lease Agreement, dated as of the Lease Date, by and between Landlord and Tenant for the Premises. The terms and conditions of this EXHIBIT B are hereby incorporated into and are made a part of the Lease. Capitalized terms used, but not otherwise defined, in this EXHIBIT B have the meanings ascribed to such terms in the Lease. 1. LANDLORD'S WORK. In addition to the Tenant Improvements (as defined in Paragraph 3 below) to be constructed in the Premises pursuant to this Exhibit B, prior to the Commencement Date, Landlord shall, at its sole cost and expense, (i) install a new roof membrane on the Building acceptable to Landlord and (ii) upgrade the landscaping surrounding the Building in a manner satisfactory to Landlord (collectively, "Landlord's Work"). Landlord shall consult with Tenant from time to time concerning the selection of the upgraded landscaping, but Landlord shall have the right to make the final decision regarding the selection of such landscaping and the same shall not be subject to the approval of Tenant. The cost of Landlord's Work shall be paid for with Landlord's own funds and shall not be applied against or otherwise decrease the Tenant Improvements Allowance (as defined in Paragraph 6 below) or the Tenant Improvements Loan (as defined in Paragraph 7 below), or treated as reimbursable by Tenant pursuant to Paragraph 4 of the Lease. 2. TENANT IMPROVEMENTS. In addition to Landlord's Work described in Paragraph 1 above, Landlord agrees, subject to the conditions set forth below, to construct certain Tenant Improvements in the Premises pursuant to the terms of this EXHIBIT B. 3. DEFINITION. "Tenant Improvements" as used in the Lease and this EXHIBIT B shall include only those improvements within (i) the interior portions of the Premises, (ii) the exterior storage area adjacent to the Premises, and (iii) the patio area outside the Building and adjacent to the lunch room, in each case solely to the extent such improvements are depicted on the Final Plans and Specifications (hereafter defined in Paragraph 4) or described hereinbelow. "Tenant Improvements" shall specifically not include Landlord's Work to be performed pursuant to Paragraph 1 above or any alterations, additions, or improvements installed or constructed by Tenant, and any of Tenant's personal property or trade fixtures. The Tenant Improvements may include: (a) Space plans, working drawings, and architectural, engineering and final plans. (b) Partitioning, doors, floor coverings, finishes, ceilings, wall coverings and painting, millwork and similar items. B-1 (c) Electrical wiring, lighting fixtures, outlets and switches, and other electrical work, but specifically excluding wiring of modular partitions and built-in furniture. (d) The HVAC Units (as hereinafter defined). (e) Duct work, terminal boxes, diffusers and accessories required for the completion of the heating, ventilation and air conditioning systems serving the Premises, including the cost of meter and key control for after-hour air conditioning. (f) Any additional Tenant requirements including, but not limited to odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems. (g) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories installed within and serving the Premises. (h) All plumbing, fixtures, pipes, and accessories to be installed within and serving the Premises. Notwithstanding anything herein to the contrary, "Tenant Improvements" shall specifically exclude the following: (a) Security systems; (b) Wiring for data communications and telephone systems; and (c) Repairs to any emergency generators located in or on the Premises. 4. PLANS AND SPECIFICATIONS. Landlord shall retain an architect selected by Landlord ("Architect") for the preparation of preliminary and final working architectural and engineering plans and specifications for the Tenant Improvements ("Final Plans and Specifications"). Tenant shall cooperate diligently with the Architect and shall furnish within ten (10) days after request therefor, all information required by the Architect for completion of the Final Plans and Specifications, and shall provide (in writing, if requested by Landlord), not later than three (3) business days after request therefor, any approval or disapproval of preliminary or Final Plans and Specifications which Tenant is permitted to give under this EXHIBIT B. Any written disapproval of Tenant shall set forth Tenant's specific objections thereto. If Tenant disapproves any matters subject to its review and approval, Landlord and Tenant, within three (3) business days after Landlord's receipt of such objections, shall meet and confer and negotiate in good faith to resolve such disputed matters. Landlord and Tenant shall indicate their approval of the Final Plans and Specifications by initialing them and attaching them to the Lease as EXHIBIT B-1. Upon completion of the Final Plans and Specifications and approval thereof by Landlord and Tenant, Landlord will obtain subcontractor trade bids and furnish a cost breakdown to Tenant. At Tenant's request, the Final Plans and Specifications may be revised once as a result of Tenant's review of the cost breakdown, at Tenant's sole cost and expense. Any such revisions shall be subject to Landlord's reasonable approval, and the amended Final Plans and Specifications, as approved by Landlord and Tenant, shall thereafter be deemed to be the Final Plans and Specifications for the Tenant Improvements. The amended Final Plans and Specifications shall be approved by Tenant (in writing, if requested by Landlord) not later than three (3) business days after Landlord's request therefor. Landlord shall thereafter submit such amended Final Plans and B-2 Specifications to its contractor and subcontractor for re-bidding, and shall furnish a cost breakdown to Tenant. If the estimated Tenant Improvements Cost, as determined by the bids based on the amended Final Plans and Specifications and the reasonably anticipated costs of other items constituting the Tenant Improvements Cost, result in an Excess Tenant Improvements Cost, then Tenant shall pay such Excess Tenant Improvements Cost as and when required by Paragraph 9.A. Tenant's failure to approve or disapprove any matters which Tenant shall be entitled to approve or disapprove pursuant to this Paragraph 4 shall be conclusively deemed to be approval of same by Tenant. 5. LANDLORD'S CONTRACTOR TO CONSTRUCT IMPROVEMENTS. When the Final Plans and Specifications (as amended, if required by Paragraph 4 above) have been approved by Landlord and Tenant, Landlord shall submit such Final Plans and Specifications to all governmental authorities having rights of approval over the Tenant Improvement work and shall apply for all governmental approvals and building permits. Subject to satisfaction of all conditions precedent and subsequent to its obligations under this EXHIBIT B, and further subject to the provisions of Paragraph 9.A., Landlord shall thereafter cause its contractor (the "Contractor") to commence and proceed to complete construction of the Tenant Improvements in a good and workmanlike manner. Within fifteen (15) days after the Commencement Date, Tenant shall have the right to submit a written "punch list" to Landlord, setting forth any defective item of construction, and provided that Landlord agrees with such "punch list," Landlord shall promptly cause the items specified therein to be corrected. 6. TENANT IMPROVEMENTS ALLOWANCE. Landlord shall provide an allowance for the planning, design and construction of the Tenant Improvements in the amount specified in the Basic Lease Information ("Tenant Improvements Allowance"). Subject to Paragraph 7, the Tenant Improvements Allowance shall be the maximum contribution by Landlord for the Tenant Improvements Cost, as defined in Paragraph 8. Should the actual cost of planning, design and constructing those Tenant Improvements depicted on the Final Plans and Specifications be less than the Tenant Improvements Allowance, the Tenant Improvements Allowance shall be reduced to an amount equal to said actual cost. 7. TENANT IMPROVEMENTS LOAN. In addition to the Tenant Improvements Allowance, Landlord agrees to loan to Tenant up to Three Hundred Seventy Seven Thousand Seven Hundred Forty Dollars ($377,740.00) for Tenant Improvements (the "Tenant Improvements Loan"). The Tenant Improvements Loan shall be repayable by Tenant to Landlord in substantially equal self-amortizing installments over the initial term of the Lease, together with interest on the balance outstanding from time to time at the rate of twelve percent (12%) per annum; provided, however, that in the event the Lease shall terminate for any reason prior to the scheduled expiration thereof, the Tenant Improvements Loan and all accrued and unpaid interest thereon shall immediately become due and payable in full. Notwithstanding the foregoing, if the Lease shall terminate prior to the scheduled B-3 expiration date as a result of a casualty or condemnation event affecting the Premises, then Tenant shall be relieved of its obligation to repay the Tenant Improvements Loan solely to the extent that Landlord actually collects insurance proceeds or a condemnation award, as appropriate, sufficient in amount to fully reimburse Landlord for all costs and expenses incurred in connection with the design, preparation, approval and construction of the Tenant Improvements. In furtherance of the foregoing, the parties agree that any such proceeds or award received by Landlord shall be allocated first to Landlord's interest in the Property and the Premises (excluding the Tenant Improvements) and then to the Tenant Improvements, and that any amounts allocated to the Tenant Improvements shall be first applied against the Tenant Improvements Allowance until the same has been repaid in full and then against the Tenant Improvements Loan. 8. TENANT IMPROVEMENTS COST. The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all costs and expenses associated with the design, preparation, approval and construction of the Tenant Improvements, including, but not limited, to the following: (a) All costs of preliminary and final architectural and engineering plans and specifications for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; provided, however, that "Tenant Improvements Cost" shall not include, and Landlord shall be solely liable for, the costs of the space plans of the Premises prepared by CAS, to the extent such space plans are dated as of, and were actually delivered to Landlord and Tenant an or before, April 20, 1995. (b) All costs of obtaining building permits and other necessary authorizations from local governmental authorities; (c) All costs of interior design and finish schedule plans and specifications including as-built drawings; (d) All direct and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises, including, but not limited to, the construction fee for overhead and profit and the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered by Landlord's contractor in connection with construction of the Tenant Improvements; (e) All fees payable to the Architect and Landlord's engineering firm if they are required by Tenant to redesign any portion of the Tenant Improvements following Tenant's approval of the Final Plans and Specifications; (f) Tenant's prorata share of all costs (the "HVAC Costs") to purchase and install new HVAC units weighing up to an aggregate of two hundred (200) tons (the "HVAC Units") on the roof of the Premises; for purposes of this Paragraph 8(f), Tenant's prorata share of the HVAC Costs shall be the portion of such costs falling due within the initial Term of the Lease based upon the amortization of such HVAC Costs over a useful life of fifteen (15) years. Landlord and Tenant acknowledge that the intent of this Paragraph 8(f) is to include within the Tenant Improvements Cost B-4 and to fund out of the Tenant Improvements Allowance Tenant's prorata share of the HVAC Costs, amortized as aforesaid and falling due within the initial Term of the Lease. In addition to the foregoing, in the event Tenant exercises the Renewal Option provided under Paragraph 47 of the Lease, then Tenant shall pay to Landlord, in substantially equal monthly installments throughout the Renewal Term, Tenant's prorata share of the HVAC Costs falling due within the Renewal Term of the Lease based upon the amortization of such costs over the aforesaid fifteen (15) year useful life. Such installments shall be payable by Tenant to Landlord at the same time Tenant pays Base Rent under Paragraph 4(a) of the Lease and shall be deemed "Rent" for all purposes of the Lease; and (g) Utility connection fees. In no event shall the Tenant Improvements Cost include any costs of Landlord's Work or any costs of procuring, constructing or installing in the Premises any of Tenant's personal property or trade fixtures. 9. EXCESS TENANT IMPROVEMENTS COST. If the Tenant Improvements Cost is more than the sum of the Tenant Improvements Allowance and the Tenant Improvements Loan, then the difference between the Tenant Improvements Cost and the sum of the Tenant Improvements Allowance and the Tenant Improvements Loan ("Excess Tenant Improvements Cost") shall be paid by Tenant to Landlord in cash within ten (10) days of delivery of statements from Landlord to Tenant therefor. If construction of the Tenant Improvements will result in Excess Tenant Imnrovements Cost, Landlord shall not be obligated to commence construction of the Tenant Improvements if payment of the Excess Tenant Improvements Costs by Tenant is not received within ten (10) days after delivery by Landlord to Tenant of a statement therefor; provided, however, that Landlord may, at its option, commence construction of the Tenant Improvements, in which event Tenant shall pay the Excess Tenant Improvements Cost within ten (10) days after delivery by Landlord to Tenant of the statement therefor. If Landlord so elects to commence construction of the Tenant Improvements or has already commenced construction of the Tenant Improvements when there occurs an Excess Tenant Improvements Cost, then Landlord shall be entitled to suspend or terminate construction of the Tenant Improvements if payment by Tenant to Landlord of the Excess Tenant Improvement Costs has not been received within ten (10) days after delivery by Landlord to Tenant of a statement therefor. 10. CHANGE REQUEST. When the Final Plans and Specifications have been approved by Landlord, there shall be no changes without Landlord and Tenant's prior written consent, except for (a) necessary on-site installation variations or minor changes necessary to comply with building codes and other governmental regulations; and (b) changes approved in writing by both parties. Any costs related to such governmentally required or requested and approved changes shall be added to the Tenant Improvements Cost and, to the extent such cost results in Excess Tenant Improvements Cost, shall be paid for by Tenant as and with any Excess Tenant Improvements Cost as set forth in Paragraph 9.A. The billing for such additional costs to Tenant shall be accompanied by evidence of the amounts billed as is customarily used in the business. Costs related to changes shall include, without limitation, any architectural or design fees, and Landlord's general contractor's price for effecting the change. B-5 11. CONSTRUCTION DEFECTS. In the event Landlord determines during the Term that the Tenant Improvements have been constructed in a manner which is materially inconsistent with the Final Plans and Specifications or in material violation of a law, code or ordinance applicable to the Premises, and if such defects or violations are covered by construction warranties obtained by Landlord in connection with the Tenant Improvements, then Landlord shall, at its discretion, either enforce such warranties against the parties providing the same or assign such warranties to Tenant and permit Tenant to enforce the same. 12. TERMINATION. If the Lease is terminated prior to completion of the Tenant Improvements, for any reason due to the Default of Tenant under the Lease, in addition to any other damages available to Landlord, Tenant shall pay to Landlord, within five (5) days of receipt of a statement therefor, all costs incurred by Landlord through the date of termination in connection with the Tenant Improvements. Landlord shall have the right to terminate the Lease, upon written notice to Tenant, if Landlord is unable to obtain a building permit for the Tenant Improvements within one hundred twenty (120) days from the date the Lease is mutually executed. 13. INTEREST. Any payments required to be made by Tenant hereunder which are not paid when due shall bear interest at the maximum rate permitted by law from the due date therefor until paid. 14. DISCLAIMER. Landlord shall have no liability to Tenant in the event construction of the Tenant Improvements is delayed or prevented due to any cause beyond Landlord's reasonable control. If Tenant is entitled or permitted to enter the Premises prior to completion of the Tenant improvements, Landlord shall not be liable to Tenant or its employees or agents for any loss or damage to property, or injury to person, arising from or related to construction of the Tenant Improvements. Tenant shall take all reasonable precautions to protect against such loss, damage or injury during construction of the Tenant Improvements, and shall not interfere with the conduct of the Tenant Improvement work. Tenant shall cooperate with all reasonable directives of Landlord and Landlord's contractor in order to minimize any disruption or delay in completion of the Tenant Improvements work. B-6 EXHIBIT B-1 FINAL PLANS AND SPECIFICATIONS Reference is hereby made to that certain Lease Agreement dated June 12, 1995 by and between Aetna Life Insurance Company, a Connecticut corporation, as landlord ("Landlord"), and Pacific Monolithics, Inc., a California corporation, as tenant ("Tenant") ("Lease Agreement"). The Final Plans and Specifications (as defined in Exhibit B to the Lease Agreement) consists of the following described drawings, specifications and other documents: Title of Drawing, Specification or Other Document Date - --------------------------------------------- ------------------------------- The Final Plans and Specifications have been initialed by both Landlord and Tenant and are on file with Landlord. Initials: Landlord Tenant ------------------- ------------- EXHIBIT C COMMENCEMENT DATE MEMORANDUM LANDLORD: AETNA LIFE INSURANCE COMPANY TENANT: PACIFIC MONOLITHICS, INC. LEASE DATE: June 12, 1995 PREMISES: 1308 Moffett Park Drive Sunnyvale, California Tenant hereby accepts the Premises as being in the condition required under the Lease, with all Tenant Improvements completed (except for minor punchlist items which Landlord agrees to complete). The Commencement Date of the above referenced Lease is hereby established as __________________________, 1995 TENANT: PACIFIC MONOLITHICS, INC. a California corporation By: ----------------------------------- Print Name: --------------------------------- Its: ---------------------------------- Approved and Agreed: AETNA LIFE INSURANCE COMPANY, a Connecticut corporation By: --------------------------------- Print Name: ------------------------------- Its: -------------------------------- EX-21.01 13 EXHIBIT 21.01 EXHIBIT 21.01 LIST OF REGISTRANT'S SUBSIDIARIES
Percentage Owned by Name Country of Organization Hybrid Networks, Inc. - ---- ----------------------- --------------------- HN Acquisition Corp. Delaware, United States 100%
EX-23.02 14 EXHIBIT 23.02 EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-4 of our report dated January 20, 1998, except for Note 16, for which the date is March 19, 1998, on our audits of the Financial Statements and Financial Statement Schedule of Hybrid Networks, Inc. We also consent to the reference to our firm under the headings "Experts" and "Selected Historical Financial Data of Hybrid" in such Joint Proxy Statement/Prospectus. COOPERS & LYBRAND LLP San Jose, California May 6, 1998 EX-23.03 15 EXHIBIT 23.03 EXHIBIT 23.03 CONSENT OF DELOITTE & TOUCHE LLP We consent to use in this Registration Statement of Hybrid Networks, Inc. on Form S-4 of our report dated November 28, 1997 (March 19, 1998 as to Note 10) insofar as such report relates to the financial statements of Pacific Monolithics, Inc. as of September 30, 1997 and 1996 and for the three years in the period ended September 30, 1997, appearing in the Joint Proxy Statement/Prospectus, which is a part of this Registration Statement. We also consent to the reference to us under the headings "Selected Historical Financial Data of Pacific" and "Experts" in such Joint Proxy Statement/Prospectus. DELOITTE & TOUCHE LLP San Jose, California May 6, 1998 EX-23.04 16 EXHIBIT 23.04 EXHIBIT 23.04 CONSENT OF PERSON TO BE NAMED AS A DIRECTOR I hereby consent to the reference to me as a person who has agreed to become a director under the heading "Management of the Combined Company" in the prospectus constituting a part of this Registration Statement on Form S-4. /s/ Richard B. Gold -------------------------------- Richard B. Gold Sunnyvale, California May 6, 1998 EX-23.05 17 EXHIBIT 23.05 EXHIBIT 23.05 CONSENT OF PERSON TO BE NAMED AS A DIRECTOR I hereby consent to the reference to me as a person who has agreed to become a director under the heading "Management of the Combined Company" in the prospectus constituting a part of this Registration Statement on Form S-4. /s/ Matthew D. Miller ------------------------------------- Matthew D. Miller Sunnyvale, California May 6, 1998 EX-27.1 18 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HYBRID NETWORKS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 7,248 12,753 12,153 2,307 5,582 35,798 3,229 1,461 39,194 3,813 6,087 0 0 10 29,284 39,194 3,528 3,528 2,897 3,959 0 450 224 (3,778) 0 0 0 0 0 (3,700) (.36) (.36)
-----END PRIVACY-ENHANCED MESSAGE-----