-----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, MnlkrzdCRBwnGylFpDcGQxEjh96lHo0CauT7N5mMVIpqM1/umulvWL6weStTNCPZ kreQHYxMJ6CAWAPeMbhh7g== 0000891618-99-002814.txt : 19990624 0000891618-99-002814.hdr.sgml : 19990624 ACCESSION NUMBER: 0000891618-99-002814 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JUNIPER NETWORKS INC CENTRAL INDEX KEY: 0001043604 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770422528 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-76681 FILM NUMBER: 99650726 BUSINESS ADDRESS: STREET 1: 385 RAVENDALE DR CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6505268000 MAIL ADDRESS: STREET 1: 385 RAVENDALE DR CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 S-1/A 1 AMENDMENT NO. 4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1999 REGISTRATION NO. 333-76681 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ JUNIPER NETWORKS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3661 77-042528 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
385 RAVENDALE DRIVE MOUNTAIN VIEW, CALIFORNIA 94043 (650) 526-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ SCOTT KRIENS PRESIDENT AND CHIEF EXECUTIVE OFFICER JUNIPER NETWORKS, INC. 385 RAVENDALE DRIVE MOUNTAIN VIEW, CALIFORNIA 94043 (650) 526-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: LARRY W. SONSINI NORA L. GIBSON JUDITH MAYER O'BRIEN TAMARA L. TOMPKINS BRUCE MCNAMARA ELISA S. LEE W. BRIAN KINARD BROBECK PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI ONE MARKET PROFESSIONAL CORPORATION SPEAR STREET TOWER 650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94105 PALO ALTO, CALIFORNIA 94304-1050 (415) 442-0900 (650) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) UNIT (2) PRICE REGISTRATION FEE(3) - -------------------------------------------- ------------------- ------------------- ------------------- ------------------- - ---------------------------------------------------------------------------------------------------------------------------- Common Stock ($.00001 par value)............ 5,520,000 $30.00 $165,600,000 $46,037 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Includes 720,000 shares of common stock which the Underwriters have the right to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose determining the registration fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as amended. (3) $35,295 of this fee has been paid previously. ------------------------ 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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED JUNE 23, 1999. 4,800,000 Shares [Juniper logo] Common Stock ---------------------- This is an initial public offering of shares of common stock of Juniper Networks, Inc. Juniper Networks is offering 2,000,000 shares to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 2,800,000 shares. Juniper Networks will not receive any of the proceeds from the sale of shares by the selling stockholders. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $28.00 and $30.00. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "JNPR". See "Risk Factors" beginning on page 6 to read about certain factors you should consider before buying shares of the common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------
Per Share --------- Total Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Juniper Networks.............. $ $ Proceeds, before expenses, to the selling stockholders...... $ $
The underwriters may, under certain circumstances, purchase up to an additional 98,071 shares from Juniper Networks and 621,929 shares from one of the selling stockholders at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver the shares in New York, New York on , 1999. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON BANCBOSTON ROBERTSON STEPHENS DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED ---------------------- Prospectus dated , 1999. 3 [Inside Cover Art] 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Juniper Networks, the common stock being sold in this offering and our consolidated financial statements, including the notes to those statements, appearing elsewhere in this prospectus. Unless otherwise indicated, this prospectus assumes: - - the conversion of our outstanding preferred stock into common stock upon the closing of this offering; and - - that the underwriters do not exercise the option granted by us and a selling stockholder to purchase additional shares in this offering. JUNIPER NETWORKS, INC. We are a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers (collectively, service providers) to meet the demands resulting from the rapid growth of the Internet. We deliver next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks and offer our customers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Our flagship product is the M40 Internet backbone router. The M40 combines the features of our JUNOS Internet Software, high performance application specific integrated circuits, or ASICs, based packet forwarding technology and Internet optimized architecture into a purpose-built solution for service providers. Unlike conventional routers, which were originally developed for enterprise applications and are increasingly inadequate for service provider use in public networks, our Internet backbone routers are specifically designed to accommodate the size and scope of the Internet. We sell our Internet backbone routers primarily through a direct sales force and an original equipment manufacturer. Our M40 Internet backbone router is currently used by several of the world's leading service providers, such as UUNet, an MCI WorldCom Company, Cable & Wireless USA, IBM Global Services (which has been acquired by AT&T Corp.), Frontier GlobalCenter Inc. and Verio Inc. We believe that the Internet will continue to grow at significant rates and will evolve into the next generation public network, superseding and expanding upon many of the functions provided by the traditional telephone network. This trend will drive the need for new Internet infrastructure equipment that can deliver the high levels of reliability and scalability needed in a public network. We believe we have developed the first commercially available Internet backbone routing platform specifically designed and built to meet these requirements. Ryan Hankin Kent, an industry research firm, estimates that the market for Internet backbone routers was $169 million in 1998 and is expected to increase to approximately $5.5 billion in 2003. Our objective is to become the primary supplier of high performance Internet backbone infrastructure equipment. The following are key elements of our strategy: - - leverage our early lead as supplier of purpose-built Internet infrastructure equipment; - - work closely with our key customers; - - increase our penetration in major service providers; - - leverage our early successes to rapidly penetrate new customers; - - expand our sales and distribution network; - - maintain and extend our technology leadership; and - - enable new IP-based services. 3 5 Our principal executive offices are located at 385 Ravendale Drive, Mountain View, California 94043, and our telephone number is (650) 526-8000. Juniper Networks, the Juniper Networks logo and M40 are trademarks of Juniper Networks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Information contained on our website, www.juniper.net, does not constitute part of the prospectus. We were incorporated in the State of California in February 1996. We reincorporated in the State of Delaware in March 1998. THE OFFERING The following information assumes that the underwriters do not exercise the option granted by us and the selling stockholders listed on page 61 under the caption "Principal and Selling Stockholders" to purchase additional shares in this offering. See "Underwriting." ---------------------- Shares offered by Juniper Networks...................... 2,000,000 shares Shares offered by the selling stockholders.............. 2,800,000 shares Shares to be outstanding after the offering(1).......... 49,032,869 shares Use of proceeds......................................... For general corporate purposes, principally working capital and capital expenditures. Proposed Nasdaq National Market symbol.................. "JNPR"
- --------------- (1) Based on shares outstanding as of March 31, 1999. It excludes: - 19,187,500 shares of common stock reserved for issuance under our Amended 1996 Stock Plan (including the 3,000,000 shares reserved for issuance on April 19, 1999), of which 4,291,564 shares were subject to outstanding options at a weighted average exercise price of $4.53 per share, and 4,813,669 shares were available for future grants; - 262,910 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.65 per share; and - 500,000 shares available for issuance under our 1999 Employee Stock Purchase Plan. See "Capitalization," "Management -- Incentive Stock Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the Consolidated Financial Statements. 4 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS)
PERIOD FROM THREE MONTHS INCEPTION YEAR ENDED ENDED (FEBRUARY 2, 1996) DECEMBER 31, MARCH 31, TO DECEMBER 31, ------------------- ------------------ 1996 1997 1998 1998 1999 ------------------ -------- -------- ------- -------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues............... $ -- $ -- $ 3,807 $ -- $ 10,044 Operating loss............. (1,939) (11,598) (32,270) (4,411) (6,767) Net loss................... (1,799) (10,363) (30,971) (3,905) (6,675)
MARCH 31, 1999 ------------------------ AS ACTUAL ADJUSTED(1) ------- -------------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $49,449 $102,289 Working capital............................................. 41,756 94,596 Total assets................................................ 67,125 119,965 Long-term obligations, less current portion................. 2,834 2,834 Stockholders' equity........................................ 47,135 99,975
- --------------- (1) The consolidated balance sheet data at March 31, 1999, as adjusted, gives effect to the sale of the shares at an assumed initial public offering price of $29.00, after deducting the underwriting discount and estimated offering expenses payable by us. 5 7 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. OUR FAILURE TO INCREASE OUR REVENUES WOULD PREVENT US FROM ACHIEVING AND MAINTAINING PROFITABILITY We have incurred significant losses since inception and expect to continue to incur losses in the future. As of March 31, 1999, we had an accumulated deficit of $49.8 million. Although our net revenues have grown from zero in the quarter ended September 30, 1998 to $10.0 million in the quarter ended March 31, 1999, we cannot be certain that our revenues will continue to grow, or that we will achieve sufficient revenues to achieve profitability. We have large fixed expenses and we expect to continue to incur significant and increasing sales and marketing, product development and administrative expenses. As a result, we will need to generate significantly higher revenues to achieve and maintain profitability. See "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Consolidated Financial Statements and the Notes to the Consolidated Financial Statements for more information on our results of operations. OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT As a result of our limited operating history, it is difficult to forecast accurately our revenues, and we have limited meaningful historical financial data upon which to base planned operating expenses. Specifically, we began operations in February 1996, introduced our M40 Internet backbone router product in September 1998 and began shipping the M40 in volume in October 1998. In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are and will continue to be fixed in the short-term. The revenue and income potential of our products and business are unproven and the market that we are addressing is rapidly evolving. If we do not achieve our expected revenues, our operating results will be below our expectations and the expectations of investors and market analysts, which could cause the price of our common stock to decline. THE M40 CURRENTLY IS OUR ONLY PRODUCT AND A SIGNIFICANT PORTION OF OUR FUTURE REVENUE DEPENDS ON ITS COMMERCIAL SUCCESS Our future growth and a significant portion of our future revenue depends on the commercial success of our M40 Internet backbone router, which is the only product that we currently offer. Many customers who have purchased the M40 have not yet fully deployed the product in large network environments and may not choose to do so. Even if our customers do fully deploy our product, it may not operate as expected. Failure of the M40 to operate as expected could delay or prevent its adoption. If our target customers do not widely adopt, purchase and successfully deploy the M40, our revenues will not grow significantly and our business, financial condition and results of operations will be seriously harmed. OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP PRODUCTS AND PRODUCT ENHANCEMENTS THAT WILL ACHIEVE MARKET ACCEPTANCE We cannot assure you that we will be able to develop new products or product enhancements in a timely manner, or at all. Any failure to develop new products or product enhancements will substantially decrease market acceptance and sales of our present and future products which will significantly harm our business and financial results. Even if we are able to develop and commercially introduce new products and enhancements, we cannot assure you that the new products or enhancements will achieve widespread market acceptance. Any failure of our future products to achieve market 6 8 acceptance could harm our business and financial results. THE LONG SALES AND IMPLEMENTATION CYCLES FOR THE M40, AS WELL AS OUR EXPECTATION THAT CUSTOMERS WILL SPORADICALLY PLACE LARGE ORDERS WITH SHORT LEAD TIMES MAY CAUSE REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER A customer's decision to purchase the M40 involves a significant commitment of its resources and a lengthy evaluation and product qualification process. As a result, our sales cycle may be lengthy. Throughout the sales cycle, we often spend considerable time educating and providing information to prospective customers regarding the use and benefits of the M40. Even after making the decision to purchase the M40, our customers tend to deploy the M40 slowly and deliberately. Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer's network environment and the degree of hardware and software configuration necessary to deploy the M40. Customers with large networks usually expand their networks in large increments on a periodic basis. Accordingly, we expect to receive purchase orders for significant dollar amounts on an irregular basis. Because of our limited operating history, we cannot predict these sales and development cycles. These long cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter. WE HAVE A LIMITED NUMBER OF CUSTOMERS UPON WHOM WE RELY, AND ANY DECREASE IN REVENUE FROM THESE CUSTOMERS COULD HAVE AN ADVERSE EFFECT ON US We began recognizing revenues from sales of the M40 in the quarter ended December 31, 1998. A significant portion of our revenues to date have been recognized from a limited number of customers. Revenues from significant customers as a percentage of net revenues are as follows:
THREE MONTHS YEAR ENDED ENDED DEC. 31, 1998 MARCH 31, 1999 ------------- -------------- *UUNet............... 78% 40% Ericsson Business Networks AB........ 22% 9% *MCI WorldCom- vBNS............... -- 15% Verio............... -- 16%
- --------------- * Subsidiaries of MCI WorldCom, each of which run separate networks and make separate purchasing decisions. We expect that the majority of our revenues will continue to depend on sales of the M40 to a small number of customers. Any downturn in the business of these customers or potential new customers could significantly decrease the sales of the M40 to these customers which could seriously harm our revenues and results of operations. IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMUNICATIONS MEDIUM, DEMAND FOR OUR PRODUCTS MAY DECLINE SIGNIFICANTLY Our future success depends on the continued growth of the Internet as a widely used medium for commerce and communication. If the Internet does not continue to expand as a widespread communications medium and commercial marketplace, the growth of the market for Internet infrastructure equipment may not continue and the demand for our products could decline significantly. WE FACE INTENSE COMPETITION THAT COULD REDUCE OUR MARKET SHARE Competition in the Internet infrastructure market is intense. This market has historically been dominated by Cisco with other companies such as Bay Networks and Ascend providing products to a smaller segment of the market. In addition, a number of private companies have announced plans 7 9 for new products to address the same problems which our products address. In order to compete effectively in the Internet router market we must deliver products which: - - provide extremely high network reliability; - - provide high performance interfaces and packet processing capabilities; - - scale easily and efficiently with minimum disruption to the network; - - interoperate with existing network designs and equipment vendors; - - reduce the complexity of the network by decreasing the need for overlapping equipment; and - - provide a cost-effective solution for service providers. If we are unable to compete successfully against our current and future competitors, we could experience price reductions, reduced gross margins and loss of market share, any one of which could materially and adversely affect our business, operating results and financial condition. See "Business -- Competition" for detailed information about our competition. WE MUST EXPAND SUBSTANTIALLY OUR DIRECT AND INDIRECT SALES OPERATIONS IN ORDER TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS Our products and services require a sophisticated sales effort targeted at several key people within our prospective customers' organizations. This sales effort requires the efforts of select personnel as well as specialized system and consulting engineers. We have recently expanded our direct sales force and plan to hire additional qualified sales personnel and system and consulting engineers. Competition for these individuals is intense, and we might not be able to hire the kind and number of sales personnel and system and consulting engineers we need. In addition, we believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. We have entered into agreements with only a small number of distribution partners. In addition, some of our distribution partners also sell products that compete with the M40. We cannot be certain that we will be able to reach agreement with additional distribution partners on a timely basis or at all, or that our distribution partners will devote adequate resources to selling our products. If we are unable to expand our direct and indirect sales operations, we may not be able to increase market awareness or sales of our products, which may prevent us from achieving and maintaining profitability. IF WE DO NOT EXPAND SUBSTANTIALLY OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION, SALES OF OUR PRODUCTS MAY BE SIGNIFICANTLY REDUCED The complexity of our products and the difficulty of installing them require highly trained customer service and support personnel. We currently have a small customer service and support organization and will need to increase our staff to support new customers and the expanding needs of existing customers. Hiring customer service and support personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of the Internet. If we are unable to expand our customer service and support organization, we may not be able to increase sales of our products, which would seriously harm our business. WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER THE M40 TO OUR CUSTOMERS We currently purchase several key components, including ASICs and power supplies, from single or limited sources. We worked with IBM for over two years to develop several of our key proprietary application specific integrated circuits, or ASICs, which are custom designed integrated circuits built to perform a specific function more rapidly than a general purpose microprocessor. IBM is currently our sole 8 10 source supplier of these ASICs. These ASICs are very complex, and we may not be able to develop an alternate source to IBM in a timely manner, which could hurt our ability to deliver the M40 to our customers. We also purchase power supplies from a single source and purchase other custom components from other sole or limited sources. If we are unable to buy these components on a timely basis, we will not be able to deliver the M40 to our customers, which would seriously impact present and future sales and revenue which would, in turn, seriously harm our business. WE CURRENTLY DEPEND ON ONE CONTRACT MANUFACTURER, AND IF WE HAVE TO QUALIFY A NEW CONTRACT MANUFACTURER WE MAY LOSE REVENUE AND DAMAGE OUR CUSTOMER RELATIONSHIPS Solectron, a third party manufacturer for numerous companies, manufactures the M40 at its Milpitas, California facility on a purchase order basis and is our sole manufacturer. We currently do not have a long-term supply contract with Solectron. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming. If we are required or choose to change contract manufacturers, we may lose revenue and damage our customer relationships. IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS Because we currently do not have a long-term supply contract with Solectron, they are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price, except as may be provided in a particular purchase order. We provide forecasts of our demand to Solectron up to six months prior to scheduled delivery of products to our customers. If we overestimate our requirements, Solectron may have excess inventory, which would increase our costs. If we underestimate our requirements, Solectron may have an inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenues. In addition, lead times for materials and components we order vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. We also may experience shortages of certain components from time to time, which also could delay the manufacturing of our products. WE DEPEND UPON SOLECTRON TO MANUFACTURE OUR PRODUCTS ON A TIMELY BASIS We plan to regularly introduce new products and product enhancements, which will require that we coordinate our efforts with those of our suppliers and Solectron to rapidly achieve volume production. If we should fail to effectively manage our relationship with Solectron, or if Solectron experiences delays, disruptions or quality control problems in its manufacturing operations, our ability to ship products to our customers could be delayed. THE UNPREDICTABILITY AND SEASONALITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: - - demand for the M40; - - the timing of sales of the M40; - - the timing of recognizing revenue and deferred revenue; - - new product introductions by our competitors; - - changes in our pricing policies or the pricing policies of our competitors; - - our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; 9 11 - - our ability to obtain sufficient supplies of the sole or limited source components, including ASICs and power supplies for the M40; - - increases in the prices of the components we purchase; - - our ability to attain and maintain production volumes and quality levels for the M40; - - decisions by end-users to reallocate their information resources to other purposes, including year 2000 preparedness; - - Internet growth and demand for Internet infrastructure; - - prototype expenses; - - costs related to acquisitions of technology or businesses; and - - general economic conditions as well as those specific to the Internet and related industries. In addition, we are dependent on decisions by customers to build their Internet infrastructure, which decisions are in turn dependent upon the success and expected demand for the services offered by those customers. Furthermore, the long sales and implementation cycles for the M40, as well as the degree to which customers will sporadically place large orders with short lead times, may cause revenues and operating results to vary significantly from quarter to quarter. We also expect to experience seasonality in our operating results. We expect the growth rate in our sales to be adversely affected in the third quarter due to a slowdown in sales in Europe and other foreign areas during the summer months. In addition, we expect the growth rate in our sales in the first quarter to be adversely affected due to our customers' budgeting cycles. We plan to increase significantly our operating expenses to fund greater levels of research and development, expand our sales and marketing operations, broaden our customer support capabilities and develop new distribution channels. We also plan to expand our general and administrative functions to address the increased reporting and other administrative demands, which will result from this offering and the increasing size of our business. Our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are, and will continue to be, fixed in the short term. As a result, a delay in generating or recognizing revenue for the reasons set forth above, or for any other reason, could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, INSTALLATIONS WILL BE DELAYED OR CANCELLED AND COULD RESULT IN SUBSTANTIAL PRODUCT RETURNS WHICH COULD HARM OUR REPUTATION Our products are designed to interface with our customers' existing networks, each of which has different specifications and utilizes multiple protocol standards. Many of our customers' networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with all of the products within these networks as well as future products in order to meet our customers' requirements. If we find errors in the existing software used in our customers' networks, we must modify our JUNOS Internet Software to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware. If our products do not interoperate with those of our customers' networks, installations could be delayed, orders for our products could be cancelled or our products could be returned. This would also seriously harm our reputation, which could seriously harm our business and prospects. 10 12 BECAUSE OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL DEPLOYMENT, WHICH COULD SERIOUSLY HARM OUR BUSINESS The M40, including our JUNOS Internet Software, is a highly complex product. In addition, the M40 is designed to be deployed in very large and complex networks. Although we have thoroughly tested the M40, because of the nature of the product, it can only be fully tested when deployed in very large networks with high amounts of traffic. To date, customers have only deployed the M40 on a limited basis. Consequently, our customers may discover errors or defects in the hardware or the software after it has been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, we could experience: - - loss of or delay in revenues and loss of market share; - - loss of customers; - - failure to achieve market acceptance; - - diversion of development resources; - - increased service and warranty costs; - - legal actions by our customers; and - - increased insurance costs. CUSTOMER PRODUCT LIABILITY CLAIMS BASED ON ERRORS IN OUR SOFTWARE OR MISTAKES IN PERFORMING OUR SERVICES COULD RESULT IN COSTLY LITIGATION AGAINST US We may be subject to claims based on errors in our software or mistakes in performing our services, including claims relating to damages to our customers' internal systems. Our contracts with our customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. We believe our product liability insurance is adequate to cover potential product liability claims. However, a product liability claim, whether successful or not, could seriously impact our capital reserves, harm our reputation, and direct the attention of key personnel away from our business, any of which could harm our business. PROBLEMS ARISING FROM USE OF OUR PRODUCTS IN CONJUNCTION WITH OTHER VENDORS' PRODUCTS COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION Service providers typically use our products in conjunction with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. OUR PRODUCTS ARE NEW AND FACE RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS AND IF WE DO NOT RESPOND IN A TIMELY MANNER, OUR BUSINESS COULD BE HARMED The Internet infrastructure market is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. In developing our products, we have made, and will continue to make, assumptions with respect to which standards will be adopted by our customers and competitors. If the standards adopted are different from those which we have chosen to support, market acceptance of our products may be significantly reduced or delayed and our business will be seriously harmed. In addition, the introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete. In addition, in order to introduce products embodying new technologies and new industry standards, we must be able to gain access to the latest technologies of our suppliers such as IBM. Any failure to gain access to the latest technologies could harm our business and operating results. 11 13 OUR FAILURE TO ESTABLISH AND MAINTAIN KEY CUSTOMER RELATIONSHIPS MAY RESULT IN DELAYS IN INTRODUCING NEW PRODUCTS OR CAUSE CUSTOMER TO FOREGO PURCHASING OUR PRODUCTS Our future success will also depend upon our ability to develop and manage key customer relationships in order to introduce a variety of new products and product enhancements that address the increasingly sophisticated needs of our customers. Our failure to establish and maintain these customer relationships may adversely affect our ability to develop new products and product enhancements. In addition, we may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products and enhancements or our inability to introduce competitive new products may cause customers to forego purchases of our products and purchase those of our competitors, which could seriously harm our business. IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS COULD BE SERIOUSLY HARMED Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have grown our headcount substantially. At December 31, 1997, we had a total of 80 employees and at March 31, 1999, we had a total of 190 employees. In addition, we plan to continue to hire a significant number of employees this year. This growth has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force worldwide. Furthermore, we expect that we will be required to manage multiple relationships with various customers and other third parties. WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing and support personnel. None of our officers or key employees is bound by an employment agreement for any specific term. Nor do we have "key person" life insurance policies covering any of our employees. We also intend to hire a significant number of engineering, sales, marketing and support personnel in the future, and we believe our success depends, in large part, upon our ability to attract and retain these key employees. Competition for these persons is intense, especially in the San Francisco Bay area. In particular, we have experienced difficulty in hiring qualified ASIC, software, system and test and customer support engineers and there can be no assurance that we will be successful in attracting and retaining these individuals. The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could delay the development and introduction of and negatively impact our ability to sell our products. IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS WE COULD INCUR SUBSTANTIAL COSTS IN DEFENDING OURSELVES Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have received claims of this kind in the past and we cannot assure you that we will not receive claims of this kind in the future as we seek to hire qualified personnel or that those claims will not result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. 12 14 OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY BE VERY EXPENSIVE From time to time we may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost either of which could seriously harm our business, financial condition and results of operations. WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS WHICH COULD SERIOUSLY HARM OUR BUSINESS In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Although we have never been involved in any intellectual property litigation, we may be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following: - - stop selling, incorporating or using our products that use the challenged intellectual property; - - obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or - - redesign those products that use such technology. If we are forced to take any of the foregoing actions, our business may be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. For more information concerning our intellectual property rights, see "Business -- Intellectual Property." WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS We market and sell our products in the United States and internationally. We have established an office in England to market and sell our products in Europe and are in the process of establishing a presence in Asia. We intend to expand substantially our international operations and enter new international markets. This expansion will require significant management attention and financial resources to develop successfully direct and indirect international sales and support channels. We may not be able to maintain or increase international market demand for the M40. We currently have limited experience in marketing and distributing our products 13 15 internationally and in developing versions of our products that comply with local standards. In addition, international operations are subject to other inherent risks, including: - - greater difficulty in accounts receivable collection and longer collection periods; - - difficulties and costs of staffing and managing foreign operations; - - the impact of recessions in economies outside the United States; - - unexpected changes in regulatory requirements; - - certification requirements; - - reduced protection for intellectual property rights in some countries; - - potentially adverse tax consequences; and - - political and economic instability. Our international revenues have been less than $2,000,000 to date and are generally denominated in U.S. dollars. Consequently, we do not currently engage in currency hedging activities. However, a portion of our international revenues may be denominated in foreign currencies in the future. WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We have designed the M40 for use in the year 2000 and beyond and believe it is year 2000 compliant. However, our products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of our customers' networks involves different combinations of third party products. We cannot evaluate whether all of their products are year 2000 compliant. We may face claims based on year 2000 problems in other companies' products or based on issues arising from the integration of multiple products within the overall network. Although no claims of this kind have been made, we may in the future be required to defend our products in legal proceedings which could be expensive regardless of the merits of these claims. If our suppliers, vendors, major distributors, partners, customers and service providers fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which party's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether year 2000 failures could harm our business and our financial results. Our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems to become year 2000 compliant. This situation may reduce funds available to purchase our products. In addition, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION We intend to make investments in complementary companies, products or technologies. While we have no current agreements or negotiations underway, we may buy businesses, products or 14 16 technologies in the future. In the event of any future purchases, we could: - - issue stock that would dilute our current stockholders' percentage ownership; - - incur debt; - - assume liabilities; - - incur amortization expenses related to goodwill and other intangible assets; or - - incur large and immediate write-offs. These purchases also involve numerous risks, including: - - problems combining the purchased operations, technologies or products; - - unanticipated costs; - - diversion of management's attention from our core business; - - adverse effects on existing business relationships with suppliers and customers; - - risks associated with entering markets in which we have no or limited prior experience; and - - potential loss of key employees, particularly those of the purchased organizations. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future. MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR PROFITS OR MARKET VALUE Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our profitability or our market value. Pending application of the proceeds, they may be placed in investments that do not produce income or that lose value. See "How We Intend to Use the Proceeds From This Offering." THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND A PUBLIC MARKET FOR OUR SECURITIES MAY NOT DEVELOP OR BE SUSTAINED Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering, and the market price might fall below the initial public offering price. The initial public offering price may bear no relationship to the price at which the common stock will trade upon completion of this offering. The initial public offering price will be determined based on negotiations between us and the representatives of the underwriters, based on factors that may not be indicative of future market performance. See "Underwriting." INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER JUNIPER NETWORKS AFTER THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL We anticipate that the executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately 43.6% of our outstanding common stock following the completion of this offering. These stockholders, if acting together, would be able to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. See "Principal and Selling Stockholders." PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL Provisions of our amended and restated certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. See "Description of Capital Stock." THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL Our current stockholders hold a substantial number of shares, which they will 15 17 be able to sell in the public market in the near future. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. See "Shares Eligible for Future Sale." WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: - - quarterly variations in operating results; - - changes in financial estimates by securities analysts; - - changes in market valuations of Internet related companies; - - announcements by us or our competitors of new products or of significant acquisitions, strategic partnerships or joint ventures; - - any loss of a major customer; - - additions or departures of key personnel; - - any deviations in net revenues or in losses from levels expected by securities analysts; - - future sales of common stock; and - - volume fluctuations, which are particularly common among highly volatile securities of Internet related companies. 16 18 NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions to identify forward-looking statements. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates regarding the growth of Internet use. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in the preceding pages and elsewhere in this prospectus. HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING Our net proceeds from the sale of the 2,000,000 shares of common stock offered by us are estimated to be $52.8 million at an assumed initial public offering price of $29.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us (approximately $1.1 million). Our principal purposes for engaging in this offering are to: - - increase our equity capital; - - create a public market for our common stock; - - facilitate future access by us to public equity markets; and - - provide increased visibility of Juniper Networks in a marketplace where our principal competitors are publicly-held companies. We expect to use the net proceeds from this offering for working capital and general corporate purposes. In addition, we may use a portion of the net proceeds to acquire complementary products, technologies or businesses; however, we currently have no plans, commitments or agreements nor are we involved in any negotiations with respect to any such transactions. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. We will not receive any proceeds from the sale of the shares being sold by the selling stockholders. See "Principal and Selling Stockholders." DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our lease lines prohibit the payment of dividends without prior approval. 17 19 CAPITALIZATION The following table sets forth (1) our actual capitalization as of March 31, 1999, and (2) our capitalization as adjusted to give effect to the sale of 2,000,000 shares of common stock at an assumed initial public offering price of $29.00 per share (less the underwriting discount and estimated offering expenses payable by us). You should read this table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.
MARCH 31, 1999 --------------------------------- ACTUAL AS ADJUSTED ----------------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) Long-term obligations, net of current portion............ $ 2,834 $ 2,834 Stockholders' equity: Convertible preferred stock, $0.00001 par value, 14,039,059 shares authorized actual (10,000,000 as adjusted); 13,796,904 shares issued and outstanding actual (none as adjusted)........................... * -- Common stock, $0.00001 par value, 71,000,000 shares authorized actual (200,000,000 as adjusted); 21,265,387 shares issued and outstanding actual; 49,400,209 shares issued and outstanding as adjusted(1)......................................... * * Additional paid-in capital............................. 102,305 155,145 Deferred stock compensation............................ (5,362) (5,362) Accumulated deficit.................................... (49,808) (49,808) -------- -------- Total stockholders' equity.......................... 47,135 99,975 -------- -------- Total capitalization........................... $ 49,969 $102,809 ======== ========
- --------------- (1) Based on shares outstanding as of March 31, 1999. It excludes (A) 19,187,500 shares of common stock reserved for issuance under our Amended 1996 Stock Plan (including the 3,000,000 shares reserved for issuance on April 19, 1999), of which 4,291,564 shares were subject to outstanding options at a weighted average exercise price of $4.53 per share and 4,813,669 shares available for future grants, (B) 262,910 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.65 per share; and (C) 500,000 shares available for issuance under our 1999 Employee Stock Purchase Plan. See "Management -- Incentive Stock Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the Consolidated Financial Statements. * Less than $1,000 18 20 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. We calculate net tangible book value per share by dividing the net tangible book value (total assets less tangible assets and total liabilities) by the number of outstanding shares of common stock. Our pro forma net tangible book value at March 31, 1999, was $47.1 million, or $1.00 per share, based on 47,032,869 shares of our common stock outstanding after giving effect to the conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering. After giving effect to the sale of the 2,000,000 shares of common stock by us at an assumed initial public offering price of $29.00 per share (less the underwriting discount and estimated offering expenses payable by us), our pro forma net tangible book value at March 31, 1999, would be $100.00 million, or $2.04 per share. This represents an immediate increase in the pro forma net tangible book value of $1.04 per share to existing stockholders and an immediate dilution of $26.96 per share to new investors, or approximately 93.0% of the assumed offering price of 29.00 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ 29.00 Pro forma net tangible book value per share at March 31, 1999................................................... $1.00 Increase per share attributable to new investors.......... 1.04 ----- Pro forma net tangible book value per share after this offering.................................................. 2.04 ------ Dilution per share to new investors......................... $ 26.96 ======
------------------------- The following table shows on a pro forma basis at March 31, 1999, after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 25,767,482 shares of common stock upon the closing of this offering, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ------------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE ---------- ---------- ------------ ---------- ------------- Existing stockholders(1)(2).. 47,032,869 95.9% $ 94,463,911 62.0% $ 1.99 New investors(2)...... 2,000,000 4.1 58,000,000 38.0 29.00 ---------- ----- ------------ ----- Total(1)............ 49,032,869 100.0% $152,463,911 100.0% ========== ===== ============ =====
- --------------- (1) The above information is based on shares outstanding as of March 31, 1999. It excludes (A) 19,187,500 shares of common stock reserved for issuance under our Amended 1996 Stock Plan (including the 3,000,000 additional shares reserved for issuance on April 19, 1999), of which 4,291,564 shares were subject to outstanding options at a weighted average exercise price of $4.53 per share and 4,813,669 shares were available for future grants; (B) 262,910 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.65 per share; and (C) 500,000 shares available for issuance under our 1999 Employee Stock Purchase Plan. See "Management -- Incentive 19 21 Stock Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the Consolidated Financial Statements. (2) Sales by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 44,232,869 shares or 90.2% of the shares to be outstanding after this offering and the number of shares held by new investors will be increased to 4,800,000 shares, or 9.8% of the number of shares to be outstanding after this offering. If the underwriters' option to purchase additional shares is exercised in full, the number of shares held by existing stockholders will be further reduced to 43,610,940 shares, or 88.7% of the number of shares to be outstanding after this offering and the number of shares held by new investors will be increased to 5,520,000 shares, or 11.3% of the number of shares to be outstanding after this offering. See "Principal and Selling Stockholders." 20 22 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The consolidated statement of operations data set forth below for the period from February 2, 1996 (inception) to December 31, 1996, and for the fiscal years ended December 31, 1997 and 1998, and the consolidated balance sheet data as of December 31, 1997 and 1998 have been derived from the audited consolidated financial statements of Juniper Networks, Inc. included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, Independent Auditors. The consolidated balance sheet data at December 31, 1996 are derived from unaudited consolidated financial statements that are not included in this prospectus. The consolidated statement of operations data for the three-month periods ended March 31, 1998 and 1999, and the consolidated balance sheet data as of March 31, 1999, are unaudited. In the opinion of management, all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this prospectus. The historical results are not necessarily indicative of results to be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PERIOD FROM INCEPTION (FEBRUARY 2, THREE MONTHS 1996) TO YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ------------ ------------------- ----------------- 1996 1997 1998 1998 1999 ------------ -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues............................................ $ -- $ -- $ 3,807 $ -- $10,044 Cost of revenues........................................ -- -- 4,416 39 6,347 ------- -------- -------- ------- ------- Gross profit (loss)..................................... -- -- (609) (39) 3,697 Operating expenses: Research and development.............................. 1,850 9,406 23,987 3,497 6,181 Sales and marketing................................... -- 1,149 4,216 519 2,603 General and administrative............................ 89 1,043 2,223 335 776 Amortization of deferred stock compensation........... -- -- 1,235 21 904 ------- -------- -------- ------- ------- Total operating expenses............................ 1,939 11,598 31,661 4,372 10,464 ------- -------- -------- ------- ------- Operating loss.......................................... (1,939) (11,598) (32,270) (4,411) (6,767) Interest income (expense), net.......................... 140 1,235 1,299 506 92 ------- -------- -------- ------- ------- Net loss................................................ $(1,799) $(10,363) $(30,971) $(3,905) $(6,675) ======= ======== ======== ======= ======= Basic and diluted net loss per share(1)................. $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45) ======= ======== ======== ======= ======= Shares used in computing basic and diluted net loss per share(1).............................................. 3,958 8,591 12,957 10,872 14,990 ======= ======== ======== ======= ======= Pro forma basic and diluted net loss per share (unaudited)(1)........................................ $ (0.84) $ (0.17) ======== ======= Shares used in computing pro forma basic and diluted net loss per share (unaudited)(1)......................... 37,070 39,324 ======== =======
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash, cash equivalents and short-term investments....... $ 9,468 $ 46,227 $ 20,098 $49,449 Working capital......................................... 9,315 44,691 14,432 41,756 Total assets............................................ 10,388 50,210 36,671 67,125 Long-term obligations, less current portion............. 408 2,083 5,204 2,834 Stockholders' equity.................................... 9,728 46,048 17,065 47,135
- --------------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the shares used to compute net loss per share. 21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including the risks discussed in "Risk Factors" and elsewhere in this prospectus. OVERVIEW We are a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers, or, collectively, service providers, to meet the demands resulting from the rapid growth of the Internet. We deliver next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks and offer our customers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Our flagship product is the M40 Internet backbone router. The M40 combines the features of our JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet optimized architecture into a purpose-built solution for service providers. In September 1998, after extensive field testing of our JUNOS Internet Software, we began shipping our first product, the M40 Internet backbone router, with volume shipments beginning in October 1998. We currently sell through our direct sales force to major service providers in North America. In addition, we distribute through value added resellers system integrators and resellers to smaller customers in North America and to international customers. Distribution and support is also provided by our strategic original equipment manufacturer relationship with Ericsson. From our inception in February 1996 through September 1998, our operating activities were primarily devoted to increasing our research and development capabilities, designing our ASICs, developing our software, developing and testing the M40 and developing other products. We also staffed our administrative, marketing and sales organizations and implemented strategic relationships. Since our inception, we have incurred significant losses, and as of March 31, 1999, we had an accumulated deficit of $49.8 million. We have not achieved profitability on a quarterly or annual basis, and anticipate that we will incur net losses for at least the next several quarters. We expect to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we will need to generate significantly higher revenues to achieve and maintain profitability. Our revenues currently are derived from sales of one product, the M40. While we are developing and plan to introduce future products, there can be no assurance that we will be successful in these efforts. To date, we have generated a substantial portion of our revenues from a limited number of customers, with three customers accounting for 71% of our net revenues in the three months ended March 31, 1999. While we are seeking to diversify our customer base, there can be no assurance that these efforts will be successful. To date, most of our direct sales have been in North America, and our international sales have been through our strategic original equipment manufacturer relationship with Ericsson. However, we have recently launched sales and marketing efforts internationally, initially focused on Europe and Asia. We expect that a significant portion of our future revenues will continue to come from sales of the M40 to a small number of customers. We have focused our initial sales and marketing efforts primarily on the world's leading service providers. We expect to receive a large portion of our revenues from 22 24 these initial customers until we can sufficiently penetrate additional accounts. Because the market for Internet backbone routers is new and evolving, the volume and timing of orders are difficult to predict. A customer's decision to purchase the M40 typically involves a significant commitment of their resources and a lengthy evaluation and product qualification process. This initial evaluation and product qualification process typically takes several months and includes: - - technical evaluation; - - integration; - - testing; - - network planning; and - - implementation into the network. Even after making the decision to purchase the M40, our customers tend to deploy the M40 slowly and deliberately. Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer's network environment and the degree of hardware and software configuration necessary to deploy the M40. Customers with large networks usually expand their networks in large increments on a periodic basis. Accordingly, we expect to receive purchase orders for significant dollar amounts on an irregular basis. Because of our limited operating history, we cannot predict these sales and development cycles. Long sales and implementation cycles for the M40, as well as the expectation that customers will tend to sporadically place large orders with short lead times, may cause revenues and operating results to vary significantly and unexpectedly from quarter to quarter. We recognize product revenue at the time of shipment, unless we have future obligations for installation or have to obtain customer acceptance, in which case revenue is deferred until these obligations are met. Revenue from service obligations is deferred and recognized on a straight-line basis over the contractual period. Amounts billed in excess of revenue recognized are included as deferred revenue in the accompanying consolidated balance sheets. At March 31, 1999, a total of $7.9 million of revenue was deferred. It is currently expected that this deferred revenue will be recognized in 1999. The amount of estimated product returns is provided for in the period of the sale. We provide a reserve for warranty returns based on our warranty history. Historically, selling prices in the Internet infrastructure equipment market have been relatively stable. However, as competitors launch new products, this pricing trend may change. Our gross margins will primarily be affected by the following factors: - - demand for our products and services; - - new product introductions both by us and by our competitors; - - changes in our pricing policies and those of our competitors; - - the mix of interfaces sold; - - the mix of products and services sold; - - the mix of sales channels through which our products and services are sold; - - the mix of domestic and international sales; and - - the volume manufacturing pricing we are able to attain from our partner for outsourced manufacturing. We have outsourced our manufacturing, our repair operations and the majority of our supply chain management operations. Accordingly, a significant portion of our cost of revenues consists of payments to Solectron, our contract manufacturer. Solectron manufactures our products using quality assurance programs and standards which we established. Manufacturing engineering and documentation control are conducted at our facility in Mountain View, California. Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, non-recurring engineering charges and prototype costs related to the design, development, testing 23 25 and enhancement of our ASICs and software and system development. We expense our research and development costs as they are incurred. Several components of our research and development effort require significant expenditures, the timing of which can cause significant quarterly variability in our expenses. The number of prototypes required to build and test a complex product such as the M40 is large and this building and testing process occurs over a short period of time. Our ASIC development requires an upfront payment of non-recurring engineering charges, regardless of whether the integrated circuit works, and a per unit cost payable as ASICs are purchased. With several large ASICs in our architecture, we will incur large non-recurring engineering and prototype expenses with every enhancement of the M40 and any new product development. We are devoting substantial resources to the continued development of new products. We believe that research and development is critical to our strategic product development objectives and that to leverage our leading technology and meet the changing requirements of our customers, we will need to fund investments in several development projects in parallel. As a result, we expect our research and development expenses to increase in absolute dollars in the future. Selling and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer engineering support functions, as well as costs associated with promotional and other marketing expenses. We intend to expand our direct and indirect sales operations substantially, both domestically and internationally, in order to increase market awareness of our products. We expect that sales and marketing expenses will increase substantially in absolute dollars over the next year as we hire additional sales and marketing personnel, initiate additional marketing programs to support the M40 and establish sales offices in additional domestic and international locations. In addition, we believe our future success is dependent upon establishing successful relationships with a variety of distribution partners. To date, we have entered into agreements with only a small number of distribution partners. To be successful, we must reach agreement with additional distribution partners in several countries. Similarly, the complexity of our Internet backbone routers and the difficulty of installing them require highly trained customer service and support personnel. We expect to significantly expand our customer service and support organization to meet these requirements. We believe that continued investment in sales and marketing is critical to our success and expect these expenses to increase in absolute dollars in the future. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, facilities, human resources personnel, recruiting expenses, professional fees and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and our operation as a public company. In connection with the grant of certain stock options to employees during 1998 and the three months ended March 31, 1999, we recorded deferred compensation of $6.4 million and $1.1 million, respectively, representing the difference between the deemed value of the common stock for accounting purposes and the exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholders' equity and is amortized over the vesting period of the applicable options. We expensed $1.2 million of deferred compensation during the year ended December 31, 1998, and $904,000 of deferred compensation during the three months ended March 31, 1999. This compensation expense relates to stock options awarded to individuals in all operating expense categories. See Note 6 of our consolidated financial statements. As of December 31, 1998, we had $34.0 million of federal net operating loss carryforwards and $33.0 million of state net operating loss carryforwards for tax reporting purposes available to offset future taxable 24 26 income. Such net operating loss carryforwards expire at various dates beginning in 2004 to the extent that they are not utilized. We have not recognized any benefit from the future use of loss carryforwards for these periods, or for any other periods, since inception. Management's evaluation of all the available evidence in assessing realizability of the tax benefits of such loss carryforwards indicates that the underlying assumptions of future profitable operations contain risks that do not provide sufficient assurance to recognize the tax benefits currently. RESULTS OF OPERATIONS NET REVENUES The quarter ended December 31, 1998, was our first quarter of revenue. Net revenues were $3.8 million in the year ended December 31, 1998, and $10.0 million for the three months ended March 31, 1999. Two customers accounted for 100% of the net revenues in the three months ended December 31, 1998, and three customers accounted for 71% of the net revenues in the three months ended March 31, 1999. COST OF REVENUES Cost of revenues for the year ended December 31, 1998, were $4.4 million and for the three months ended March 31, 1999, were $6.3 million. Cost of revenues was high during these periods due to the large cost of initial start-up of production. Cost of revenues includes the cost of our customer service and support organization. Cost of service and support for the year ended December 31, 1998, was $1.5 million and for the three months ended March 31, 1999, was $1.1 million. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $24.0 million in 1998, an increase of $14.6 million or 155% over 1997, and were $6.2 million in the three months ended March 31, 1999, an increase of $2.7 million or 77% over the comparable quarter of 1998. The increase was due primarily to increased costs associated with a significant increase in personnel, which accounted for approximately 30% of the increase in 1998 over 1997 and 50% of the increase in the three months ended March 31, 1999 over the comparable quarter in 1998. An increase in non-recurring engineering costs accounted for approximately 10% of the increase in 1998 over 1997 and a negligible portion of the increase in the three months ended March 31, 1999 over the comparable quarter in 1998. The increase in research and development expenses in 1998 over 1997 was due also to an increase in prototype expenses, which accounted for approximately 40% of the increase in research and development expenses in 1998 over 1997; however, the increase in research and development expenses in the three months ended March 31, 1999 over the comparable quarter in 1998 was partially offset by a decrease of approximately 40% in prototype expenses in the three months ended March 31, 1999 over the comparable quarter in 1998. The primary purposes of the increase in research and development expenses were to support the completion, bring-up, alpha test (the early tests of the product in labs) and beta test (the tests conducted at customer premises just prior to shipping the product when product is of sufficient quality to run in production networks) phases of the product development and to complete the M40 product. Development is essential to our future success and we expect that research and development expenses will increase in absolute dollars in future periods. SALES AND MARKETING EXPENSES Sales and marketing expenses were $4.2 million in 1998, an increase of $3.1 million or 267% over 1997, and were $2.6 million in the three months ended March 31, 1999, an increase of $2.1 million or 401% over the comparable quarter of 1998. The increase was due primarily to a significant increase in the number of sales and marketing personnel, which increased costs associated with such increase in personnel accounted for approximately 70% of the increase in 1998 over 1997 and 50% of the increase in the three months ended 25 27 March 31, 1999 over the comparable quarter in 1998. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses totaled $2.2 million in 1998, an increase of $1.2 million or 113% over 1997, and $776,000 in the three months ended March 31, 1999, an increase of $441,000 or 132% over the comparable quarter of 1998. The increase was due primarily to the increased costs associated with an increase in the number of general and administrative personnel and with increased recruiting, accounting and consulting activities, each of which accounted for approximately 35% of the increase in general and administrative expenses in 1998 over 1997 and 25% and 60%, respectively, of the increase in the three months ended March 31, 1999 over the comparable quarter in 1998. The primary purpose of the increase was to support our growing business activities. INTEREST AND OTHER EXPENSE Interest and other expense includes expenses related to our financing obligations. Interest and other expense totaled $657,000 in 1998 and $231,000 in the three months ended March 31, 1999. This compares to expenses of $325,000 in 1997 and $104,000 in the three months ended March 31, 1998. This increase was generated by larger interest charges on capital lease obligations. INTEREST INCOME Interest income includes income on our cash investments. Interest income was $2.0 million in 1998 and $323,000 in the three months ended March 31, 1999. This compares with interest income of $1.6 million in 1997 and with interest income of $610,000 in the three months ended March 31, 1998. Most of the interest increase in 1998 was generated from interest income on larger cash balances from the proceeds of issuances of our preferred stock. QUARTERLY RESULTS OF OPERATIONS The following table presents our operating results for the quarters ended March 31, 1999 and December 31, 1998, which are the only quarters for which we have recognized revenue. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements appearing elsewhere in this prospectus. In the opinion of management, all necessary adjustments consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. These operating results are not 26 28 necessarily indicative of the results of any future period.
QUARTER ENDED ------------------------- DECEMBER 31, MARCH 31, 1998 1999 ------------ --------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................................................ $ 3,807 $10,044 Cost of revenues............................................ 3,815 6,347 ------- ------- Gross profit (loss)......................................... (8) 3,697 Operating expenses: Research and development.................................. 6,145 6,181 Sales and marketing....................................... 1,718 2,603 General and administrative................................ 882 776 Amortization of deferred stock compensation............... 648 904 ------- ------- Total operating expenses............................... 9,393 10,464 ------- ------- Operating loss.............................................. (9,401) (6,767) Interest income (expense), net.............................. 117 92 ------- ------- Net loss.................................................... $(9,284) $(6,675) ======= =======
Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: - - demand for the M40; - - the timing of sales of the M40; - - the timing of recognizing revenue and deferred revenue; - - new product introductions by our competitors; - - changes in our pricing policies or the pricing policies of our competitors; - - our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; - - our ability to obtain sufficient supplies of sole or limited source components, including ASICs and power supplies for the M40; - - increases in the prices of the components we purchase; - - our ability to attain and maintain production volumes and quality levels for the M40; - - decisions by end-users to reallocate their information resources to other purposes, including year 2000 preparedness; - - Internet growth and demand for Internet infrastructure; - - prototype expenses; - - costs related to acquisitions of technology or businesses; and - - general economic conditions as well as those specific to the Internet and related industries. In addition, we are dependent on decisions by customers to build their Internet infrastructure, which decisions are in turn dependent upon the success and expected demand for the services offered by those customers. Furthermore, the long sales and implementation cycles for the M40, as well as the degree to which customers will sporadically place large orders with short lead 27 29 times, may cause revenues and operating results to vary significantly from quarter to quarter. We also expect to experience seasonality in our operating results. We expect the growth rate in our sales to be adversely affected in the third quarter due to a slowdown in sales in Europe and other foreign areas during the summer months. In addition, we expect the growth rate in our sales in the first quarter to be adversely affected due to our customers' budgeting cycles. We plan to increase significantly our operating expenses to fund greater levels of research and development, expand our sales and marketing operations, broaden our customer support capabilities and develop new distribution channels. We also plan to expand our general and administrative functions to address the increased reporting and other administrative demands, which will result from this offering and the increasing size of our business. Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses are and will continue to be fixed in the short term. As a result, a delay in generating or recognizing revenue for the reasons set forth above or for any other reason could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private sales of approximately $90.8 million of convertible preferred stock as well as through capital leases for computers, office equipment, software and furniture. We used $24.8 million in cash for operations in 1998, an increase of $16.2 million from the $8.6 million used in 1997. The increase was primarily due to an increase in our net loss from $10.4 million in 1997 to $31.0 million in 1998, partially offset by increased non-cash charges in 1998. We used $1.7 million in cash for operations in the three months ended March 31, 1999, as a result of our net loss of $6.7 million, partially offset by non-cash charges. We generated $9.3 million in cash from investing activities in 1998 and used $13.0 million in cash from investing activities in 1997. We generated $48.5 million in cash in 1997, $5.2 million in cash in 1998 and $32.4 million in cash in the three months ended March 31, 1999, from financing activities, primarily private sales of convertible preferred stock. We have used leases to partially finance capital purchases. In addition, we had $7.4 million in capitalized lease obligations outstanding at December 31, 1998, and $4.0 million at March 31, 1999. Cash, cash equivalents and short-term investments totaled $20.1 million at December 31, 1998, down from $46.2 million at December 31, 1997. Most of the decrease came from cash used in operations and the purchase of equipment. At March 31, 1999, cash, cash equivalents and short-term investments totaled $49.5 million. The increase from December 31, 1998 was due to the receipt of $33.9 million from the sale of preferred stock in March 1999. Our capital requirements depend on numerous factors, including: - - market acceptance of our products; - - the resources we devote to developing, marketing, selling and supporting our products; - - the timing and extent of establishing international operations; and - - other factors. We expect to devote substantial capital resources to continue our research and development efforts, to hire and expand our sales, support, marketing and product development organizations, to expand 28 30 marketing programs, to establish additional facilities worldwide and for other general corporate activities. Although we believe that our current cash balances will be sufficient to fund our operations for at least the next 12 months, there can be no assurance that we will not require additional financing within this time frame or that such additional funding, if needed, will be available on terms acceptable to us or at all. In the quarter ended March 31, 1999, accounts receivable increased to $8.6 million, accrued warranty liability increased to $1.5 million and deferred revenue increased to $7.9 million, as compared to December 31, 1998, due to the increase in revenues in the this quarter as compared to the quarter ended December 31, 1998. Our customers are billed at the time that the product is shipped, with payment terms generally of 30 days. We have deferred revenue recognition on shipments to new customers until the point at which the installation obligations are satisfied. The typical installation process, which involves customer and Juniper Networks personnel, historically has taken approximately 90 days. For sales to existing customers, we recognize revenue upon shipment as these customers have already concluded the product testing period. Customers historically either have paid us prior to the completion of the installation process, or in no instance later than 30 days subsequent to the completion of the installation process. The accounts receivable balance as of December 31, 1998 was collected prior to March 31, 1999. YEAR 2000 COMPLIANCE IMPACT OF THE YEAR 2000 COMPUTER PROBLEM. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. STATE OF READINESS OF OUR PRODUCTS. We have designed the M40 for use in the year 2000 and beyond and believe it is year 2000 compliant. However, our products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of our customers' networks involves different combinations of third party products. We cannot evaluate whether all of their products are year 2000 compliant. We may face claims based on year 2000 problems in other companies' products or based on issues arising from the integration of multiple products within the overall network. Although no such claims have been made, we may in the future be required to defend our products in legal proceedings which could be expensive regardless of the merits of such claims. STATE OF READINESS OF OUR INTERNAL SYSTEMS. Our business may be affected by year 2000 issues related to non-compliant internal systems developed by us or by third-party vendors. We have received assurances that all material systems from third-party vendors in use by us are year 2000 compliant. We are not currently aware of any year 2000 problem relating to any of our material internal systems. We are in the process of testing all such systems for year 2000 compliance and plan to complete such testing before September 30, 1999. We do not believe that we have any significant systems that contain embedded chips that are not year 2000 compliant. Our internal operations and business are also dependent upon the computer-controlled systems of third parties such as suppliers, customers and service providers. We believe that absent a systemic failure outside our control, such as a prolonged loss of electrical or telephone service, year 2000 problems at third parties such as suppliers, customers and service providers will not have a material impact on our operations. 29 31 If our suppliers, vendors, major distributors, partners, customers and service providers fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which party's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether year 2000 failures could harm our business and our financial results. Our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems to become year 2000 compliant. This situation may reduce funds available to purchase our products. In addition, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue. COST. Based on our assessment to date, we anticipate that costs associated with testing and remediating our internal systems will be approximately $200,000. RISKS. Failures of our internal systems to be year 2000 compliant could temporarily prevent us from processing orders, issuing invoices and developing products and could require us to devote significant resources to correcting such problems. Due to the general uncertainty inherent in the year 2000 computer problem, resulting from the uncertainty of the year 2000 readiness of third-party suppliers and vendors, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our business, results of operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. We expect that the adoption of SOP No. 98-1 will not have a material impact on our financial position or results of operations. We adopted SOP No. 98-1 effective January 1, 1999. In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. We expect that the adoption of SOP No. 98-5 will not have a material impact on our financial position or results of operations. We adopted SOP No. 98-5 effective January 1, 1999. In June 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because we do not currently hold any derivative instruments and do not engage in hedging activities, we expect that the adoption of FAS No. 133 will not have a material impact on our financial position or results of operations. We adopted FAS No. 133 effective January 1, 1999. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, we 30 32 maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, we invest in relatively short-term securities. As of December 31, 1998, all of our investments mature in less than one year. See Note 2 to the Consolidated Financial Statements. The following table presents the amounts of our cash equivalents and short-term investments that are subject to market risk by range of expected maturity and weighted average interest rates as of December 31, 1998. This table does not include money market funds because those funds are not subject to market risk.
MATURING BETWEEN THREE MATURING IN THREE MONTHS MONTHS AND ONE YEAR TOTAL ------------------------ ---------------------- ------- Included in cash and cash equivalents............... $16,520 $ -- $16,520 Weighted average interest rate...................... 5.33% --% 5.33%
EXCHANGE RATE SENSITIVITY We operate primarily in the United States, and all sales to date have been made in US dollars. Accordingly, we have had no material exposure to foreign currency rate fluctuations. 31 33 BUSINESS OVERVIEW We are a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers, or, collectively, service providers, to meet the demands resulting from the rapid growth of the Internet. We deliver next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks and offer our customers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Our flagship product is the M40 Internet backbone router. The M40 combines the features of our JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet optimized architecture into a purpose-built solution for service providers. Unlike conventional routers, which were originally developed for enterprise applications and are increasingly inadequate for service provider use in public networks, our Internet backbone routers are specifically designed to accommodate the size and scope of the Internet. We believe that the Internet will continue to grow at significant rates and will evolve into the next generation public network, superseding and expanding upon many of the functions provided by the traditional telephone network. This trend will drive the need for new Internet infrastructure equipment that can deliver the high levels of reliability and scalability needed in a public network. We believe we have developed the first commercially available Internet backbone routing platform specifically designed and built to meet these requirements. Ryan Hankin Kent, an industry research firm, estimates that the market for Internet backbone routers was $169 million in 1998 and is expected to increase to approximately $5.5 billion in 2003. We sell our Internet backbone routers primarily through a direct sales force and one original equipment manufacturer. Our M40 Internet backbone router is currently used by several of the world's leading service providers, such as UUNet, Cable & Wireless, IBM Global Services, Frontier GlobalCenter and Verio. INDUSTRY BACKGROUND The Internet has evolved from an academic research project into a network of hundreds of separately administered, public and private networks interconnected using Internet Protocol, or IP. IP traffic is growing exponentially, driven by increasing numbers of new users, connected devices and Internet transactions. The result of the widespread use of IP is a ubiquitous network that today carries a large and growing amount of data traffic enabling millions of users to share information and conduct electronic commerce. International Data Corporation, an industry research firm, forecasts continued dramatic growth worldwide in the Internet and Internet traffic: - - World Wide Web users will grow from approximately 69 million in 1997 to approximately 300 million in 2002; - - the number of computers and other devices accessing the World Wide Web will grow from approximately 78 million in 1997 to approximately 515 million by 2002; and - - commerce revenues on the Internet will grow from approximately $32 billion at the end of 1998 to approximately $426 billion by the end of 2002. The importance of IP continues to increase as the number of users, connected devices and transactions over the Internet grows. This growth highlights the potential for the Internet to become the replacement for the traditional telephone network and the pervasive public network. The rapid adoption of the Internet and the tremendous growth of IP traffic have prompted service providers to construct large scale data networks. These networks are being optimized to transport data traffic as compared to traditional telephone networks, which were optimized to transport voice traffic. The architecture of these next generation networks is being driven by two key technologies: packet/cell switching and optical networking. 32 34 ADVANTAGES OF PACKET/CELL SWITCHING. Packet/cell switching technology, which divides data traffic into distinct units called packets or cells and routes each packet or cell independently, provides superior use of available network capacity compared to traditional circuit switching technology. In a circuit switched network, each data stream, such as a voice telephone call between two points, is provided with a dedicated channel, or circuit, for the duration of the telephone call. This approach leads to inefficient use of network resources because a channel is fully dedicated to each transaction, whether or not data is actually flowing at any given moment. As a result, a circuit switched architecture is highly inefficient for Internet applications which tend to create large bursts of data traffic followed by long periods of silence. Packet/cell switching architectures enable greater utilization out of a fixed capacity circuit by combining traffic that has different capacity demands of the circuit at different times. Packet/cell switches more efficiently fill the available network bandwidth with packets of data from many users, thereby reducing the wasted bandwidth due to silence from any one particular user. The use of packet/cell switching is driving the architecture of the Internet to be fundamentally different from traditional circuit switched voice based networks. In packet/cell switched networks, IP has emerged as the de facto standard for providing services to end users. Primary packet/cell switching products include frame relay switches, ATM switches and routers. RAPID ADVANCES IN OPTICAL NETWORKING. Optical networking technology uses pulses of light, rather than pulses of electricity, to transmit data in a network, and uses fiber optic connections instead of wires. Optical networking can be used to transmit much more information over a given connection than electrical signals can convey. Optical networking advances, such as dense wavelength division multiplexing, or DWDM, which allows transmission of several frequencies of light over one strand of optical fiber, have enabled still higher data transmission rates and improved efficiency of bandwidth utilization. Currently available DWDM technology enables the transmission of up to 128 frequencies which allows a service provider to multiply the transmission capacity of a fiber optic network by a factor of up to 128. PACKET/CELL TECHNOLOGIES HAVE NOT KEPT UP WITH OPTICAL TECHNOLOGIES. Many service providers are installing DWDM equipment and are increasingly focusing on combining IP and optical networking technologies. However, traditional packet switching equipment is not capable of forwarding packets at rates sufficient to keep pace with optical transmission speeds. As affordable fiber optic transmission capacity becomes widely available, the performance and complexity of current packet/cell switching architectures is increasingly constraining the growth of the Internet. The intersection of traditional packet/cell switching and fiber optic technology is demonstrated by the following diagram: [DIAGRAM] THE NEW REQUIREMENTS OF THE INTERNET The reliability and performance of current Internet infrastructure equipment have become critical issues for service providers as they continue to support dramatic growth in IP traffic and increasingly seek to offer new revenue generating, mission-critical services, such as Virtual Private Networks, or VPNs, and voice-over IP. New requirements for next generation networks are driving a set of new requirements for Internet infrastructure equipment, including: - - high reliability; - - high performance; 33 35 - - high performance under stressful conditions; - - scalability; - - interoperability; - - reduced complexity; and - - cost effectiveness. HIGH RELIABILITY. As businesses and consumers increasingly rely on the Internet for mission-critical applications, high network reliability becomes essential. Service providers are increasingly expected to provide a similar degree of reliability on the Internet that users have become accustomed to on the traditional telephone network. The "five nines" (99.999%) reliability standard of the traditional telephone network is becoming the target to which suppliers of next-generation Internet platforms are being compared. As service providers begin to bundle voice and data on their networks, this high degree of reliability is becoming even more critical. HIGH PERFORMANCE. To handle the rapid growth in IP traffic, today's networks increasingly require routers that can operate at interface speeds as high as 2.5 billion bits of information per second, or Gbps, and in the near future, 10 Gbps. The processing of data packets at these high speeds requires sophisticated forwarding technology to inspect each packet and assign it to a destination based on priority, data type and other considerations. Since a large number of IP packets, many of which perform critical administrative functions, are small in size, high performance Internet routers need to achieve their specified transmission speeds even for small packet sizes. Since smaller packets increase packet processing demands, routing large numbers of smaller packets tends to be more resource intensive than routing of larger packets. Routers based on general-purpose microprocessors traditionally are unable to forward small packets at maximum rates, and, as a consequence, fail to operate at wire speed, which results in data loss, packet retransmission and network instability. A wire speed router, which achieves its specified transmission rate for any type of traffic passing through it, can accomplish this task. Unlike the enterprise environment, where network capacity is relatively inexpensive and service quality requirements are not as demanding, the additional capacity and related costs of network bandwidth and low service levels resulting from retransmission of dropped packets are increasingly unacceptable to service providers. Thus, provisioning of mission-critical services increasingly requires the high performance enabled by wire speed processing. HIGH PERFORMANCE UNDER STRESSFUL CONDITIONS. In a large and complex network, individual components inevitably fail. However, the failure of an individual device or link must not compromise the network as a whole. In a typical network, when a failure occurs, the network loses some degree of capacity and, in turn, a greater load falls on the remaining network routers, which must provide alternate routes. Routers must quickly adjust to the new state of the network to maintain packet forwarding rates and avoid dropping significant numbers of packets when active routes are lost or when large numbers of routes change. Routing protocols are used to accomplish this convergence, a process that places even greater stress on the router. Given the complexity of Internet infrastructure, particularly compared to enterprise networks, the convergence process is far more complex and places a far greater load on the routing software, thereby requiring a much more sophisticated device. SCALABILITY. Due to the rapid growth in Internet users and IP traffic, service providers must continuously expand their networks, both in terms of increased numbers of access points of presence, or PoPs, and also greater capacity per PoP. To facilitate this expansion process, Internet infrastructure equipment must be highly scalable. Next generation routers therefore need to be upgradeable and configurable to function within constantly changing networks while incurring minimal downtime. INTEROPERABILITY. Service providers do not have the time or inclination to change their existing networks to favor introduction of new products; rather, new products must be compatible with the existing environment. Given the open and inter-connected nature of the Internet, the complexity of running an 34 36 Internet backbone network requires a service provider to control and police relations with other service providers. For example, service providers must carefully control what traffic is accepted under what conditions from other providers. Major service providers connect their respective networks via peering arrangements, in which service providers agree to exchange traffic with one another. These arrangements are prone to abuse, such as the illicit use by one service provider of another service provider's backbone to carry excess traffic. Service provider relationships are controlled by a set of rules called policies, implemented through a data protocol called Border Gateway Protocol 4, or BGP4. The software in each router must offer 100% compatibility with all aspects of BGP4, as well as 100% compatibility with the interior protocols and standards used within each service provider's backbone network. The compatibility level must be maintained despite changes to software equipment configuration and network architecture and upgrades to the various protocol standards. Thus, routing software must be flexible and quickly upgradeable to support any necessary revisions. This level of compatibility, in turn, cannot impact the performance, scalability or reliability of the equipment. Attaining this sophisticated level of interoperability is highly challenging and requires significant testing to ensure compatibility. REDUCED COMPLEXITY. Today's Internet architectures are highly complex. Since traditional routers have not fully met service providers' needs, many service providers have tried to improve Internet backbone performance by adding additional network devices such as ATM switches in the core of the network. As a result, service providers have built networks with ATM switches surrounded by an overlay network of lower capacity routers. These different layers of equipment lead to higher capital costs and the need to manage distinct network elements. ATM switches are also poorly suited to carrying IP traffic, which results in inefficient use of network bandwidth. Moreover, this network design can cause unpredictable router behavior during periods of stress because the routers are not aware of the ATM backbone infrastructure and thus cannot quickly converge if there is a partial network outage. 35 37 This type of layered backbone network with a complex patchwork of products based on different technologies is represented below: [DIAGRAM] COST EFFECTIVENESS. Exponential growth in IP traffic and intense price competition in the telecommunications market is increasingly requiring service providers to seek solutions that significantly reduce the capital expenditures required to build and operate their networks. In addition to the basic cost of equipment such as routers, service providers incur substantial ancillary costs in terms of space required to deploy the equipment, power consumption and on-going operations and maintenance. Service providers therefore want to deploy dense and varied equipment configurations in limited amounts of rack and floor space. Currently, service providers are moving from OC-3 (155 million bits per second, or Mbps) and OC-12 (622 Mbps) speed networks at the core to higher capacity OC-12 and OC-48 (2.5 gigabits per second, or Gbps) speed networks. In turn, the connections from each PoP to the core are evolving from 100 Mbps and OC-3 speeds to gigabit and OC-12 transmission rates. Therefore, in order to continue to scale their networks toward higher data speeds in a cost effective manner, service providers need the ability to mix and match easily many different speed connections at appropriate densities, without significantly increasing the consumption of space or power. There is a clear need for next generation routers that can support high speeds and offer new IP-based services. Network operators are eagerly seeking new solutions that increase the level of scalability and reliability within their networks and reduce the cost and complexity of their architectures. THE JUNIPER NETWORKS SOLUTION We develop, market and sell what we believe is the first commercially available purpose-built Internet backbone router optimized for the specific high performance needs of service providers. Our flagship product, the M40 Internet backbone router, combines the features of our JUNOS Internet Software, high-performance ASIC-based 36 38 packet forwarding technology and Internet-optimized architecture. JUNOS INTERNET SOFTWARE. Our Internet software, called JUNOS, is one of our key competitive differentiators. JUNOS is designed to meet the IP network routing, operations and control requirements of the world's largest service providers and is an integral component of the M40 system architecture. The ability of JUNOS to manage the complex network sharing relationships among service providers allows the M40 to be placed at critical points in the core of a service provider's network. The JUNOS Internet Software allows the M40 to have widespread network placement due to its interoperability with Cisco's Internetwork Operating System, or IOS, currently the most broadly deployed routing operating system. The ability to coexist has enabled the M40 to achieve successful deployment where other products in the past have failed. Unconstrained by legacy routing software, we developed JUNOS using a modular design, in which distinct functions are implemented as separate modules with well defined interfaces and interactions, simplifying troubleshooting and maintenance. JUNOS operates in protected memory mode. These features keep functionality distinct, and minimize the impact of any failure that may occur to the specific software application in which the failure occurs. Also, we believe JUNOS' software modularity will enable the continuous upgrade of new enhanced capabilities, while protecting reliability and compatibility with existing networks. The design and development of the JUNOS Internet Software has been possible due to the significant Internet engineering expertise of our development team. Our expert engineers have authored or co-authored 22 Requests for Comments, which are documents by industry experts that define major standards for Internet protocols. HIGH PERFORMANCE ASIC-BASED PACKET FORWARDING TECHNOLOGY. The M40 Internet backbone router contains five major integrated circuits that we designed and built using the most advanced ASIC technology. These ASICs contain over five million gates in total, with three of the designs each having a larger number of transistors than the Intel Pentium II microprocessor. The result is a system that is substantially faster than today's general purpose microprocessor based routers in its ability to process and forward IP packets, allowing the M40 to deliver high performance at wire speed. The ability to enhance and implement large scale ASICs will be a long-term differentiator for us, particularly as the sophistication required to forward traffic across higher speed networks increases. We expect to leverage our existing ASIC technology in future products and continue to capitalize on our advanced ASIC design capabilities. INTERNET OPTIMIZED ARCHITECTURE. As a purpose-built Internet backbone router, the M40 employs an architecture designed exclusively for the Internet. The M40 system architecture provides a clean separation between the routing and packet-forwarding functions. Separating these two functions enables us to develop independently a full-featured routing protocol and traffic engineering functionality through our JUNOS Internet Software and wire speed packet forwarding performance through high performance ASICs. Furthermore, with the routing and forwarding functions segregated, the M40 does not sacrifice performance, even when there is a failure in the network. When a failure occurs, JUNOS detects the failure and is able to quickly converge to the new state of the network while the ASICs continue to forward packets at wire speed until they receive updated routes from JUNOS. The key benefits of our solution are: - - carrier class reliability; - - wire speed performance; - - scalability; - - interoperability; - - flexibility; - - reduced complexity; and - - cost effectiveness. CARRIER CLASS RELIABILITY. The M40's system architecture provides reliable operation for service providers in large 37 39 complex networks even under abnormal conditions. This architecture, combined with JUNOS' modular software design, limits the impact of a failure to the specific software application. In addition, the hardware used in the M40 has been designed with a very high level of integration to maximize the mean time between failure. Moreover, data and instructions have appropriate error correction and parity checks in memory to guarantee their integrity. WIRE SPEED PERFORMANCE. We believe the M40 is the first Internet backbone router that can forward minimum-sized IP packets over OC-48 links at wire speed. This maximizes network stability and the capacity utilization of expensive wide area circuits. In contrast to available solutions, the M40 is able to maintain packet forwarding rates and to avoid dropping significant numbers of packets when active routes are lost or when large numbers of routes change. SCALABILITY. Our JUNOS Internet Software is designed to accommodate service providers' scale requirements. In addition, the ASIC interface links have been oversized, enabling the M40 to easily scale with growing levels of data traffic. We believe our software and ASIC designs represent a competitive advantage, because it is very difficult for existing vendors to graft these capabilities to their prior generation designs. INTEROPERABILITY. The M40 has demonstrated consistent interoperability with existing network infrastructures. Our internal test environments confirm interoperability with Cisco routers, a variety of leading ATM and Gigabit Ethernet switches and SONET add drop multiplexers. Deployment of the M40 at several major carriers has demonstrated that JUNOS is interoperable with installed Cisco routers for both routing and administration. In addition, JUNOS enables service providers to manage their complex peering relationships with other service providers despite frequent software, equipment configuration and network architecture changes. FLEXIBILITY. Our ASICs are programmable and provide the flexibility to add support for new protocols or changes in existing protocols. Since JUNOS is modular in architecture and already supports existing and emerging protocols, it is also a platform for efficiently introducing new interfaces and new services in the network. REDUCED COMPLEXITY. The M40 is purpose-built for service providers and allows a simple and more structured approach to building Internet backbones compared to the complex topologies in place today. With the M40, service providers can build more efficient networks with less dependence on devices like ATM switches, which reduce the operational burdens of running multiple distinct network layers. Additionally, the M40 offers a thorough implementation of traffic engineering based on MPLS, including the ability to dynamically adapt traffic flows according to rules adopted by the network operator. Traffic engineering refers to a set of capabilities for understanding underlying traffic trends in the network and maximizing the utilization of the network on multiple dimensions. [DIAGRAM] 38 40 COST EFFECTIVENESS. We have integrated these customer benefits into a system that provides critical routing and forwarding functions at lower overall cost. The M40's wire speed performance allows service providers to reduce network operating cost by making more efficient use of their networks. In addition, we designed the M40 to support a broad variety and density of interfaces in a unit that occupies half a typical telecommunications rack. As a result, service providers can cost effectively deploy the M40, which can be easily upgraded, to connect to a variety of speed and circuit types at the network core. THE JUNIPER NETWORKS STRATEGY Our objective is to become the primary supplier of high performance Internet backbone infrastructure. The key elements of our strategy include: - - leverage early lead as supplier of purpose-built Internet infrastructure; - - work very closely with key customers; - - increase penetration at major service providers; - - leverage early success to penetrate new customers rapidly; - - expand sales and distribution network; - - maintain and extend technology leadership; and - - enable new IP-based services. LEVERAGE EARLY LEAD AS SUPPLIER OF PURPOSE-BUILT INTERNET INFRASTRUCTURE. From inception we have focused solely on designing and building Internet infrastructure for service providers. We have integrated purpose-built software and hardware into an Internet optimized architecture that specifically meets service providers' needs and have seen significantly positive initial responses from our existing and potential customers. We believe that many of these customers will deploy Internet backbone infrastructure equipment from only a few vendors. The purpose-built advantages of the M40 provide us with a time-to-market lead, which is a critical advantage in gaining rapid penetration as one of these selected vendors. Once our products are widely deployed in a service provider's network as the primary or even secondary Internet backbone infrastructure equipment, we create a significant barrier to entry to potential competitors who do not currently offer commercially-viable next generation routing solutions. WORK VERY CLOSELY WITH KEY CUSTOMERS. In developing the M40 and JUNOS Internet Software, we worked very closely with customers to design and build a product specifically to meet their complex needs. Since JUNOS has been available and used by our customers for over a year, we understand clearly the challenges facing these carriers, enabling us to subsequently design additional features and capabilities into both our software and hardware. We believe our close relationships with, and constant feedback from, our customers have been key elements in our design wins and rapid deployment to date. We plan to continue to work very closely with our key customers to implement enhancements to current products as well as to design future products that specifically meet their evolving needs. We are also actively involved with these customers in developing key standards, such as MPLS, and are an active participant in standards organizations such as the Internet Engineering Task Force and the Optical Internetworking Forum. INCREASE PENETRATION AT MAJOR SERVICE PROVIDERS. Our initial focus has been to penetrate several of the largest service providers, where operators have the technical sophistication, resources and desire to test and evaluate our solution against potential alternatives. While we have received initial orders from major service providers, such as UUNet, Cable & Wireless, IBM Global Services, Frontier GlobalCenter and Verio, we believe that there is a significant opportunity to further penetrate these large and complex networks given the advantages of the M40. As the growth of the Internet requires these service providers to continue to build their networks and replace outdated equipment, we will pursue further opportunities to capture greater market share within these large accounts. 39 41 LEVERAGE EARLY SUCCESSES TO PENETRATE NEW CUSTOMERS RAPIDLY. We believe that the Internet infrastructure equipment buying patterns of the medium and smaller-sized service providers typically lag behind those of the larger service providers. Since the network challenges that the large service providers face today are likely to be the problems encountered by smaller service providers in the near future, we believe smaller service providers are likely to deploy equipment similar to larger service providers. Furthermore, smaller service providers often lack the technical resources to thoroughly test different vendors' products. Therefore, they typically piggyback on larger service providers' evaluation efforts by purchasing the same platforms deployed by the larger service providers. Since we have begun to sell to several of the largest service providers, we intend to leverage this success by allocating our marketing efforts towards a greater number of medium and smaller-sized service providers. EXPAND SALES AND DISTRIBUTION NETWORK. In order to pursue the large number of potential customers for our Internet infrastructure solutions, we plan to aggressively add to our sales and distribution capabilities. We are adding to our direct sales and support capabilities for our major customers in North America and adding value-added resellers, system integrators and distributors to sell to and support our other domestic and international customers. In addition to our strategic original equipment manufacturer relationship with Ericsson, we are adding distribution partners on a country specific basis. In the quarter ended March 31, 1999, we added seven salespeople and announced the opening of a European office and a presence in Asia. MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. Our Internet software, ASIC technology and Internet-optimized architecture have been key elements to establishing our technology leadership. We believe that these elements are highly leverageable into future products we are currently building. We intend to maintain and extend our technological leadership in the Internet infrastructure market through continued significant investment in JUNOS Internet Software and ASIC designs to enhance the feature richness of the M40 and to develop future differentiated offerings for service providers. ENABLE NEW IP-BASED SERVICES. Our platform enables service providers to build networks cost effectively and to offer new differentiated services for their customers more efficiently than conventional products. While we believe that current service providers are likely to be the largest and most successful IP network operators in the near term, many new service providers are likely to emerge oriented around the delivery of IP-based services. These services, which include web hosting, outsourced Internet and intranet services, VPNs, outsourced enterprise applications and voice-over IP, are cost-effectively enabled by our Internet infrastructure platform. Although the market for our products today is driven primarily by the need for traditional Internet network capacity, as other IP-based services and applications continue to grow in importance, the total potential market for our products will continue to grow commensurately. TECHNOLOGY Our core technology consists of our Internet backbone router architecture, JUNOS Internet Software and ASIC hardware expertise. Our general-purpose architecture is initially embodied in the M40, but also is designed to serve as the platform for future generations of products. 40 42 M40 ARCHITECTURE The following diagram illustrates the architecture of the M40 Internet backbone router: [DIAGRAM] The M40 architecture delivers the forwarding rates and network control necessary to scale Internet backbones rapidly and reliably. The M40 system includes a Routing Engine, or RE, and a Packet Forwarding Engine, or PFE. The clean separation of the routing and forwarding functions ensures that the two functions do not compete for the same resources. THE ROUTING ENGINE. The RE consists of the JUNOS Internet Software operating on an Intel-based platform. The JUNOS Internet Software features Internet-scale protocol support, with flexible policy software that enables maximum control over the acceptance, modification and advertisement of route prefixes. In addition, the JUNOS Internet Software offers a range of configuration management tools that simplify the configuration process and help protect against operator error. The RE conducts the processing intensive activity of maintaining the routing table, from which the forwarding table residing in the PFE is derived. The RE is connected to the PFE through a dedicated 100 Mbps link. After constructing or updating the forwarding table, the RE downloads a copy of the table to the PFE. Updates to the forwarding table are done atomically in small incremental steps so that packet forwarding is not interrupted by routing changes. THE PACKET FORWARDING ENGINE. The M40 delivers wire speed packet forwarding using our ASIC designs. All links between ASICs are oversized, dedicated channels, and the PFE architecture is free from the bottlenecks faced by traditional crossbar switches, which use intelligent agent software to perform both routing and forwarding functions over multiple connections to either parts of the network. Bottleneck can occur in a crossbar switch because the routing and forwarding functions are not separated. The heart of the PFE is the Internet Processor ASIC. With over one million gates and a lookup rate of over 40 million packets per second, or Mpps, the Internet Processor represents the largest and fastest route lookup ASIC currently available, capable of processing data at throughput rates in excess of 40 Gbps. All lookup rates reflect longest-match route table lookups for all packets and all lookups are performed in hardware. There is no caching mechanism, which is a mechanism by which critical information, such as destinations for traffic, is stored in rapidly accessible memory to make the process of looking up traffic destinations faster. In addition there is no risk of cache misses in the system which can result in slower storage access and thus considerably slower traffic delivery. In addition, the forwarding table can be updated without affecting forwarding rates. The Internet Processor is programmable to support up to four different forwarding tables (layer 2 and/or layer 3) simultaneously. Supported forwarding protocols currently 41 43 include unicast and multicast IPv4 and MPLS. Finally, the Internet Processor maintains its performance regardless of length of lookups or table size. The PFE also features a shared memory system with single-stage buffering, so packets are written to and read from memory only once. Single-stage buffering greatly reduces the complexities and throughput delays associated with multistage buffering systems. The pooled memory is distributed across the Flexible PIC Concentrator, or FPC, cards, allowing memory to scale as interfaces are added. The Internet Processor also features prefix accounting mechanisms that operate at rates in excess of 20 Mpps. JUNOS INTERNET SOFTWARE: TRAFFIC ENGINEERING AND CONTROL JUNOS Internet Software offers a full suite of Internet-scale, Internet-tested routing protocols. Protocols and software tools, which are used to control and direct network traffic, are critical to an Internet backbone routing solution. Software control is made more important by the fact that the size and complexity of backbone networks are increasing at a time when service providers are looking to differentiate themselves through value-added service offerings. JUNOS Internet Software features implementations of all major Internet protocols, including BGP4, DVMRP, PIM, IS-IS, Open Shortest Path First. IS-IS and Open Shortest Path First are algorithms broadly used in enterprise networks and by service providers to determine and update the running state of the network and available destinations in the network. These implementations were developed in-house by our design team which has extensive experience in addressing the scaling issues of rapidly growing service providers. JUNOS Internet Software also provides a new level of traffic engineering capabilities with its implementation of MPLS. Developed in conjunction with the Internet Engineering Task Force, our MPLS capability offers enhanced visibility into traffic patterns and the ability to control the path traffic takes through the network. Path selection enables service providers to engineer traffic for efficient use of network capacity and avoidance of congestion. We expect MPLS and its traffic engineering capabilities to become a crucial tool for service providers as they scale their networks. JUNOS Internet Software features a modular design, with separate programs running in protected memory space in conjunction with an independent operating system. Unlike monolithic, unprotected operating system designs, which are prone to system wide failure, the protected, modular approach improves reliability by ensuring that modifications made to one module have no unwanted side-effects on other sections of the software. In addition, having clean software interfaces between modules facilitates software development and maintenance, enabling faster response to customer needs and delivery of new features. JUNOS Internet Software has been extensively tested in multiple service provider networks to ensure compatibility with Cisco's IOS. Since each major service provider's network is different, this extensive testing is necessary to ensure seamless introduction into existing service provider environments. PRODUCTS M40 INTERNET BACKBONE ROUTER The M40 Internet backbone router is specifically designed for the specialized needs of service providers. The M40 features leading-edge packet-forwarding performance, very high port density and flexibility, and purpose-built Internet software. The M40 delivers higher speed performance for service providers than current alternatives. The M40 helps solve the critical problem of managing backbone networks by ensuring greater control over traffic and better use of network capacity and by providing service providers 42 44 with the necessary traffic engineering tools, such as MPLS. LOGO FEATURES OF THE M40 INTERNET BACKBONE ROUTER PORT DENSITY PER RACK-INCH. Our M40 Internet backbone router offers very high port density per rack-inch, ensuring optimal use of valuable and scarce PoP rack space. Because the forwarding engine is oversized, all interfaces perform at wire speed for all packet sizes. The M40 router features a highly flexible combination of backbone interface speeds on the market today. In a 35-inch chassis, the M40 router provides 8 OC-48/STM-16, 32 OC-12/STM-4, 128 OC-3/STM-1 or 128 DS3 interfaces. M40 interfaces are located on Physical Interface Cards, or PICs, which plug into FPC boards. There are eight FPC slots on the M40 and each FPC slot supports up to four PICs and an aggregate throughput rate of more than 2.5 Gbps. In addition to supporting wire speed OC-48 interfaces, each FPC supports various combinations of interfaces, permitting the mixing of interface types and speeds on a single FPC. Supported PIC interfaces include: - - 1-port OC-48/STM-16 SONET/SDH; - - 1-port OC-12/STM-4 SONET/SDH; - - 1-port OC-12/STM-4 ATM; - - 4-port OC-3/STM-1 SONET/SDH; - - 2-port OC-3/STM-1 ATM; - - 4-port DS3; and - - 1-port Gigabit Ethernet. The PIC interface cards are sold both as part of the initial product configuration and also, subsequently, as add-on items. Interfaces are typically added as the customer's network expands or the capacity of individual links is upgraded. CLASS-OF-SERVICE FLEXIBILITY. The M40 router is designed for a variety of class-of-service applications. The M40's queuing mechanism is based on a weighted round-robin selection among multiple queues on outgoing interfaces. Queues can be configured with drop profiles to control the rate of packet drops based on utilization of buffer capacity. LOW POWER CONSUMPTION. As provider PoPs have grown and become more fully populated with systems, power consumption has become a significant concern. Access to sufficient power can be a constraint on the ability of a facility to support a larger network. Because of its low part count and efficient design, our M40 Internet backbone router draws less than 1700 watts of power (35A at 48V) in a fully loaded configuration, enabling it to offer very high performance and port density per watt. ENGINEERED FOR STRESSFUL CONDITIONS. The M40 architecture is designed to reliably handle stressful network conditions. For example, the route lookup capacity of our Internet Processor has been oversized with respect to interface speeds. In addition, the separation of routing and processing enables the M40 to converge quickly while maintaining wire speed. BUILT FOR RELIABILITY. In addition to preserving network reliability, the M40 router 43 45 is designed to ensure system reliability. The M40's cooling system is fully redundant to protect against individual fan failure. Similarly, the M40's dual power supplies are fully redundant, each capable of supporting the full power load of the system. The M40 can boot off of any one of multiple redundant storage media, ensuring that the system remains operational in the event of a disk failure. For software reliability, JUNOS Internet Software features a protected, modular design with separate processes running in protected memory space on top of an independent operating system. A modular design protects against system wide failures, ensuring that modifications made to one module have no unwanted side-effects on other portions of the code base. Finally, a low component count and an efficient design combine to give the M40 system superior reliability. The M40 base price list ranges between $45,000 and $55,000. PIC module prices begin at $18,000. CUSTOMERS The following is a list of our customers that as of March 31, 1999, have ordered at least $100,000 of products: BACKBONE ISP: INTERNATIONAL (ASIA/EUROPE): EDUCATION/GOVERNMENT: AT&T Corporation Ericsson MCI NSF-sponsored Cable & Wireless, Inc. Nissho Electronics WorldCom-vBNS Frontier GlobalCenter Corporation University of Southern IBM Global Services NTT PC Communications, Inc. California PSINet, Inc. Oki Electric Industry Company, University of Washington TCG CERFnet, Inc. Ltd. UUNET Verio Inc. CONTENT SITE/HOSTING: MULTISERVICE IP: AboveNet Communications, Inc. The Data Place, Inc. Conxion Corporation QWEST Communications Exodus Communications, Inc. International Inc.
In the quarter ended March 31, 1999, we recognized revenue from shipments to six of these customers. Revenues from significant customers as a percentage of net revenues are as follows:
THREE MONTHS YEAR ENDED ENDED DEC. 31, 1998 MARCH 31, 1999 ------------- -------------- *UUNet...................................................... 78% 40% Ericsson................................................... 22% 9% *MCI WorldCom-vBNS.......................................... -- 15% Verio...................................................... -- 16%
- --------------- * Subsidiaries of MCI WorldCom, each of which run separate networks and make separate purchasing decisions. SALES AND MARKETING We sell and market our products through a combination of our direct sales organization, value-added resellers, a strategic original equipment manufacturer partner relationship and country specific distributors. DIRECT SALES. Our North American direct sales organization is divided into Western and Eastern regional operations. Our direct sales 44 46 efforts are focused on the largest service providers. The direct sales account managers cover the market on an assigned account basis and work as a team with account oriented systems engineers. They are directed by a regional operations manager who reports to the North American Director of Sales. We also have a team of consulting engineers that provide our customers with guidance and assistance on the evolution of their networks as it relates to the deployment of our products. These consulting engineers also help in defining the features that are required for our products to be successful in specific applications. A key feature in our selling effort is the relationship we establish at various levels in our customers' organization. Our sales team maintains contact with key individuals who have service planning and infrastructure buildout responsibility. VALUE-ADDED RESELLERS. We plan to complement our direct sales effort in the United States through the addition of a small number of highly focused value-added resellers. Our arrangements with value-added resellers typically have been non-exclusive and provide the value-added reseller with discounts based upon the volume of their orders. ORIGINAL EQUIPMENT MANUFACTURER PARTNER. We have established a strategic distribution relationship with Ericsson. We believe that Ericsson has significant customer relationships in place and offers products which complement ours. Ericsson will provide the first level of support to its customers. Our agreement with Ericsson allows Ericsson to distribute our products on a worldwide, non-exclusive basis with discounts based upon the volume of orders received through Ericsson. INTERNATIONAL DISTRIBUTORS. In order to further our international sales objectives, we are establishing a number of country specific distributors. These distributors have expertise in deploying complex Internet infrastructure equipment in their respective markets and provide the first level of support required by our international customers. As of March 31, 1999, we employed 30 people in our sales support and marketing organizations. CUSTOMER SERVICE AND SUPPORT We believe that a broad range of support services is essential to the successful installation and ongoing support of the M40. We have hired support engineers with proven Internet experience. We offer services in the following areas: 24 hours a day, seven days a week technical assistance (on-line, telephone and on-site), professional services, educational services, logistics services and web-based information. We offer a variety of flexible and comprehensive support programs, including basic hardware and software warranty services, next day onsite parts and labor, 24 hours a day, seven days a week same day parts and labor and on-site resident engineers. We deliver these services directly to major end users and also utilize a two-tiered support model, leveraging the capabilities of our partners and third party organizations. We also train our partners in the delivery of education and support services. Customer service and support provide front line product support and is the problem resolution interface to our partners and direct end users. If customer service and support are unable to resolve an issue themselves, they duplicate the problem scenario and provide the failure information, such as logs, dumps, traces and system configuration to appropriate subject matter experts in our engineering department. Based on the severity of the problem and the impact to our customers' network, there are strict escalation guidelines to ensure that the appropriate technical resource and management attention is brought to bear on the problem in a timeframe commensurate with problem priority. The overall goal is to fix the problem, at the appropriate level, in the right timeframe in order to ensure our customers' satisfaction. As of March 31, 1999, we employed 12 people in our customer service and support organization, with the majority located 45 47 in our Mountain View, California corporate headquarters. RESEARCH AND DEVELOPMENT We have assembled a team of skilled engineers with extensive experience in the fields of high end computing, network system design, Internet routing protocols and embedded software. These individuals have been drawn from leading computer data networking and telecommunications companies. In addition to building complex hardware and software systems, the engineering team has experience in delivering very large, highly integrated ASICs and extremely scalable Internet software. Our research and development department is organized into teams that work in parallel on several projects in a way similar to the development of successive generations of complex microprocessors. As a result, we will seek to offer our customers next generation products as they are needed. We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications, incorporating that technology and maintaining the competitiveness of our product and service offerings. We are leveraging our first generation ASICs, developing additional network interfaces targeted to our customer applications and continuing to develop next generation technology to support the anticipated growth in network bandwidth requirements. We continue to expand the functionality of our JUNOS Internet Software to improve performance and scalability, and to provide an enhanced user interface. Our research and development process is driven by the availability of new technology, market demand and customer feedback. We have invested significant time and resources in creating a structured process for undertaking all product development projects. This process involves all functional groups and all levels within our company. Following an assessment of market demand, our research and development team develops a full set of comprehensive functional product specifications based on inputs from the product management and sales organizations. This process is designed to provide a framework for defining and addressing the steps, tasks and activities required to bring product concepts and development projects to market. As of March 31, 1999, we employed 114 people in our research and development group. Our research and development expenses totaled $6.2 million for the three months ended March 31, 1999, $24.0 million for the year ended December 31, 1998, $9.4 million for the year ended December 31, 1997 and $1.9 million for the period from February 2, 1996, the date of our inception, to December 31, 1996. MANUFACTURING Our manufacturing operation is entirely outsourced. We have developed a strategic relationship with Solectron, under which we have subcontracted our manufacturing activity. This subcontracting activity extends from prototypes to full production and includes activities such as material procurement, final assembly, test, control and shipment to our customers. We design, specify and monitor all of the tests that are required to meet internal and external quality standards. This arrangement provides us with the following benefits: - - we operate without dedicating any space to manufacturing operations; - - we conserve the working capital that would be required for funding inventory; - - we can adjust manufacturing volumes quickly to meet changes in demand; and - - we can quickly deliver products to customers through Solectron's turnkey manufacturing and drop shipment capabilities. Our ASICs are manufactured by IBM using its 0.25 micron process. IBM is responsible for all aspects of the production of the ASICs using our proprietary designs. 46 48 COMPETITION Competition in the Internet infrastructure market is intense. The market historically has been dominated by Cisco Systems, Inc., with other companies such as Bay Networks, Inc. (now Nortel Networks Corporation) and Ascend Communications, Inc. (which has agreed to be acquired by Lucent Technologies Inc.) providing products to a smaller segment of the market. In addition, a number of private companies have announced plans for new products to address the same problems which our products address. Cisco traditionally has been the dominant supplier of solutions to this market. We believe this is the result of its early leadership position in the enterprise router market. As the Internet has grown rapidly, Cisco has leveraged this position and has developed a broad product line of routers which support all major local area and wide area interfaces. We believe that our ability to compete with Cisco depends upon our ability to demonstrate that our products are superior in meeting the needs of service providers and are extremely compatible with Cisco's current and future products. Although we believe that we are currently among the top providers of Internet infrastructure solutions worldwide, we cannot assure you that we will be able to compete successfully with Cisco, currently the leading provider in this market. We expect that, over time, large companies with significant resources, technical expertise, market experience, customer relationships and broad product lines, such as Lucent and Nortel, will introduce new products which are designed to compete more effectively in this market. As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have. Although we believe that our technology and the purpose-built features of our products make them unique and will enable us to compete effectively with these companies, we cannot assure you that we will be successful. Many of our current and potential competitors, such as Cisco, Lucent and Nortel, have significantly broader product lines than we do and may bundle their products with other networking products in a manner that may discourage customers from purchasing the M40 Internet backbone router. Also, many of our current and potential competitors have greater name recognition and more extensive customer bases that could be leveraged. Increased competition could result in price reduction, fewer customer orders, reduced gross margins and loss of market share, any of which could seriously harm our operating results. There are also many small private companies which claim to have products with greater capabilities than the M40. We believe that there is likely to be consolidation in this industry with one or more of these smaller private companies being acquired by a large, established supplier of Internet infrastructure products. As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have. Several companies also provide solutions which can substitute for some uses of routers. For example, high bandwidth asynchronous transfer mode, or ATM, switches, are used in the core of certain major backbone service providers. ATM switches can carry a variety of traffic types, including voice, video and data, using fixed, 53 byte cells. Companies that use ATM switches are enhancing their products with new software technologies such as multi protocol label switching, or MPLS, which can potentially simplify the task of mixing routers and switches in the same network. These substitutes can reduce the need for large numbers of routers. INTELLECTUAL PROPERTY Our success and ability to compete are substantially dependent upon our internally developed technology and know how. We have two patents issued relating to high speed switching devices. These patents will expire in April 18, 2017 and December 16, 2016, respectively. In addition we have four patent applications pending in the United States relating to the design of the M40 and our future products. Our engineering teams 47 49 have significant expertise in ASIC design and we own all rights to the design of the ASICs which form the core of the M40. Our JUNOS Internet Software was developed internally and is protected by United States and other copyright laws. While we rely on patent, copyright, trade secret and trademark law to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology. Our success will depend upon our ability to obtain necessary intellectual property rights and protect our intellectual rights. We cannot be certain that we will be able to obtain the necessary intellectual property rights or that other parties will not contest our intellectual property rights. LEGAL PROCEEDINGS We are not subject to any material legal proceedings. EMPLOYEES As of March 31, 1999, we had 190 full-time employees, 114 of whom were engaged in research and development, 30 in sales and marketing, 12 in customer support and 34 in finance, administration and operations. None of our employees is represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could have a material adverse effect on our business, financial condition and results of operations. Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we can retain our key personnel in the future. FACILITIES We sublease approximately 60,000 square feet in two buildings located in Mountain View, California. Approximately 33,000 square feet are subleased pursuant to a sublease that expires December 31, 2001, and approximately 27,000 square feet are subleased pursuant to a lease that expires June 30, 2000. We believe that by the end of 1999, we will need additional space to accommodate our growth. In response to this necessary additional space, we have entered into leases for approximately 144,000 and 25,000 square feet of office space in Sunnyvale, California. The lease on the office space for 144,000 square feet will commence on the later of May 1, 2000 or the completion of our improvements on the premises, and it will expire on the later of May 1, 2012 or twelve years after the completion of our improvements on the premises. The lease on the office space for 25,000 square feet will commence on October 1, 1999, and it will expire two months after the later of May 1, 2000 or the completion of our improvements on the 144,000 square foot facility. The commercial real estate market in the San Francisco Bay area is volatile and unpredictable in terms of available space, rental fees, occupancy rates and preferred locations. We can not be certain that additional space will be available when we require it, or that it will be affordable or in a preferred location. 48 50 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their ages, as of March 31, 1999, are as follows:
NAME AGE POSITION - ---- --- -------- Scott Kriens......................... 41 President, Chief Executive Officer and Chairman of the Board Pradeep Sindhu....................... 46 Chief Technical Officer and Vice Chairman of the Board Joe Furgerson........................ 40 Vice President of Marketing Marcel Gani.......................... 46 Chief Financial Officer Steven Haley......................... 44 Vice President of Worldwide Sales and Service Gary Heidenreich..................... 50 Vice President of Operations Peter L. Wexler...................... 43 Vice President of Engineering William R. Hearst III(1)............. 49 Director Vinod Khosla(2)...................... 44 Director C. Richard Kramlich(1)............... 63 Director William Stensrud(2).................. 48 Director
- --------------- (1) Member of audit committee (2) Member of compensation committee SCOTT KRIENS has served as President, Chief Executive Officer and Chairman of the board of directors of Juniper Networks since October 1996. From April 1986 to January 1996, Mr. Kriens served as Vice President of Sales and Vice President of Operations at StrataCom, Inc., a telecommunications equipment company, which he co-founded in 1986. Mr. Kriens received a B.A. in Economics from California State University, Hayward. PRADEEP SINDHU co-founded Juniper Networks in February 1996 and served as Chief Executive Officer and Chairman of the board of directors until September 1996. Since then, Dr. Sindhu has served as Vice Chairman of the board of directors and Chief Technical Officer of Juniper Networks. From September 1984 to February 1991, Dr. Sindhu worked as a Member of the Research Staff, and from March 1987 to February 1996, as the Principal Scientist, and from February 1994 to February 1996, as Distinguished Engineer at the Computer Science Lab, Xerox Corporation, Palo Alto Research Center, a technology research center. Dr. Sindhu holds a B.S.E.E. from the Indian Institute of Technology in Kanpur, an M.S.E.E. from the University of Hawaii and a Masters in Computer Science and Ph.D. in Computer Science from Carnegie-Mellon University. JOE FURGERSON joined Juniper Networks in January 1997. He served as our Director of Marketing from January 1997 to September 1998 and has served as our Vice President of Marketing since September 1998. From April 1994 to December 1996, Mr. Furgerson served as Director of Product Marketing, Network Systems Division at 3Com Corporation, a data networking company. He holds a B.A. in Economics from Claremont Men's College and an M.B.A. from the Stanford Graduate School of Business. MARCEL GANI joined Juniper Networks as Chief Financial Officer in February 1997. From January 1996 to January 1997, Mr. Gani served as Vice President and Chief Financial Officer of NVIDIA Corporation, a 3D graphic processor company. Mr. Gani also held the positions of Vice President and Chief Financial Officer at Grand Junction Networks, a data networking company acquired by Cisco Systems, Inc., from March 1995 to January 1996, and at Primary Access Corporation, a data networking company 49 51 acquired by 3Com Corporation, from March 1993 to March 1995. Mr. Gani holds an M.B.A. from the University of Michigan. STEVEN HALEY joined Juniper Networks as Vice President of Worldwide Sales and Service in August 1997. Prior to joining Juniper Networks, Mr. Haley served as Vice President of Sales at Cisco Systems, Inc., a data networking company, from July 1996 to August 1997. From February 1990 to July 1996, he worked for StrataCom, Inc., serving in a variety of management roles from Managing Director, Europe to Vice President of Sales, Americas. He holds a B.S. in Marketing from the University of Massachusetts, Amherst. GARY HEIDENREICH joined Juniper Networks in July 1997 as Vice President of Operations. From August 1993 to July 1997, Mr. Heidenreich served as Vice President of Systems Manufacturing at 3Com Corporation. Mr. Heidenreich holds an M.B.A. from the University of Dallas and a B.S.I.E. from New Mexico State University. PETER L. WEXLER joined Juniper Networks as Vice President of Engineering in January 1997. From April 1995 to January 1997, Mr. Wexler served as Vice President of Engineering at Bay Networks, a data networking company. From April 1993 to April 1995, Mr. Wexler served as Director of High-End Platform Development at Wellfleet Communications, a predecessor to Bay Networks and a manufacturer of high-performance routers. He holds a B.S.E. from State University of New York at Stony Brook, an M.S.E. from the University of Illinois and an M.B.A. from Boston University. WILLIAM R. HEARST III has served as a Director of Juniper Networks since February 1996 and has served as a member of the audit committee since July 1998. Mr. Hearst has been a General Partner of Kleiner Perkins Caufield & Byers, a venture capital firm, since January 1995. From May 1995 to August 1996, he was the founding Chief Executive Officer of At Home Corporation, a data networking company and Internet service provider. Before joining Kleiner Perkins Caufield & Byers, Mr. Hearst was editor and publisher of the San Francisco Examiner, a news publication, for eleven years. Mr. Hearst also serves on the boards of At Home Corporation, Hearst-Argyle Television and Com21, Inc. He is a fellow of the American Association for the Advancement of Science and a Trustee of the Carnegie Institute of Washington and the California Academy of Sciences. Mr. Hearst holds an A.B. degree in Mathematics from Harvard University. VINOD KHOSLA has served a Director of Juniper Networks since February 1996 and has served as a member of the compensation committee since July 1998. Mr. Khosla has been a General Partner with the venture capital firm of Kleiner Perkins Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-founder of Daisy Systems Corporation, an electronic design automation company, and the founding Chief Executive Officer of Sun Microsystems, Inc., a computer and data networking company. Mr. Khosla also serves on the boards of Asera, Cerent, Concentric Network Corporation, Corio Inc., Corvis Corporation, Excite Inc., Siara Systems and QWEST Communications International Inc., as well as several other private companies. Mr. Khosla holds a B.S.E.E. from the Indian Institute of Technology in New Delhi, an M.S.E. from Carnegie-Mellon University, and an M.B.A. from the Stanford Graduate School of Business. C. RICHARD KRAMLICH has served as a Director of Juniper Networks since July 1996 and has been a member of the audit committee since July 1998. Mr. Kramlich is the co-founder and has been a General Partner of New Enterprise Associates, L.P., a venture capital fund, since 1978. He is a director of Healtheon Corporation, Ascend Communications, Inc., Com 21, Inc., Lumisys, Inc., Silicon Graphics, Inc. and Chalone Wire Group, Inc. Mr. Kramlich holds a B.A. from Northwestern University and an M.B.A. from Harvard Business School. WILLIAM STENSRUD has served as a Director of Juniper Networks since October 1996 and has served as a member of the compensation committee since July 1998. Mr. Stensrud has been a General Partner with 50 52 the venture capital firm of Enterprise Partners from January 1997 to the present. Mr. Stensrud was an independent investor and turn-around executive from March 1996 to January 1997. During this period Mr. Stensrud served as President at Paradyne Corporation and as a director of Paradyne Corporation, GlobeSpan Corporation and Paradyne Partners LLP, all data networking companies. From January 1992 to July 1995, Mr. Stensrud served as President and Chief Executive Officer of Primary Access Corporation, a data networking company acquired by 3Com Corporation. From the acquisition through March 1996, Mr. Stensrud served as an executive at 3Com Corporation. From 1986 to 1992, Mr. Stensrud served as the Marketing Vice President of StrataCom, Inc., a telecommunications equipment company, which Mr. Stensrud co-founded. Mr. Stensrud also serves on the boards of Rhythms Corporation, Paradyne Corporation and GlobeSpan Corporation. He holds a B.S. degree in Electrical Engineering and Computer Science from Massachusetts Institute of Technology. BOARD OF DIRECTORS Our board of directors currently consists of six authorized members. Upon completion of this offering, our certificate of incorporation will provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. To implement the classified structure, prior to the consummation of the offering, two of the nominees to the board of directors will be elected to one-year terms, two will be elected to two-year terms and two will be elected to three-year terms. Thereafter, directors will be elected for three-year terms. Messrs. Kriens and Stensrud have been designated Class I Directors, whose terms expire at the 2000 annual meeting of stockholders. Messrs. Khosla and Sindhu have been designated Class II Directors, whose terms expire at the 2001 annual meeting of stockholders. Messrs. Hearst and Kramlich have been designated Class III Directors, whose terms expire at the 2002 annual meeting of stockholders. This classification of the board of directors may delay or prevent a change in control of our company or in our management. See "Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions." Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been elected and qualified. There are no family relationships among any of our directors, officers or key employees. BOARD COMMITTEES We established an audit committee and a compensation committee in July 1998. The audit committee consists of Messrs. Hearst and Kramlich. The audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. The compensation committee consists of Messrs. Khosla and Stensrud. The compensation committee reviews and recommends to the board of directors the compensation of all of our officers and directors, including stock compensation and loans and establishes and reviews general policies relating to the compensation and benefits of our employees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. DIRECTOR COMPENSATION We do not currently compensate in cash our directors for their service as members of the board of directors, although they are reimbursed for certain expenses in 51 53 connection with attendance at board of director and compensation committee meetings. Under our 1996 Stock Plan, nonemployee directors are eligible to receive stock option grants at the discretion of the board of directors or other administrator of the plan. For further information regarding the provisions of the 1996 Stock Plan, see "-- Incentive Stock Plans." LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: - - any breach of their duty of loyalty to the corporation or its stockholders; - - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - - any transaction from which the director derived an improper personal benefit. The limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we will indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in their capacity as an officer, director, employee or other agent, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors, executive officers and controller, in addition to the indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors, executive officers and controller for judgments, fines, settlement amounts and certain expenses, including attorneys' fees incurred by the director, executive officer or controller in any action or proceeding, including any action by or in the right of Juniper Networks, arising out of the person's services as a director, executive officer or controller of us, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. The limited liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty and may reduce the likelihood of derivative litigation against our directors and officers, even though a derivative action, if successful, might otherwise benefit us and our stockholders. A stockholder's investment in us may be adversely affected to the extent we pay the costs of settlement or damage awards against our directors and officers under these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. 52 54 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth the compensation earned, awarded or paid for services rendered to us in all capacities for the fiscal year ended December 31, 1998, by our Chief Executive Officer and our four next most highly compensated executive officers who earned more than $100,000 in salary and bonus during the fiscal year ended December 31, 1998, whom we refer to in this prospectus collectively as the "Named Executive Officers": SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION - ---------------------------- --------- -------- ------------ --------------- Scott Kriens...................... $170,000 $ -- 1,245 $1,200(1) President and Chief Executive Officer Steven Haley...................... 150,000 69,039 38,130 1,133(1) Vice President of Worldwide Sales and Service Pradeep Sindhu.................... 140,225 25,000 1,785 1,004(1) Chief Technical Officer Peter Wexler...................... 150,000 -- 1,020 1,133(1) Vice President of Engineering Marcel Gani....................... 150,000 -- 915 1,133(1) Chief Financial Officer
- --------------- (1) Consists of premiums paid by us for term life insurance. 53 55 OPTION GRANTS IN LAST FISCAL YEAR. The following table shows certain information regarding stock options granted to the Named Executive Officers during the fiscal year ended December 31, 1998. All of these stock options were granted under our 1996 Stock Plan and have a term of ten years, subject to earlier termination in the event the optionees' services to us cease. See "-- Incentive Stock Plan" for a description of material terms of these stock options. See "Certain Transactions" for a description of the exercises of stock options granted to the Named Executive Officers under the 1996 Stock Plan. In accordance with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These amounts are based on certain assumed rates of appreciation and do not represent our estimate of our future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of the common stock. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS GRANTED APPRECIATION FOR UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM(3) OPTIONS DURING PRICE EXPIRATION ----------------------- NAME GRANTED PERIOD(1) PER SHARE(2) DATE 5% 10% - ---- ---------- ---------------- ------------ ---------- ---------- ---------- Scott Kriens......... 1,245(4) 0.035% $1.67 8/16/08 $ 56,732 $ 91,568 Steven Haley......... 37,500(5) 1.076 0.83 5/13/08 1,740,298 2,789,570 630(4) 0.018 1.67 8/16/08 28,708 46,336 Pradeep Sindhu....... 1,785(6) 0.051 1.67 8/16/08 81,339 131,284 Peter Wexler......... 1,020(6) 0.029 1.67 8/16/08 46,479 75,020 Marcel Gani.......... 915(4) 0.026 1.67 8/16/08 41,695 67,297
- --------------- (1) Based on an aggregate of 3,512,480 options granted by us during the fiscal year ended December 31, 1998, to our employees, directors and consultants, including the Named Executive Officers. (2) Options were granted at an exercise price equal to the fair market value of our common stock, as determined in good faith by our board of directors. (3) The potential realizable value is calculated based on the ten year term of the option at its time of grant. It is calculated assuming that the assumed initial public offering price of $29.00 per share appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. (4) As of March 31, 1999, each of the options for Messrs. Kriens, Haley and Gani listed in the table under this note had been exercised, but the shares purchased are subject to repurchase by us at the original exercise price upon the optionee's cessation of services prior to vesting of the shares, which will be fully vested and no longer be subject to repurchase by us on August 16, 1999. See "Employment Agreements" for a description of accelerated vesting for Messrs. Kriens and Gani. (5) As of March 31, 1999, the options for Mr. Haley listed in the table under this note had not been exercised, but the shares are subject to early exercise by Mr. Haley and are then subject to repurchase by us at the original exercise price upon Mr. Haley's cessation of service prior to vesting of such shares. The options for Mr. Haley under this note vested as to 25% on May 13, 1999, and the balance vests in a series of monthly installments over the next three years of service. (6) As of March 31, 1999, none of the options for Messrs. Sindhu and Wexler listed in the table under this note had been exercised, but the shares are subject to early exercise by Messrs. Sindhu and Wexler and are then subject to repurchase by us at the original exercise price upon optionee's cessation of service prior to the vesting of such shares. These options shall fully vest and no longer be subject to repurchase by us on August 16, 1999. 54 56 AGGREGATE OPTION EXERCISES AND OPTION VALUES. The following table sets forth information with respect to the Named Executive Officers concerning option exercises for the fiscal year ended December 31, 1998, and exercisable and unexercisable options held as of December 31, 1998: OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES VALUE DECEMBER 31, 1998 DECEMBER 31, 1998(2) ACQUIRED ON REALIZED --------------------------- --------------------------- NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- ----------- ------------- Scott Kriens......... 1,245(3) $2,075 -- -- $ -- $ -- Pradeep Sindhu....... -- -- 1,785(4) -- 48,784 -- Marcel Gani.......... 915(3) 1,525 -- -- -- -- Peter Wexler......... -- -- 1,020(4) -- 27,877 -- Steven Haley......... 630(3) 1,050 37,500(5) -- 1,056,375 --
- --------------- (1) Based on the fair market value of our stock on the date of grant, as determined by our board of directors, minus the exercise price, multiplied by the number of shares issued upon exercise of the option. (2) The value of in-the-money options is based on an assumed initial public offering price of $29.00 per share, the fair market value of our stock on December 31, 1998, minus the per share exercise price, multiplied by the number of shares underlying the option. (3) As of March 31, 1999, each of the options for Messrs. Kriens, Haley and Gani listed in the table under this note had been exercised, but the shares purchased are subject to repurchase by us at the original exercise price upon the optionee's cessation of services prior to vesting of the shares, which shares shall be fully vested and no longer subject to repurchase by us on August 16, 1999. See "Employment Agreements" for a description of accelerated vesting for Messrs. Kriens and Gani. (4) As of March 31, 1999, none of the options for Messrs. Sindhu and Wexler listed in the table under this note had been exercised, but the shares are subject to early exercise by Messrs. Sindhu and Wexler and are then subject to repurchase by us at the original exercise price upon optionee's cessation of service prior to the vesting of the shares. These options shall be fully vested and no longer subject to repurchase by us on August 16, 1999. (5) As of March 31, 1999, these options had not been exercised, but the shares are subject to early exercise by Mr. Haley and are then subject to repurchase by us at the original exercise price upon Mr. Haley's cessation of service prior to vesting of such shares. As of May 13, 1999, 25% of these options were vested and the balance vests in a series of monthly installments over the following three years. INCENTIVE STOCK PLANS 1996 STOCK PLAN, (AS AMENDED ON APRIL 19, 1999) Our 1996 Stock Plan, as amended on April 19, 1999, provides for the grant of incentive stock options to employees and nonstatutory stock options, or incentive stock options and stock purchase rights to employees, directors and consultants. A total of 19,187,500 shares of common stock have been reserved for issuance under the 1996 Stock Plan. An annual increase will be added on the first day of our fiscal year, beginning in 2000, equal to the lesser of: - - 3,000,000 shares; - - 5% of the outstanding shares on that date; or - - a lesser amount determined by the board of directors. 55 57 As of March 31, 1999, options to purchase 4,291,564 shares of common stock were outstanding and 4,813,669 shares available for future grant (including the 3,000,000 shares reserved for issuance on April 19, 1999). The compensation committee of the board of directors administers the 1996 Stock Plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of the options. No employee may be granted options to purchase more than 1,000,000 shares in any fiscal year, except that in the initial year of employment, the limit is 2,000,000 shares. The exercise price of incentive stock option grants cannot be lower than 100% of the fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. The term of an incentive stock option cannot exceed ten years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. Stock purchase rights may be issued either alone, in addition to, or in tandem with other awards granted under the 1996 Stock Plan and/or cash awards made outside of the 1996 Stock Plan. Options and stock purchase rights granted under our 1996 Stock Plan generally become exercisable at the rate of 1/4 of the total number of shares subject to the option twelve months after the date of grant, and 1/48 of the shares subject to the option each month thereafter. Options not assumed or substituted by a successor corporation in the event we are acquired, will terminate on the closing date of the acquisition. The board of directors may amend, modify or terminate the 1996 Stock Plan at any time as long as such amendment, modification or termination does not impair the rights of plan participants with respect to outstanding options under the 1996 Stock Plan. Our 1996 Stock Plan will terminate in June 2006, unless terminated earlier by the board of directors. 1999 EMPLOYEE STOCK PURCHASE PLAN Our 1999 Employee Stock Purchase Plan was adopted in April 1999, and will be effective upon completion of this offering, subject to stockholder approval. The 1999 Employee Stock Purchase Plan provides our employees with an opportunity to purchase common stock of Juniper Networks through accumulated payroll deductions. A total of 500,000 shares of common stock have been reserved for issuance under the 1999 Employee Stock Purchase Plan, none of which had been issued as of March 31, 1999. An annual increase will be added on the first day of our fiscal year, beginning in 2000, equal to the lesser of: - - 500,000 shares; - - 1% of the outstanding shares on that date; or - - a lesser amount determined by the board of directors. The 1999 Employee Stock Purchase Plan will be administered by our board of directors or by a committee appointed by the board of directors. The 1999 Employee Stock Purchase Plan will permit eligible employees to purchase common stock through payroll deductions of up to 10% of an employee's base compensation on each pay day during the offering period, provided that no employee may purchase more than 1,000 shares in any twelve-month period, and in no event may an employee purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the time the option is granted, in one calendar year. Any employee employed by us on a given enrollment date is eligible to participate during that offering period, provided they remain employed by us for the duration of that offering period. Unless the board of directors or its committee determines otherwise, the 1999 Employee Stock Purchase Plan will be implemented in a series of offering periods, each approximately six months in duration; provided, however, that the first offering period will be approximately thirteen months in duration, ending on the last trading day on or before July 31, 2000. Offering periods will begin on the first trading day on or after August 1 and February 1 of each year and terminate on the last trading day in the period six months later. However, the first offering period shall commence on the date upon which the registration statement, of which this 56 58 prospectus is a part, is declared effective by the Commission and terminate on the last trading day in the period ending July 31, 2000. In the event we are acquired, offering and purchase periods then in progress will be shortened and all options automatically exercised. The price at which common stock will be purchased under the 1999 Employee Stock Purchase Plan is equal to 85% of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. Employees may end their participation in the offering period at any time, and participation automatically ends on termination of employment. The board of directors may amend, modify or terminate the 1999 Employee Stock Purchase Plan at any time as long as the amendment, modification or termination does not impair vesting rights of plan participants. The 1999 Employee Stock Purchase Plan will terminate on April 18, 2009, unless terminated earlier in accordance with its provisions. 401(k) PLAN In 1996, we adopted a Retirement Savings and Investment Plan, or 401(k) plan, covering our full-time employees located in the United States. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) plan by employees, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) plan. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the lesser of 20% of their annual compensation or the statutorily prescribed annual limit ($10,000 in 1998) and to have the amount of the reduction contributed to the 401(k) plan. The 401(k) plan does not permit additional matching contributions to the 401(k) plan by us on behalf of participants in the 401(k) plan. EMPLOYMENT AGREEMENTS We entered into a severance agreement with Mr. Kriens on October 1, 1996, which provides that he will be entitled to base compensation and benefit payments for a period of three months, in the event that his employment is terminated in connection with a change of control of Juniper Networks. Further, Mr. Kriens' restricted stock would be released from any repurchase option and his stock options would become vested and exercisable as to an additional amount equal to that amount which would have vested and become exercisable had Mr. Kriens remained employed for a period of 18 months following the change of control. If his employment continues following a change of control, his stock options will be vested and exercisable at a rate 1.5 times the rate otherwise set forth in the stock option agreement for a period of twelve months following the change of control. Under the employment agreement, Mr. Kriens is entitled to receive three months' base compensation and benefits, regardless of whether there is a change of control, in the event that his employment is involuntarily terminated. Upon involuntary termination, and regardless of whether there has been a change of control, Mr. Kriens' restricted stock and stock options would become immediately vested and exercisable as to an additional amount equal to the number of stock options which would have become vested and exercisable during the three-month period following the involuntary termination had Mr. Kriens remained employed with us. We entered into an employment agreement with Mr. Gani in February 1997, which provides that he will be entitled to receive base compensation and benefits for a period of three months, in the event of involuntary termination. In the event of a change of control at Juniper Networks, the vesting of Mr. Gani's stock options will accelerate as to that number of options equal to the number of shares that would vest over the next 30 months in accordance with our standard vesting schedule or the balance of his unvested stock, whichever amount is less. 57 59 CERTAIN TRANSACTIONS Since our inception in February 1996, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeds $60,000, and in which any director, executive officer, holder of more than 5% of our common stock or any member of the immediate family of any of these people had or will have a direct or indirect material interest other than compensation agreements and other arrangements, which are described where required in "Management," and the transactions described below. TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS COMMON STOCK. On February 26, 1996, we issued 2,250,000 shares of common stock at a price of $0.044 per share to Mr. Sindhu, one of our founders, executive officers and directors. On June 11, 1996, we issued the following shares of common stock at a price of $0.044 per share to the following purchasers, among others:
SHARES OF PURCHASER COMMON STOCK - --------- ------------ Kleiner, Perkins, Caufield & Byers VII..................... 5,493,749 KPCB VII Founders Fund..................................... 600,001 KPCB Information Sciences Zaibatsu Fund II................. 156,249
Kleiner, Perkins, Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information Sciences Zaibatsu Fund II are affiliated entities and together are considered a holder of more than 5% of our common stock. Messrs. Khosla and Hearst, two of our directors, are general partners of Kleiner, Perkins, Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information Sciences Zaibatsu Fund II. Messrs. Khosla and Hearst disclaim beneficial ownership of the securities held by such entities, except for their proportional interests in the entities. SERIES A PREFERRED STOCK. On June 11, 1996, we sold 1,743,751 shares of our Series A Preferred Stock for $1.00 per share. Each share of Series A Preferred Stock is convertible into 2.25 shares of common stock. The purchasers of the Series A Preferred Stock included, among others:
AS CONVERTED SHARES OF SHARES OF PURCHASER SERIES A STOCK COMMON STOCK - --------- -------------- ------------ Kleiner, Perkins, Caufield & Byers VII... 1,513,834 3,406,127 KPCB VII Founders Fund................... 165,333 371,999 KPCB Information Sciences Zaibatsu Fund II..................................... 43,056 96,876
SERIES B PREFERRED STOCK. On August 5, 1996, November 8, 1996, and December 30, 1996, we sold a total of 3,333,334 shares, 484,683 shares, and 3,958 shares, respectively, of our Series B Preferred Stock for $2.40 per share. In addition, on December 16, 1996, and June 18, 1997, we granted warrants exercisable for 83,333 shares and 10,000 shares, respectively, of our Series B Preferred Stock at an exercise price of $2.40. Each share of Series B Preferred Stock is 58 60 convertible into 2.25 shares of common stock. The purchasers of the Series B Preferred Stock included, among others:
AS CONVERTED SHARES OF SHARES OF PURCHASER SERIES B STOCK COMMON STOCK - --------- -------------- ------------ Kleiner, Perkins, Caufield & Byers VII... 304,688 685,548 KPCB Information Sciences Zaibatsu Fund II..................................... 7,812 17,577 New Enterprise Associates VI, Limited Partnership............................ 1,214,583 2,732,812 NEA Presidents Fund, L.P. ............... 31,250 70,313 NEA Ventures 1996, L.P. ................. 4,167 9,376 Kriens 1996 Trust U/T/A October 29, 1996....................... 364,683 820,537 Stensrud Family Trust U/T/A September 6, 1993................................... 120,000 270,000
New Enterprise Associates VI, Limited Partnership and NEA Presidents Fund, L.P. and NEA Ventures 1996, L.P. are affiliated entities and together are considered a holder of more than 5% of our common stock. Mr. Kramlich, one of our directors, is a partner of New Enterprise Associates VI, Limited Partnership and NEA Presidents Fund, L.P. and NEA Ventures 1996, L.P. Mr. Kramlich disclaims beneficial ownership of the securities held by these entities, except for his proportional interest in the entities. Mr. Kriens, one of our directors and executive officers and a holder of more than 5% of our common stock, is a trustee of the Kriens 1996 Trust U/T/A October 29, 1996. Mr. Stensrud, one of our directors, is a trustee of the Stensrud Family Trust U/T/A September 16, 1993. SERIES C PREFERRED STOCK. On July 1, 1997, and September 30, 1997, we sold 4,479,286 shares and 671,892 shares, respectively, of our Series C Preferred Stock for $8.93 per share. Each share of Series C Preferred Stock is convertible into 2.25 shares of common stock. The sale of Series C Preferred Stock included, among others, the sale of 783,875 shares of Series C Preferred Stock (1,763,718 shares as converted to common stock) to Ericsson Business Networks AB, which is a holder of more than 5% of our common stock. SERIES D AND D-1 PREFERRED STOCK. On March 16, 1999, we sold 500,000 shares of our Series D Preferred Stock and 2,580,000 shares of our Series D-1 Preferred Stock for $11.03 per share to Ericsson Business Networks AB. Each share of Series D Preferred Stock is convertible into one share of common stock. Each share of D-1 Preferred Stock is convertible into shares of common stock according to a conversion ratio obtained by dividing $11.03 by the then-effective Conversion Price, as defined in our certificate of incorporation. At the closing of this offering, the effective Conversion Price of the Series D-1 Preferred Stock shall be eighty-five percent (85%) of the initial public offering price; and therefore, each share of Series D-1 Preferred Stock is convertible into 0.44746 shares of common stock. STOCK OPTION GRANTS TO CERTAIN DIRECTORS On October 9, 1996, we granted to William Stensrud, one of our directors, an option to purchase 45,000 shares of our common stock at $0.11 per share, which vests over four years with 1/8 of the total number of shares vesting after six months and the balance vesting in a series of monthly installments over the next 42 months of service thereafter. 59 61 INDEMNIFICATION We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements will require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. All future transactions, including any loans from us to our officers, directors, principal stockholders or affiliates, will be approved by a majority of the board of directors, including a majority of the independent and disinterested members of the board of directors or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 60 62 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of March 31, 1999, and as adjusted to reflect the sale of common stock offered in this prospectus: - -each stockholder known by us to own beneficially more than 5% of our common stock, as explained below; - -each of the Named Executive Officers; - -each of our directors; - -all of our directors and executive officers as a group; and - -all other selling stockholders. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. 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 or warrants held by that person that are currently exercisable or will become exercisable within 60 days after March 31, 1999, are deemed outstanding, while the shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting or investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on the aggregate of (i) 47,032,869 shares of common stock outstanding as of March 31, 1999, assuming conversion of all outstanding shares of preferred stock into common stock, and (ii) 2,000,000 shares of common stock issued in this offering.
SHARES OF SHARES OF COMMON STOCK COMMON STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER BEFORE SALE UNDER THIS SALE UNDER THIS PROSPECTUS PROSPECTUS(2) ----------------------- SHARES TO ------------------------- NUMBER PERCENTAGE BE SOLD(2) NUMBER PERCENTAGE OFFICERS AND DIRECTORS(1): ---------- ---------- ------------ ------------ ---------- Scott Kriens(3).......................... 3,153,485 6.7% -- 3,153,485 6.4% Steven Haley(4).......................... 375,630 * -- 375,630 * Pradeep Sindhu(5)........................ 2,251,785 4.8 -- 2,251,785 4.6 Peter Wexler(6).......................... 676,020 1.4 -- 676,020 1.4 Marcel Gani(7)........................... 417,165 * -- 417,165 * William Hearst(8)........................ 10,828,125 23.0 -- 10,828,125 22.1 c/o Kleiner, Perkins, Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Vinod Khosla(9).......................... 10,828,125 23.0 -- 10,828,125 22.1 c/o Kleiner, Perkins, Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 C. Richard Kramlich(10).................. 2,812,501 6.0 -- 2,812,501 5.7 c/o New Enterprise Associates 2490 Sand Hill Road Menlo Park, CA 94025 William R. Stensrud(11).................. 315,000 * -- 315,000 * c/o Enterprise Partners 7979 Ivanhoe Ave., Suite 550 La Jolla, CA 92037 All directors and executive officers as a group (11 persons)(12)................. 21,585,156 45.9 -- 21,585,156 44.1 5% STOCKHOLDERS: Kleiner, Perkins, Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025(13)............... 10,828,125 23.0 -- 10,828,125 22.1
61 63
SHARES OF SHARES OF COMMON STOCK COMMON STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER BEFORE SALE UNDER THIS SALE UNDER THIS PROSPECTUS PROSPECTUS(2) ----------------------- SHARES TO ------------------------- NUMBER PERCENTAGE BE SOLD(2) NUMBER PERCENTAGE OFFICERS AND DIRECTORS(1): ---------- ---------- ------------ ------------ ---------- New Enterprise Associates 2490 Sand Hill Road Menlo Park, CA 94025(14)............... 2,812,501 6.0 -- 2,812,501 5.7 Ericsson Business Networks AB S-131 89 Stockholm Sweden(15)............................. 3,418,165 7.3 -- 3,418,165 6.97 SELLING STOCKHOLDERS: Crosspoint Venture Partners 1996 2925 Woodside Road Woodside, CA 94062(16)................. 1,658,210 3.5 1,036,281 621,929 1.3 Nortel Networks Corporation 8200 Dixie Road, Suite 100 Brampton, Ontario, L6T 5P6 Canada................................. 1,763,719 3.7 1,763,719 -- --
- --------------- * Less than 1% of the outstanding shares of common stock. (1) Unless otherwise indicated, the address of each listed stockholder is c/o Juniper Networks, Inc., 385 Ravendale Drive, Mountain View, California 94043. (2) Assumes no exercise of underwriters' over-allotment option. Percentage ownership figures after the offering do not include shares that may be purchased by each person in the offering. (3) Includes 3,152,240 shares held in the name of the Kriens 1996 Trust of which Scott Kriens and his spouse are trustees. Includes 974,072 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time. (4) Includes 20,000 shares held in the name of the Haley Family Foundation Trust and 30,000 shares held in the name of trusts for Mr. Haley's children. Includes 204,537 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time and an option exercisable for 37,500 shares of which all 37,500 shares are exercisable within 60 days of March 31, 1999. (5) Includes 517,410 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time. Includes 60,000 shares gifted to Mr. Sindhu's children pursuant to the California Uniform Transfer to Minors Act. (6) Includes 324,458 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time and an option exercisable for 1,020 shares of which all 1,020 shares are exercisable within 60 days of March 31, 1999. (7) Includes 416,250 shares held in the name of the Gani 1995 Trust dated December 8, 1995, of which Mr. Gani and his spouse are trustees. Includes 243,494 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time. (8) Comprised of 10,828,125 shares held by entities affiliated with Kleiner, Perkins, Caufield & Byers. Mr. Hearst is a general partner of Kleiner, Perkins, Caufield & Byers and is a director of Juniper. Mr. Hearst disclaims beneficial ownership of shares held by those entities, except to the extent of his proportional interest arising from his partnership interest in Kleiner, Perkins, Caufield & Byers. (9) Comprised of 10,828,125 shares held by entities affiliated with Kleiner, Perkins, Caufield & Byers. Mr. Khosla is a general partner of Kleiner, Perkins, Caufield & Byers and is a director of Juniper. Mr. Khosla disclaims beneficial ownership of shares held by those entities, except to the extent of his proportional interest arising from his partnership interest in Kleiner, Perkins, Caufield & Byers. (10) Comprised of 2,812,500 shares held by entities affiliated with New Enterprise Associates. Mr. Kramlich is a general partner of New Enterprise Associates and is a director of Juniper. Mr. Kramlich disclaims beneficial ownership of shares held by those entities, except to the extent of his proportional interest in New Enterprise Associates. (11) Includes 270,000 shares held in the name of the Stensrud Family Trust U/T/A September 16, 1993, as community property. Includes 17,813 shares subject to our right of repurchase, as of March 31, 1999, which lapses over time. 62 64 (12) Includes all shares referenced in notes 3 through 11 above, except that the shares beneficially owned by Messrs. Hearst and Khosla are counted only once in this calculation. Includes 755,445 shares beneficially owned by two other executive officers, 39,195 of which are subject to options exercisable within 60 days of March 31, 1999. (13) Includes (i) 9,585,423 shares held by Kleiner, Perkins, Caufield & Byers VII, (ii) 972,000 shares held by KPCB VII Founders Fund and (iii) 270,702 shares held by KPCB Information Sciences Zaibatsu Fund II. (14) Includes (i) 2,732,812 shares held by New Enterprise Associates VI, Limited Partnership, (ii) 70,313 shares held by NEA Presidents Fund, L.P., and (iii) 9,376 shares held by NEA Ventures 1996, L.P. (15) Includes 1,154,447 shares of common stock issuable upon conversion of 2,580,000 Series D-1 Preferred Stock at an assumed initial public offering price of $29.00 per share. (16) Crosspoint Venture Partners 1996 has granted the underwriters the option to purchase their remaining 621,929 shares of stock to cover overallotments, if any. 63 65 DESCRIPTION OF CAPITAL STOCK GENERAL We are authorized to issue 200,000,000 shares of common stock, $0.00001 par value, and 10,000,000 shares of undesignated Preferred Stock, $0.00001 par value. The following description of our capital stock does not purport to be complete and is subject to and qualified by our certificate of incorporation and bylaws, which are included as exhibits to the Registration Statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK As of March 31, 1999, there were 47,032,869 shares of common stock outstanding, as adjusted to reflect the conversion of all outstanding shares of preferred stock into common stock, which were held of record by approximately 159 stockholders. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Juniper Networks, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon the closing of this offering will be fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. We cannot state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock and delaying or preventing a change in control of Juniper Networks without further action by the stockholders. We have no present plans to issue any shares of preferred stock. WARRANTS At March 31, 1999, there were warrants outstanding to purchase a total of 93,333 shares of Series B Preferred Stock and 23,516 shares of Series C Preferred Stock. Warrants to purchase 83,333 shares of Series B Preferred Stock and 23,516 shares of Series C Preferred Stock will remain outstanding after the completion of this offering and will become exercisable for an aggregate of 240,410 shares of common stock. These will expire on December 15, 2003, unless earlier exercised. REGISTRATION RIGHTS The holders of 32,055,198 shares of common stock, as converted, and the holders of warrants to purchase 262,910 shares of common stock or their permitted transferees are entitled to certain rights with respect to registration of the shares under the Securities Act at any time after 180 days following the closing of this offering. Under the terms of the agreements between us and the holders of the registrable securities, by written consent of at least 40% of the registrable securities then outstanding, the holders may require on one occasion that we, at our expense, file a registration statement under the Securities Act, with respect to the registrable securities, provided that at least 20% of the registrable securities would be included in the proposed 64 66 registration or the anticipated public offering price of the proposed registration would be at least $10,000,000. In addition, holders of registrable securities may, at any time twelve months after the closing of this offering and at their expense, require on three separate occasions that we register their shares for public resale on Form S-3 or similar short-form registration, provided that we are eligible to use Form S-3 or similar short-form registration, and provided further that the value of the securities to be registered is at least $5,000,000. Furthermore, in the event we elect to register any of our shares of common stock after this offering for purposes of effecting any public offering, the holders of registrable securities are entitled, at our expense, to include their shares of common stock in the registration, subject to the right of the underwriter to reduce the number of shares proposed to be registered in view of market conditions. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of Delaware law and our certificate of incorporation and bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Our certificate of incorporation and bylaws require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of our stockholders may be called only by the board of directors or certain of our officers. Our certificate of incorporation and bylaws also provide that, beginning upon the closing of this offering, our board of directors will be divided into three classes, with each class serving staggered three-year terms, and that certain amendments of the certificate of incorporation and of the bylaws require the approval of holders of at least 66 2/3% of the voting power of all outstanding stock. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of Juniper Networks. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is Norwest Bank Minnesota, N.A. HOLDING COMPANY STRUCTURE On May 13, 1999 our stockholders approved a proposal to reorganize into a holding company structure in which we would 65 67 become a wholly-owned subsidiary of a new corporation which would be owned by our existing stockholders. Our board of directors subsequently decided to abandon the formation of this holding company structure. Although we currently do not have any plans to implement a holding company structure, we may at any time decide to do so. In addition, as permitted by Delaware law, we may implement this structure without submitting it to our stockholders for approval. 66 68 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Upon completion of this offering, we will have outstanding 49,032,881 shares of common stock, assuming the issuance of 2,000,000 shares of common stock offered by us and no exercise of options after March 31, 1999, and assuming no exercise of the underwriters' over-allotment option. All of the 4,800,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act; provided, however, that if shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act, their sales of shares would be subject to certain limitations and restrictions that are described below. The remaining 49,032,869 shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Of these shares, all 49,032,869 shares will be subject to "lock-up" agreements described below on the effective date of this offering. On the effective date of this offering, shares not subject to the lock-up agreements described below will not be eligible for sale pursuant to Rule 144(k). All of the directors and officers as well as stockholders collectively holding more than 99% of the outstanding common stock have entered into lock-up agreements with the underwriters that provide that the shares set forth in the table below will become eligible for sale on the dates set forth in the table below, subject in most cases to the limitations of Rule 144. In addition, holders of stock options could exercise such options and sell certain of the shares issued upon exercise as described below.
APPROXIMATE SHARES ELIGIBLE RELEVANT DATES FOR FUTURE SALE COMMENT - -------------- --------------- ------------------------------------------ On effective date(1)................. 4,800,000 Shares sold in this offering. 90 days after effective date(2)...... 0 Shares saleable under Rules 144 and 701. 2 days after September 30, 1999 quarterly results are released(3)........................ 6,268,238 15% of shares subject to lock-up released; shares saleable under Rules 144 and 701. 30 days after September 30, 1999 quarterly results are released..... 10,433,476 Additional 25% of shares subject to lock-up released; shares saleable under Rules 144 and 701. 180 days after effective date........ 22,677,779 All shares subject to lock-up released; shares saleable under Rules 144 and 701.
- --------------- (1) Assumes no exercise of underwriters' over-allotment option. (2) Assumes effective date of June 24, 1999. (3) Assumes quarterly results are released on October 25, 1999. As of March 31, 1999, there were a total of 4,291,564 shares of common stock subject to outstanding options under our 1996 Stock Plan, 137,026 of which were vested, and all of which are subject to lock-up agreements. Immediately after the completion of the offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our 1996 Stock Plan, as amended, and 1999 Employee Stock Purchase Plan. On the 67 69 date 180 days after the effective date of the offering, a total of 1,083,152 shares of common stock subject to outstanding options will be vested. After the effective dates of the registration statements on Form S-8, shares purchased upon exercise of options granted pursuant to the 1996 Stock Plan, as amended, and 1999 Employee Stock Purchase Plan generally would be available for resale in the public market. Our officers, directors and stockholders have agreed not to sell or otherwise dispose of any of their shares for the time periods described above. Goldman, Sachs & Co., however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - - 1% of the number of shares of common stock then outstanding, which will equal approximately 490,328 shares immediately after this offering; or - - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain other requirements regarding the manner of sale, notice filing and the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of our "affiliates" at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an "affiliate," is entitled to sell such shares without complying with the manner of sale, notice filing, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of such options (including exercises after the date of this prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement. 68 70 WHERE YOU MAY FIND ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to Juniper Networks and our common stock, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedule that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon payment of the prescribed fee. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. Upon completion of this offering, Juniper Networks will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance with the requirements of the Securities Exchange Act of 1934, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the Securities and Exchange Commission referred to above. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Brobeck Phleger & Harrison LLP, San Francisco, California. As of the date of this prospectus, WS Investment Company 96A and WS Investment Co. 96B, each an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to certain current individual members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of 159,374 of Juniper Networks' common stock. EXPERTS Ernst & Young, LLP, independent auditors, have audited our consolidated financial statements at December 31, 1997 and 1998, for the period from February 2, 1996 (inception) to December 31, 1996, and for each of the two years in the period ended December 31, 1998, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon the authority of such firm as experts in accounting and auditing. 69 71 (THIS PAGE INTENTIONALLY LEFT BLANK) 72 JUNIPER NETWORKS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statement of Stockholders' Equity.............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-8
F-1 73 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Juniper Networks, Inc. We have audited the accompanying consolidated balance sheets of Juniper Networks, Inc. as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from inception (February 2, 1996) to December 31, 1996 and for each of the two years in the period ended December 31, 1998. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Juniper Networks, Inc. at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for the period from inception (February 2, 1996) to December 31, 1996 and for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Palo Alto, California February 26, 1999 F-2 74 JUNIPER NETWORKS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT STATED VALUE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, MARCH 31, EQUITY AT -------------------- --------- MARCH 31, 1997 1998 1999 1999 ---- ---- ---- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................ $ 30,442 $ 20,098 $ 48,947 Short-term investments................................... 15,785 -- 502 Accounts receivable...................................... -- 8,056 8,618 Prepaid expenses and other current assets................ 543 680 845 -------- -------- -------- Total current assets....................................... 46,770 28,834 58,912 Property, equipment and purchased software, net............ 3,315 7,702 8,078 Other assets............................................... 125 135 135 -------- -------- -------- Total assets............................................... $ 50,210 $ 36,671 $ 67,125 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 661 $ 4,745 $ 5,378 Accrued warranty liability............................... -- 684 1,514 Accrued milestone payment................................ 423 -- -- Accrued compensation and related liabilities............. 245 1,114 1,223 Deferred revenue......................................... -- 5,639 7,858 Current obligations under capital leases................. 750 2,220 1,183 -------- -------- -------- Total current liabilities.................................. 2,079 14,402 17,156 Other long-term liabilities................................ -- 43 48 Long-term obligations under capital leases................. 2,083 5,161 2,786 Commitments Stockholders' equity: Convertible preferred stock, $0.00001 stated value, issuable in series: 10,859 shares authorized at December 31, 1997 and 1998, 14,039 shares authorized at March 31, 1999 (10,000 shares pro forma); 10,717 shares issued and outstanding at December 31, 1997 and 1998, and 13,797 shares issued and outstanding at March 31, 1999 (none pro forma); aggregate liquidation preference of $90,889 at March 31, 1999 (none pro forma).......... -- -- $ -- Common stock, $0.00001 stated value, 67,500 shares authorized at December 31, 1998, and 71,000 shares authorized at March 31, 1999 (200,000 pro forma); 19,121, 20,577, and 21,265 issued and outstanding at December 31, 1997 and 1998 and March 31, 1999 (47,033 pro forma)............................................. -- -- -- -- Additional paid-in capital............................... 58,210 65,351 102,305 102,305 Deferred stock compensation.............................. -- (5,153) (5,362) (5,362) Accumulated deficit...................................... (12,162) (43,133) (49,808) (49,808) -------- -------- -------- -------- Stockholders' equity....................................... 46,048 17,065 47,135 $ 47,135 -------- -------- -------- ======== $ 50,210 $ 36,671 $ 67,125 ======== ======== ========
See accompanying notes. F-3 75 JUNIPER NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM INCEPTION THREE MONTHS (FEBRUARY 2, YEAR ENDED ENDED 1996) TO DECEMBER 31, MARCH 31, DECEMBER 31, -------------------- ------------------ 1996 1997 1998 1998 1999 ------------ ---- ---- ---- ---- (UNAUDITED) Net revenues................. $ -- $ -- $ 3,807 $ -- $10,044 Cost of revenues............. -- -- 4,416 39 6,347 ------- -------- -------- ------- ------- Gross profit (loss).......... -- -- (609) (39) 3,697 Operating expenses: Research and development... 1,850 9,406 23,987 3,497 6,181 Sales and marketing........ -- 1,149 4,216 519 2,603 General and administrative.......... 89 1,043 2,223 335 776 Amortization of deferred stock compensation...... -- -- 1,235 21 904 ------- -------- -------- ------- ------- Total operating expenses......... 1,939 11,598 31,661 4,372 10,464 ------- -------- -------- ------- ------- Operating loss............... (1,939) (11,598) (32,270) (4,411) (6,767) Interest and other expense... (1) (325) (657) (104) (231) Interest income.............. 141 1,560 1,956 610 323 ------- -------- -------- ------- ------- Net loss..................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675) ======= ======== ======== ======= ======= Basic and diluted net loss per share.................. $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45) ======= ======== ======== ======= ======= Shares used in computing basic and diluted net loss per share.................. 3,958 8,591 12,957 10,872 14,990 ======= ======== ======== ======= ======= Pro forma basic and diluted net loss per share (unaudited)................ $ (0.84) $ (0.17) ======== ======= Shares used in computing pro forma basic and diluted net loss per share (unaudited)................ 37,070 39,324 ======== =======
See accompanying notes. F-4 76 JUNIPER NETWORKS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- --------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY ------ ------ ------ ------ ---------- ------------ ----------- ------------- Issuance of common stock to founders...................... -- $-- 4,050 $-- $ 9 $ -- $ -- $ 9 Issuance of Series A preferred stock to investors, net of issuance costs................ 1,744 -- -- -- 1,738 -- -- 1,738 Issuance of common stock........ -- -- 11,844 -- 603 -- -- 603 Issuance of Series B preferred stock to investors, net of issuance costs................ 3,818 -- -- -- 9,157 -- -- 9,157 Issuance of Series B preferred stock in exchange for consulting services........... 4 -- -- -- 9 -- -- 9 Issuance of warrants to purchase Series B preferred stock...... -- -- -- -- 11 -- -- 11 Net loss........................ -- -- -- -- -- -- (1,799) (1,799) ------ -- ------ -- -------- ------- -------- -------- Balance at December 31, 1996...... 5,566 -- 15,894 -- 11,527 -- (1,799) 9,728 Issuance of warrants to purchase Series B preferred stock...... -- -- -- -- 1 -- -- 1 Issuance of Series C preferred stock to investors............ 5,151 -- -- -- 45,953 -- -- 45,953 Issuance of warrants to purchase Series C preferred stock...... -- -- -- -- 3 -- -- 3 Issuance of common stock, net of repurchases................... -- -- 3,227 -- 375 -- -- 375 Compensation expense related to stock options................. -- -- -- -- 351 -- -- 351 Net loss........................ -- -- -- -- -- -- (10,363) (10,363) ------ -- ------ -- -------- ------- -------- -------- Balance at December 31, 1997...... 10,717 -- 19,121 -- 58,210 -- (12,162) 46,048 Exercise of stock options by employees, net of repurchases................... -- -- 1,456 -- 753 -- -- 753 Deferred stock compensation..... -- -- -- -- 6,388 (6,388) -- -- Amortization of deferred stock compensation.................. -- -- -- -- -- 1,235 -- 1,235 Net loss........................ -- -- -- -- -- -- (30,971) (30,971) ------ -- ------ -- -------- ------- -------- -------- Balance at December 31, 1998...... 10,717 -- 20,577 -- 65,351 (5,153) (43,133) 17,065 Issuance of Series D and D-1 preferred stock to investors (unaudited)................... 3,080 -- -- -- 33,948 -- -- 33,948 Exercise of stock options by employees (unaudited)......... -- -- 558 -- 656 -- -- 656 Issuance of common stock to employees (unaudited)......... -- -- 130 -- 1,237 -- -- 1,237 Deferred stock compensation (unaudited)................... -- -- -- -- 1,113 (1,113) -- -- Amortization of deferred stock compensation (unaudited)...... -- -- -- -- -- 904 -- 904 Net loss (unaudited)............ -- -- -- -- -- -- (6,675) (6,675) ------ -- ------ -- -------- ------- -------- -------- Balance at March 31, 1999 (unaudited)..................... 13,797 $-- 21,265 $-- $102,305 $(5,362) $(49,808) $ 47,135 ====== == ====== == ======== ======= ======== ========
See accompanying notes. F-5 77 JUNIPER NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM INCEPTION THREE MONTHS (FEBRUARY 2, YEAR ENDED ENDED 1996) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------- ----------------- 1996 1997 1998 1998 1999 ------------- -------- -------- ------- ------- (UNAUDITED) OPERATING ACTIVITIES: Net loss.............................. $(1,799) $(10,363) $(30,971) $(3,905) $(6,675) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and lease amortization..................... 47 712 2,171 339 1,051 Amortization of prepaid maintenance contracts........................ -- 238 367 9 133 Amortization of deferred stock compensation..................... -- 351 1,235 21 904 Loss on disposal of property, equipment, and purchased software......................... -- 59 -- -- -- Issuance of stock for consulting services......................... 18 21 30 -- -- Issuance of warrants in connection with certain leasing arrangements..................... 28 14 -- -- -- Changes in operating assets and liabilities: Accounts receivable.............. -- -- (8,056) -- (562) Prepaid expenses and other current assets................. (82) (699) (504) (258) (298) Other assets..................... (49) (104) (10) 125 -- Accounts payable and other current liabilities.................... 172 489 4,084 306 633 Accrued warranty liability....... -- -- 684 -- 830 Accrued milestone payment........ -- 423 (423) (423) -- Accrued compensation and related liabilities.................... -- 245 869 86 109 Deferred revenue................. -- -- 5,639 -- 2,219 Other long-term liabilities...... -- -- 43 18 5 ------- -------- -------- ------- ------- Net cash used in operating activities............................ (1,665) (8,614) (24,842) (3,682) (1,651) INVESTING ACTIVITIES: Purchases of property, equipment, and purchased software.................. (864) (3,110) (6,531) (1,011) (1,422) Purchases of short-term investments... (5,870) (20,715) (3,501) (118) (502) Maturities of short-term investments......................... -- 10,800 19,286 6,841 -- ------- -------- -------- ------- ------- Net cash provided by (used in) investing activities................ (6,734) (13,025) 9,254 5,712 (1,924)
F-6 78 JUNIPER NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS)
PERIOD FROM INCEPTION THREE MONTHS (FEBRUARY 2, YEAR ENDED ENDED 1996) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------- ----------------- 1996 1997 1998 1998 1999 ------------- -------- -------- ------- ------- (UNAUDITED) FINANCING ACTIVITIES: Proceeds from sale leaseback liabilities......................... 535 2,603 5,705 863 -- Payments on lease obligations......... (25) (439) (1,157) (258) (3,412) Proceeds from issuance of preferred stock............................... 10,895 45,953 -- -- 33,948 Issuance of common stock.............. 592 396 699 -- 1,888 Repurchase of common stock............ -- (30) (3) (3) -- ------- -------- -------- ------- ------- Net cash provided by financing activities.......................... 11,997 48,483 5,244 602 32,424 ------- -------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents.................... 3,598 26,844 (10,344) 2,632 28,849 Cash and cash equivalents at beginning of period........................... -- 3,598 30,442 30,442 20,098 ------- -------- -------- ------- ------- Cash and cash equivalents at end of period.............................. $ 3,598 $ 30,442 $ 20,098 $33,074 $48,947 ======= ======== ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest................ $ -- $ 210 $ 592 $ 96 $ 138 ======= ======== ======== ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of property, equipment and purchased software under capital lease............................... $ 535 $ 2,243 $ 5,692 $ 863 $ -- ======= ======== ======== ======= ======= Deferred stock compensation........... $ -- $ -- $ 6,388 $ -- $ 1,113 ======= ======== ======== ======= =======
See accompanying notes. F-7 79 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Juniper Networks, Inc. ("Juniper Networks") was incorporated in the state of California on February 2, 1996. Juniper Networks was reincorporated in the state of Delaware on March 15, 1998. Juniper Networks was established for the purpose of providing Internet infrastructure solutions to Internet service providers and other telecommunication service providers. Juniper Networks develops next generation Internet backbone routers. From inception, in February 1996, through September 1998, Juniper Networks' operating activities were primarily devoted to increasing research and development capabilities, designing ASICs, developing software, developing and testing the M40 and other products which are currently in development, staffing the administrative, marketing and sales organizations and establishing strategic relationships. Accordingly, Juniper Networks was classified as a development stage company through that date. Juniper Networks commenced product shipments in October 1998 and therefore emerged from the development stage. INTERIM FINANCIAL INFORMATION The financial information at March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that Juniper Networks considers necessary for a fair presentation of its financial position, operating results, and cash flows for the interim date and periods presented. Results for the three-month period ended March 31, 1999 are not necessarily indicative of results for the entire fiscal year or future periods. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Juniper Networks and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Juniper Networks considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of commercial paper and money market accounts. Juniper classifies, at the date of acquisition, its marketable securities into available-for-sale categories in accordance with the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Currently, Juniper classifies its securities as available-for-sale which are reported at fair market value with the related unrealized gains and losses included in stockholders' equity. Unrealized gains and losses were not material for all periods presented. Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income. Interest and dividends on all securities are included in interest income. CONCENTRATIONS Financial instruments that potentially subject Juniper Networks to concentrations of F-8 80 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) credit risk consist principally of investments in debt securities and trade receivables. Juniper Networks is exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent recorded on the balance sheet. Juniper Networks generally does not require collateral. For the year ended December 31, 1998, two customers, A and B, accounted for 78% and 22% of Juniper Networks' net revenues. For the three months ended March 31, 1999, three customers, A, C, and D, accounted for 40%, 15% and 16% of Juniper Networks' net revenues. Juniper Networks receives certain custom semiconductor chips from a sole supplier. Additionally, Juniper Networks relies on one hardware manufacturer for the production of its product. The inability of the supplier or manufacturer to fulfill supply requirements of Juniper Networks could negatively impact future results. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of Juniper Networks' short-term investments is based on quoted market prices. The carrying value of those investments approximates their fair value. The fair value of short-term and long-term capital lease obligations is estimated based on current interest rates available to Juniper Networks for debt instruments with similar terms, degrees of risk, and remaining maturities. The carrying values of these obligations approximate their respective fair values. PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE Property, equipment and purchased software, including equipment leased under capital leases, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over the lesser of the estimated useful life, generally three to five years, or the lease term of the respective assets. REVENUE RECOGNITION Juniper Networks generally recognizes product revenue at the time of shipment, assuming that collectibility is probable, unless Juniper Networks has future obligations for installation or has to obtain customer acceptance in which case revenue is deferred until these obligations are met. Revenue from service obligations is deferred and recognized on a straight-line basis over the contractual period. Amounts billed in excess of revenue recognized are included as deferred revenue in the accompanying consolidated balance sheets. WARRANTY RESERVES Juniper Networks' product generally carries a one-year warranty that includes factory repair services as needed for replacement of parts. Estimated expenses for warranty obligations are accrued as revenue is recognized. RESEARCH AND DEVELOPMENT Costs to develop Juniper Networks' products are expensed as incurred in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," which establishes accounting and reporting standards for research and development. COMPREHENSIVE INCOME Effective January 1, 1998, Juniper Networks adopted Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). Juniper Networks has no components of other comprehensive income and accordingly the comprehensive loss is the same as net loss for all periods presented. STOCK-BASED COMPENSATION Juniper Networks accounts for its stock options and equity awards in accordance with F-9 81 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the provisions of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has elected to follow the "disclosure only" alternative prescribed by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). NET LOSS PER SHARE Basic net loss per share and diluted net loss per share are presented in conformity with Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, Juniper Networks has not had any issuances or grants for nominal consideration. In accordance with FAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less the weighted average number of shares of common stock issued to founders, investors and employees that are subject to repurchase (see Notes 5 and 6). Basic and diluted pro forma net loss per share, as presented in the consolidated statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance, using an assumed initial public offering price of $29.00 per share to calculate the conversion ratio for Series D1 convertible preferred stock. F-10 82 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
PERIOD FROM INCEPTION THREE MONTHS (FEBRUARY 2, 1996) YEAR ENDED ENDED TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------- ----------------- 1996 1997 1998 1998 1999 ------------------ -------- -------- ------- ------- (UNAUDITED) Net loss.......................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675) ======= ======== ======== ======= ======= Basic and diluted: Weighted-average shares of common stock outstanding..... 11,030 18,623 19,691 19,096 20,921 Less: weighted-average shares subject to repurchase........ (7,072) (10,032) (6,734) (8,224) (5,931) ------- -------- -------- ------- ------- Weighted-average shares used in computing basic and diluted net loss per share........... 3,958 8,591 12,957 10,872 14,990 ======= ======== ======== ======= ======= Basic and diluted net loss per share........................ $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45) ======= ======== ======== ======= ======= Pro forma: Net loss........................ $(30,971) $(6,675) ======== ======= Shares used above............... 12,957 14,990 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock.............. 24,113 24,334 -------- ------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited).................. 37,070 39,324 ======== ======= Pro forma basic and diluted net loss per common share (unaudited).................. $ (0.84) $ (0.17) ======== =======
Juniper Networks has excluded all convertible preferred stock, warrants for convertible preferred stock, outstanding stock options and shares subject to repurchase from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. The total number of shares excluded from the calculations of diluted net loss per share were 10,810,000, 28,937,000, 33,923,000, 34,483,000 and 34,222,000 for the period from inception (February 2, 1996) through December 31, 1996 for the two years ended December 31, 1997 and 1998 and for the three months ended March 31, 1998 and 1999, respectively. F-11 83 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY If the offering contemplated by this prospectus is consummated, all of the convertible preferred stock outstanding will automatically be converted into common stock. Unaudited pro forma stockholders' equity at March 31, 1999, as adjusted for the assumed conversion of convertible preferred stock based on the shares of convertible preferred stock outstanding at March 31, 1999 at an assumed initial public offering price of $29 per share, is disclosed on the consolidated balance sheet. Series A, B and C preferred stock convert to common stock at a conversion rate of 2.25. Series D preferred stock converts to common stock at a conversion rate of 1. Series D-1 converts to common stock at a rate of 0.44746, assuming an initial offering price of $29 per share. SEGMENT INFORMATION Effective January 1, 1998, Juniper Networks adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" (FAS 131). FAS 131 changes the way companies report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. Juniper Networks operates solely in one segment, the development and marketing of Internet infrastructure equipment, and therefore there is no impact to Juniper Networks' consolidated financial statements due to the adoption of FAS 131. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. Juniper Networks adopted SOP 98-1 in January 1999, with no material impact on its consolidated financial position, results of operations, or cash flows. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5, which is effective for fiscal years beginning after December 31, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires the costs of start-up activities and organization costs to be expensed as incurred. Juniper Networks adopted SOP 98-5 in January 1999, with no significant impact on consolidated operating results, financial position or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which will be effective for the fiscal year ended December 31, 2000. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. Juniper Networks has not evaluated the impact of FAS 133, however, it believes the adoption of FAS 133 will not have a material effect on the financial position, consolidated results of operations, or cash flows as Juniper Networks has not entered into any derivative contracts. F-12 84 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents and short-term investments consist of the following (in thousands):
DECEMBER 31, -------------------- MARCH 31, 1997 1998 1999 ---- ---- --------- (UNAUDITED) Money market funds................................... $ 14,351 $ 3,037 $ 48,814 Commercial paper..................................... 12,536 16,520 502 Government securities................................ 9,205 -- -- Corporate debt securities............................ 7,061 -- -- Certificates of deposit.............................. 3,066 -- -- -------- -------- -------- Total available-for-sale investments................. 46,219 19,557 49,316 Less amounts classified as cash equivalents.......... (30,434) (19,557) (48,814) -------- -------- -------- Total investments.................................... $ 15,785 $ -- $ 502 ======== ======== ========
3. PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE Property, equipment and purchased software consist of the following (in thousands):
DECEMBER 31, ----------------- 1997 1998 ---- ---- Computers and equipment..................................... $2,242 $ 7,435 Purchased software.......................................... 1,394 2,540 Furniture and fixtures...................................... 424 594 ------ ------- Total....................................................... 4,060 10,569 Less accumulated depreciation and lease amortization........ (745) (2,867) ------ ------- Property, equipment and purchased software, net............. $3,315 $ 7,702 ====== =======
4. CAPITAL LEASE OBLIGATIONS Juniper Networks enters into various capital leases, including sale and leaseback transactions, to finance purchases of property, equipment and software. As of December 31, 1997 and 1998 and March 31, 1999, under various lease lines of credit, Juniper Networks had $4,861,000, $1,891,000, and $5,000,000 available for future purchases of property, equipment and software that expire through June 30, 1999. Under the terms of certain lease agreements, warrants to purchase the Company's preferred stock have been granted as described in Note 5. Capitalized costs of $2,778,000 and $8,470,000, and accumulated amortization of $690,000 and $905,000 are included in property and equipment at December 31, 1997 and 1998. F-13 85 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under capital leases consist of the following (in thousands):
AS OF DECEMBER 31, 1998 ------------ 1999........................................................ $2,974 2000........................................................ 2,859 2001........................................................ 2,449 2002........................................................ 582 ------ Total minimum lease payments................................ 8,864 Less amount representing interest........................... (1,483) ------ Present value of net minimum lease payments................. 7,381 Less current portion........................................ (2,220) ------ Long-term portion........................................... $5,161 ======
5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK
SHARES ISSUED AND OUTSTANDING AT --------------------------------------- DECEMBER 31, SHARES ------------------------ MARCH 31, AUTHORIZED 1997 1998 1999 ---------- ---- ---- --------- (UNAUDITED) Series A............................ 1,743,751 1,743,751 1,743,751 1,743,751 Series B............................ 3,915,308 3,821,975 3,821,975 3,821,975 Series C............................ 5,200,000 5,151,178 5,151,178 5,151,178 Series D (unaudited)................ 600,000 -- -- 500,000 Series D-1 (unaudited).............. 2,580,000 -- -- 2,580,000 ---------- ---------- ---------- ---------- Total preferred stock............... 14,039,059 10,716,904 10,716,904 13,796,904 ========== ========== ========== ==========
Holders of Juniper Networks' preferred stock are entitled to one vote for each share of common stock into which the preferred stock is convertible. Holders of Juniper Networks' preferred stock shall also be entitled to vote separately as a class with regard to customary protective provisions. The stockholders of Series A, B, and C preferred stock are entitled to annual noncumulative dividends per share of $0.05, $0.12, and $0.45 when and if declared by the board of directors. Under the terms of certain lease agreements, Juniper Networks is prohibited from declaring or paying any dividends on its capital stock. In the event of any voluntary or involuntary liquidation of Juniper Networks, Series A, B, and C stockholders are entitled to a liquidation preference per share of $1.00, $2.40, and $8.93 plus any declared but unpaid dividends, all in preference to the holders of the common stock. Upon the completion of this distribution, the holders of the common stock will receive any and all remaining assets of Juniper Networks. F-14 86 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The stockholders of Series A, B, and C preferred stock have the right at any time after the date of issuance to convert each of their shares into 2.25 shares of common stock, which equals the initial offering price per share of Series A, B, and C preferred stock of $1.00, $2.40 and $8.93, respectively, divided by $0.4444, $1.07, and $3.97. Each of these conversion rates is subject to adjustments for dilution. Each share of preferred stock shall be automatically converted into shares of common stock at the then effective conversion rate upon (a) the closing of the issuance of shares following the effectiveness of a registration statement under the Securities Act of 1933, pursuant to a firm commitment public offering of Juniper Networks' common stock at a price per share of not less than three times the applicable conversion price for the Series A and B preferred stock and at a price per share of not less than one-and-a-half times the then applicable conversion price for the Series C preferred stock, subject to adjustments for dilution, with aggregate proceeds in excess of $10,000,000 or (b) the affirmative vote of the holders of 66 2/3 of the then outstanding shares of preferred stock. See description of Series D and D-1 preferred stock in Note 10. WARRANTS Juniper Networks periodically grants warrants in connection with certain lease arrangements. Juniper Networks had the following warrants to purchase shares of preferred stock outstanding at December 31, 1998 and March 31, 1999:
PREFERRED EXERCISE STOCK PRICE PER DATE EXPIRATION OF NUMBER OF SHARES SERIES SHARE ISSUED WARRANTS - ---------------- --------- --------- ------ ------------- 83,333......................... Series B $2.40 December 1996 December 2003 10,000......................... Series B 2.40 June 1997 June 2002 23,516......................... Series C 8.93 June 1997 December 2003 - --------- 116,849 - --------- - ---------
All of the outstanding warrants are exercisable immediately and will become exercisable for common stock at the then effective conversion rate if Juniper Networks completes an initial public offering of its common stock. The fair value of the warrants are amortized as interest expense over the life of the respective lease arrangements. COMMON STOCK Juniper Networks is authorized to issue up to 71,000,000 shares of its common stock. At December 31, 1997 and 1998 and March 31, 1999, 19,121,347, 20,577,328, and 21,265,387 shares were issued and outstanding. Prior to the adoption of the 1996 Stock Option Plan (see Note 6), Juniper Networks issued shares of common stock to founders, investors, and employees. The shares issued to investors were fully vested upon purchase. Generally, shares issued to founders and employees were sold pursuant to restricted stock purchase agreements containing provisions established by the board of directors. These provisions give Juniper Networks the right to repurchase the shares at the original sales price. This right expires at the rate of 25% after one year and 2.0833% per month thereafter. At December 31, 1997 and 1998 and March 31, 1999, 2,564,063, 1,382,813, and 1,217,501 of these shares, issued outside of the 1996 Stock Option Plan, remained subject to repurchase. See Note 6 for shares subject to repurchase under the 1996 Stock Option Plan. F-15 87 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Juniper Networks effected a three-for-two stock split of its common stock on June 27, 1997 and October 2, 1998. All share and per share amounts have been adjusted to reflect the splits. Common stock reserved for future issuance consists of the following:
DECEMBER 31, MARCH 31, 1998 1999 ------------ --------- (UNAUDITED) Common stock reserved for: Conversion of preferred stock............................. 24,113,034 25,767,482 Conversion of preferred stock issuable on exercise of warrants............................................... 262,910 262,910 Stock option plan......................................... 6,663,292 6,105,233 ---------- ---------- Total common stock reserved for future issuance............. 31,039,236 32,135,625 ========== ==========
6. STOCK OPTION PLAN Juniper Networks' 1996 Stock Option Plan (the "Plan") provides for the granting of incentive stock options to employees and nonstatutory stock options to employees, directors and consultants. Incentive stock options are granted at an exercise price of not less than the fair value per share of the common stock on the date of grant as determined by the board of directors. Nonstatutory stock options are granted at an exercise price of not less than 85% of the fair value per share on the date of grant as determined by the board of directors. Options granted to consultants are in consideration for the fair value of services previously rendered and are not contingent upon future events. No options have been granted to consultants to date. Vesting and exercise provisions are determined by the board of directors. Options granted under the Plan generally become exercisable over a four-year period beginning on the date of grant. Options granted under the Plan have a maximum term of ten years. Option activity under the Plan is summarized as follows:
OUTSTANDING OPTIONS ---------------------------------------------- NUMBER PRICE PER WEIGHTED-AVERAGE OF SHARES SHARE EXERCISE PRICE --------- --------- ---------------- Options granted........................... 1,797,750 $0.11-$ 0.40 $ 0.22 ---------- Balance at December 31, 1997.............. 1,797,750 0.11-$ 0.40 0.22 Options granted........................... 3,512,480 0.53-$ 4.90 1.86 Options exercised......................... (1,507,316) 0.11-$ 4.90 0.49 Options canceled.......................... (121,676) 0.11-$ 1.67 0.27 ---------- Balance at December 31, 1998.............. 3,681,238 0.11-$ 4.90 1.67 Options granted (unaudited)............... 1,242,900 8.80-$14.00 11.82 Options exercised (unaudited)............. (558,059) 0.11-$ 8.80 1.17 Options canceled (unaudited).............. (74,515) 1.67-$14.00 10.27 ---------- Balance at March 31, 1999 (unaudited)..... 4,291,564 0.11-$14.00 4.53 ==========
F-16 88 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Plan also provides for the sale of shares of common stock to employees and consultants at the fair value per share of the common stock as determined by the board of directors. Shares issued to consultants are for the fair value of services previously rendered and are not contingent upon future events. Shares sold to employees are made pursuant to restricted stock purchase agreements containing provisions established by the board of directors. These provisions give Juniper Networks the right to repurchase the shares at the original sales price. This right expires at a rate determined by the board of directors, generally at the rate of 25% after one year and 2.0833% per month thereafter. During the period from inception (February 2, 1996) to December 31, 1996 and the year ended December 31, 1997, Juniper Networks issued 4,840,884 and 3,572,433 shares under the Plan. No shares were issued under the Plan in the year ended December 31, 1998 and the three month period ended March 31, 1999. At December 31, 1997 and 1998 and March 31, 1999, 6,340,994, 4,685,104, and 4,575,599 shares were subject to repurchase rights under the Plan. At December 31, 1997, 345,095 shares had been repurchased under the Plan. As of December 31, 1998 and March 31, 1999, 396,425 shares had been repurchased under the Plan. Juniper Networks has reserved 16,187,500 shares of common stock for issuance under the Plan. At December 31, 1998, 2,982,054 shares were available for future option grants or stock sales under the Plan. At March 31, 1999, 1,813,669 shares were available for future option grants or stock sales under the Plan. In 1997, Juniper Networks recorded compensation expense of $351,000 representing the difference between the deemed fair value and the exercise price of certain option grants made during the year. During the year ended December 31, 1998 and the three months ended March 31, 1999, in connection with the grant of certain stock options to employees, Juniper Networks recorded deferred stock compensation of $6,388,000 and $1,113,000 representing the difference between the exercise price and the deemed fair value of Juniper Networks' common stock on the date such stock options were granted. Such amount is included as a reduction of stockholders' equity and is being amortized by charges to operations on a graded vesting method. Juniper Networks recorded amortization of deferred stock compensation expense of $1,235,000 for the year ended December 31, 1998 and $904,000 for the three months ended March 31, 1999. At December 31, 1998 and March 31, 1999, Juniper Networks had a total of $5,153,000 and $5,362,000 remaining to be amortized over the corresponding vesting period of each respective option, generally four years. The amortization expense relates to options awarded to employees in all operating expense categories. This amount has not been separately allocated to these categories. STOCK-BASED COMPENSATION The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock-based compensation plans. Because the exercise price of Juniper Networks' employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized. Pro forma information regarding net loss has been determined as if Juniper Networks had accounted for its employee stock options under the fair value method prescribed by FAS 123. The resulting effect on pro forma net loss disclosed is not likely to be representative of the effects on net (loss) on a pro forma basis in future years, due to subsequent years including additional grants and years of vesting. F-17 89 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of each option granted through March 31, 1999 was estimated on the date of grant using the minimum value method with the following weighted-average assumptions:
PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS (FEBRUARY 2, 1996) DECEMBER 31, ENDED MARCH 31, TO DECEMBER 31, -------------------- -------------------- 1996 1997 1998 1998 1999 ------------------ --------- --------- --------- --------- (UNAUDITED) Dividend yield............... -- -- -- -- -- Volatility factor............ -- -- -- -- -- Risk-free interest rate...... 6.20% 6.20% 5.23% 5.23% 5.23% Expected life................ 4.5 years 4.5 years 4.5 years 4.5 years 4.0 years Weighted average fair value of options granted in the period..................... $0.02 $0.03 $0.37 $0.37 $2.19
For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the options' vesting period. Pro forma information follows (in thousands, except share and per share amounts):
PERIOD FROM INCEPTION THREE MONTHS (FEBRUARY 2, YEAR ENDED ENDED 1996) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------- ----------------- 1996 1997 1998 1998 1999 ------------ -------- -------- ------- ------- (UNAUDITED) Net Loss: As Reported................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675) Pro Forma..................... (1,805) (10,403) (31,143) (3,922) (6,849) Basic and Diluted Net Loss Per Share: As Reported................... (0.46) (1.21) (2.39) (0.36) (0.45) Pro Forma..................... (0.46) (1.21) (2.40) (0.36) (0.46)
7. 401(k) PLAN Juniper Networks maintains a savings and retirement plan under Section 401(k) of the Internal Revenue Code. All employees are eligible to participate on their first day of employment with Juniper Networks. Under the plan, employees may contribute up to 20% of their pretax salaries per year but not more than the statutory limits. Juniper Networks does not contribute to the plan. 8. COMMITMENTS Juniper Networks leases its facilities under operating leases that expire in 2001. Rental expense for the period from inception (February 2, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, were $145,000, $529,000, and $937,000. F-18 90 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under the noncancellable operating leases consist of the following (in thousands):
DECEMBER 31, 1998 ------------ 1999........................ $1,422 2000........................ 1,071 2001........................ 721 ------ Total minimum lease payments.................. $3,214 ======
Juniper Networks has outstanding purchase order commitments for materials of approximately $2,442,000 at December 31, 1998 and $2,000,000 at March 31, 1999. Juniper Networks expects the purchase orders to be fulfilled in 1999. Of this amount, Juniper Networks has accrued approximately $295,000 and $160,000 of the outstanding commitments for obsolete inventory as of December 31, 1998 and March 31, 1999. These expenses are included within cost of revenue in the year ended December 31, 1998 and the three months ended March 31, 1999. 9. INCOME TAXES Due to operating losses and the inability to recognize the benefits therefrom, there is no provision for income taxes for the period from inception (February 2, 1996) to December 31, 1996, or for the years ended December 31, 1997, and 1998. Significant components of Juniper Networks' deferred tax assets as of December 31, 1997 and 1998 are as follows (in thousands):
DECEMBER 31, ------------------- 1997 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards.................... $ 4,600 $ 13,470 Research credit carryforwards....................... 600 1,490 Deferred revenue.................................... -- 2,700 Other temporary differences......................... -- 390 ------- -------- Total deferred tax assets............................. 5,200 18,050 Valuation allowance................................... (5,200) (18,050) ------- -------- Net deferred tax assets............................... $ -- $ -- ======= ========
FASB Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes Juniper Networks' historical operating performance and the reported cumulative net losses in all prior years, Juniper Networks has provided a full valuation allowance against its net deferred tax assets. The net valuation allowance increased by $5,200,000 during the year ended December 31, 1997. At December 31, 1998, Juniper Networks had net operating loss carryforwards for federal and California tax purposes of approximately $34,000,000 and $33,000,000. Juniper Networks also had federal and state research and development tax credit carryforwards of approximately $950,000 and $815,000. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2004, if not utilized. Utilization of net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the F-19 91 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss and credit carryforwards before utilization. 10. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT 1999 EMPLOYEE STOCK PURCHASE PLAN In April 1999, the board of directors approved the adoption of Juniper Networks' 1999 Employee Stock Purchase Plan (the "purchase plan"). A total of 500,000 shares of common stock have been reserved for issuance under the 1999 purchase plan, plus, commencing on January 1, 2000, annual increases equal to the lesser of 500,000 shares, 1% of the outstanding common shares on such date or a lesser amount determined by the board of directors. The 1999 purchase plan permits eligible employees to acquire shares of Juniper Networks' common stock through periodic payroll deductions of up to 10% of base compensation. No more than 1,000 shares may be purchased by each employee in any twelve month period, and in no event, may an employee purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the time such option is granted, in one calendar year. The purchase plan will be implemented in a series of offering periods, each approximately six months in duration; provided, however, that the first offering period will be approximately thirteen months in duration, ending on the last trading day on or before July 31, 2000. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Juniper Network's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. The initial offering period will commence on the effectiveness of the initial public offering and will end on July 31, 2000. ISSUANCE OF SERIES D AND D-1 CONVERTIBLE PREFERRED STOCK In March 1999, Juniper Network's board of directors approved an increase in the authorized number of shares of preferred stock to 14,039,059 shares. In March 1999, the Company issued 500,000 shares of Series D preferred stock and 2,580,000 shares of Series D-1 preferred stock at $11.03 per share, resulting in cash proceeds of $33,972,400. Holders of Juniper Networks' Series D and D-1 preferred stock are entitled to one vote for each share of common stock into which the preferred stock is convertible. Holders of Juniper Networks' preferred stock shall also be entitled to vote separately as a class with regard to customary protective provisions. The holders of Series D and D-1 preferred stock are entitled to annual noncumulative dividends per share of $0.55 per share when and if declared by the board of directors. In the event of any voluntary or involuntary liquidations of Juniper Networks, Series D and D-1 shareholders are entitled to a liquidation preference per share of $11.03 per share plus any declared but unpaid dividends, all in preference to the holders of the common stock. Upon the completion of this distribution, the holders of the common stock will receive any and all remaining assets of Juniper Networks. The holders of Series D and D-1 preferred stock have the right at any time after the date of issuance to convert each of their shares into a number of shares of common stock determined by dividing the initial offering price per share of the Series D and D-1 preferred stock by the conversion price, which is $11.03. This conversion rate is subject to adjustments for dilution. Each share of preferred stock shall be automatically converted into shares of common stock at the then effective conversion rate upon (a) the closing of the issuance of shares following the effectiveness F-20 92 JUNIPER NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of a registration statement under the Securities Act of 1933, pursuant to a firm commitment offering of Juniper Networks' common stock at a price per share of not less than three times the applicable conversion rate for the Series A and B preferred stock, a price per share of not less than one-and-a-half times the then applicable conversion rate for the Series C preferred stock, and a price per share of not less than one times the then applicable conversion rate for the Series D and D-1 preferred stock, subject to adjustments for dilution, with aggregate proceeds in excess of $10,000,000 or (b) the affirmative vote of the holders of 66 2/3 of the then outstanding shares of preferred stock. If within one hundred and eighty days of the original issue date of the Series D-1 preferred stock, Juniper Networks files a registration statement under the Securities Act of 1933 covering an underwritten initial public offering, the Series D-1 conversion rate will be modified to equal the original issue price per share of the Series D-1 preferred stock divided by 85% of the initial public offering price. If, between 180 days and one year from the original issue date of the Series D-1 preferred stock, Juniper Networks files a registration statement under the Securities Act of 1933 covering an underwritten initial public offering, the Series D-1 conversion rate will be modified to equal the original issue price per share of the Series D-1 preferred stock divided by 75% of the initial public offering price. If, between one year and fifteen months from the original issue date of the Series D-1 preferred stock, Juniper Networks files a registration statement under the Securities Act of 1933 covering an underwritten initial public offering, the Series D-1 conversion rate will be modified to equal the original issue price per share of the Series D-1 preferred stock divided by 65% of the initial public offering price. If Juniper Networks files a registration statement under the Securities Act of 1933 covering an underwritten initial public offering after 15 months from the original issue date of the Series D-1 preferred stock there will be no adjustment to the Series D-1 conversion rate. AMENDMENT TO 1996 STOCK OPTION PLAN On April 19, 1999, the board of directors approved the following amendments to the 1996 Stock Option Plan: (i) The number of shares reserved for issuance under the Plan was increased by 3,000,000 to 19,187,500 shares. (ii) An annual increase to the Plan will be added on the first day of each fiscal year, beginning in 2000, equal to the lesser of (1) 3,000,000 shares, (2) 5% of the outstanding shares on that date, or (3) a lesser amount determined by the board of directors. F-21 93 UNDERWRITING Juniper Networks, the selling stockholders and the underwriters for this offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation, BancBoston Robertson Stephens Inc., and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated are the representatives of the underwriters.
NUMBER OF UNDERWRITERS SHARES ------------ --------- Goldman, Sachs & Co......................................... Credit Suisse First Boston Corporation...................... BancBoston Robertson Stephens Inc........................... Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.............................................. --------- Total..................................................... 4,800,000 =========
------------------------------ If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 98,071 shares from Juniper Networks and an option to buy an additional 621,929 shares from one of the selling stockholders to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and the underwriting discount to be paid to the underwriters by Juniper Networks and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase 720,000 additional shares. Paid by the Company
No Exercise Full Exercise ----------- ------------- Per Share............ $ $ Total................ $ $
Paid by the Selling Stockholders
No Exercise Full Exercise ----------- ------------- Per Share............ $ $ Total................ $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. Prior to this offering, there has been no public market for the shares of common stock. The initial public offering price will be negotiated among Juniper Networks and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Juniper Networks' historical performance, estimates of the business potential and earnings U-1 94 prospects of Juniper Networks, an assessment of Juniper Networks' management and the consideration of the above factors in relation to market valuation of companies in related businesses. Juniper Networks, the officers, the directors and the stockholders have agreed with the underwriters not to dispose of or hedge any of their shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except that (i) two (2) days after Juniper Networks publicly releases its operating results for the quarter ended September 30, 1999, fifteen percent (15%) of the total number of shares of common stock locked-up pursuant to lock-up agreements shall be released from the lock-up provisions on a pro rata basis for each stockholder subject to such lock-up agreements, and (ii) thirty (30) days after Juniper Networks releases its operating results for the quarter ended September 30, 1999, another twenty- five percent (25%) of the total number of shares of common stock locked-up pursuant to lock-up agreements shall be released from the lock-up provisions on a pro rata basis for each stockholder subject to such lock-up agreements. In addition, shares of common stock can be released with the prior written consent of Goldman, Sachs & Co. See "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions. At the request of Juniper Networks, the underwriters have reserved at the initial public offering price up to eight percent of the shares of common stock for sale to directors, officers, employees, business associates and related persons of Juniper Networks. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. The common stock will be quoted on the Nasdaq National Market under the symbol "JNPR." Juniper Networks estimates that the total expenses of the offering payable by us, excluding the underwriting discount, will be approximately $1,100,000. Juniper Networks and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 95 APPENDIX -- DESCRIPTION OF GRAPHICS PROSPECTUS COVER Juniper Networks, Inc. Logo INSIDE FRONT COVER A diagram that shows the M40 providing the critical links in the Internet backbone to the fiber optic core of a Service Provider's Network. Four different links showing the M40 and other pictures are depicted with the tag lines as follows: 1) The hub of the diagram has the tag line "Controlling the Fiber-Optic Core"; "Connecting the Service Provider" and "Servers"; 2) "Concentrating Network Access," "Home" and "Business"; 3) "Managing Exploding Traffic Demands," "Cyber Cafe," "ATM" and "Cellular"; 4) "Differentiated Services for Multimedia Applications," and "Multimedia Web Pages,"; 5) At the bottom of the page is the text "Juniper Networks M40 Internet backbone routers are linking users and applications across the new public network." PAGE 33 Diagram showing areas of bottleneck when packet/cell switching and fiber optic technologies are deployed together. The left side of the diagram is labeled "Electronic Packet/Cell Switching" above pictures of computers. To the right of the diagram is the text "Electronic Packet/Cell Switching" above pictures of servers which are labeled "Servers." Between these pictures are links labeled "Fiber Optic Core" and the text "Bottleneck" at the edges of the Fiber Optic Core links. PAGE 36 Diagram showing a typical architecture for a service provider's network backbone, including the placement of network routes, switches and access concentration points. Diagram contains the text "Enterprise Routers," "DS3," "DS1," "DS0," "OC-12," "OC-3," "ATM," "OC-12 ATM or OC-12 SONET or OC-48 SONET," "Core Backbone," "Intra-POP," "Access," "Router," "Switch" and "Access Concentration Point." PAGE 38 Diagram showing traffic path between router points labeled "San Francisco" and "New York." Below the diagram is a legend of icons in the diagram which are labeled "Shortest path," "Traffic Engineered Path" and "Router." PAGE 41 Diagram showing the JUNOS Routing Engine with the text "Forwarding Table" contained in the diagram. Also includes a diagram below this diagram of the Packet Forwarding Engine containing the text "Forwarding Table," "Internet Processor," "Memory-based Switch Fabric" and "I/O Card." PAGE 43 Picture of our M40 Internet backbone router together with a data table of rack configuration information. The data table includes the following configuration data: Interface Ports Per M40 Ports per 7ft. Rack - ------------------------------------------------------------------------ OC-48 STM-16 SONET/SDH 8 16 - ------------------------------------------------------------------------ OC-12/STM-4 ATM 32 64 - ------------------------------------------------------------------------ OC-12/STM-4 SONET/SDH 32 64 - ------------------------------------------------------------------------ OC-3/STM-1 ATM 64 128 - ------------------------------------------------------------------------ OC-3/STM-1 SONET/SDH 128 256 - ------------------------------------------------------------------------ DS3 128 256 - ------------------------------------------------------------------------ Gigabit Ethernet 32 64 INSIDE BACK COVER A hub and spoke diagram showing a photograph of our M40 Internet backbone with the three critical ASIC components of the M40. Surrounding the photo of the M40 is the following text listed in counter clockwise order starting from the top: 1) "Purpose-built wire speed system for scaling the new public network growth"; 2) "Using the IP infrastructure to manage our business of delivering the new public network"; 3) "Services for customers to harness technology for competitive advantage"; 4) "creating the fiber optic new public network with greater bandwidth and richer services"; and 5) "JUNOS Internet Software for traffic engineering, network optimization and control." Also includes a diagram on the lower left hand portion showing the JUNOS Routing Engine with the text "Forwarding Table" contained in the diagram. To the right of this diagram is the text "Routing Engine uses knowledge of network to construct a forwarding table." Also includes a diagram below this diagram of the Packet Forwarding Engine containing the text "Forwarding Table," "Internet Processor," "Memory-based Switch Fabric" and "I/O Card." To the right of this diagram is the text "Packet Forwarding Engine (PFE) directs packets from an input interface to an output interface based on the forwarding table." PROSPECTUS BACK COVER Juniper Networks, Inc. Logo 96 - ------------------------------------------------------ - ------------------------------------------------------ No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 6 Note Regarding Forward-Looking Statements........................ 17 How We Intend to Use the Proceeds from this Offering................ 17 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 19 Selected Consolidated Financial Data.............................. 21 Management's Discussion and Analysis Of Financial Condition and Results of Operations..................... 22 Business............................ 32 Management.......................... 49 Certain Transactions................ 58 Principal and Selling Stockholders...................... 61 Description of Capital Stock........ 64 Shares Eligible for Future Sale..... 67 Where You May Find Additional Information....................... 69 Legal Matters....................... 69 Experts............................. 69 Index to Consolidated Financial Statements........................ F-1 Underwriting........................ U-1
Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 4,800,000 Shares JUNIPER NETWORKS, INC. Common Stock ------------------------- [Juniper logo] ------------------------- GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON BANCBOSTON ROBERTSON STEPHENS DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED Representatives of the Underwriters ------------------------------------------------------ ------------------------------------------------------ 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market listing fee. None of such expenses will be borne by selling stockholders.
AMOUNT TO BE PAID ---------- SEC registration fee........................................ $ 46,037 NASD filing fee............................................. 17,060 Nasdaq National Market listing fee.......................... 5,000 Printing and engraving expenses............................. 200,000 Legal fees and expenses..................................... 450,000 Accounting fees and expenses................................ 250,000 Blue Sky qualification fees and expenses.................... 3,000 Transfer Agent and Registrar fees........................... 10,000 Miscellaneous fees and expenses............................. 43,509 ---------- Total.............................................. $1,024,606 ==========
- --------------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article Eighth of our amended and restated certificate of incorporation provides for the indemnification of directors and officers to the fullest extent permissible under Delaware law. Article VI of our bylaws provides for the indemnification of officers, directors and third parties acting on behalf of Juniper Networks if such person acted in good faith and in a manner reasonably believed to be in and not opposed to our best interest, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. We have entered into indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our bylaws, and intend to enter into indemnification agreements with any new directors and executive officers in the future. The indemnification agreements may require us, among other things, to indemnify our directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers (other than liabilities arising from willful misconduct of culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors and officers' insurance, if available on reasonable terms. Reference is also made to Section 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of Juniper Networks against certain liabilities. II-1 98 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception, we have issued unregistered securities to a limited number of persons as described below: 1. On February 6, 1996, we sold 4,050,000 shares of our common stock for an aggregate purchase price of $8,910.00 to employees. 2. On April 15, 1996 we sold 225,000 shares of our common stock for an aggregate purchase price of $2,002.50 to an employee. 3. On June 12, 1996 we sold 450,000 shares of our common stock for an aggregate purchase price of $20,025.00 to an employee. 4. From inception through March 31, 1999 (the most recent practicable date), we granted stock options and restricted stock purchase rights to purchase an aggregate of 14,966,447 shares of our common stock at prices ranging from $0.11 to $14.00 per share to employees, consultants and directors pursuant to our 1996 Stock Plan. 5. From inception through March 31, 1999 (the most recent practicable date), we issued and sold an aggregate of 10,367,409 shares of our common stock to employees, consultants and directors for aggregate consideration of $2,022,816.00 pursuant to exercise of options granted under our 1996 Stock Plan. 6. From inception through March 31, 1999, we issued an aggregate of 111,283 shares of our common stock under our 1996 Stock Plan to consultants in consideration for past services rendered for an aggregate value of $74,365.00. 7. On June 11, 1996, we sold 1,743,751 shares of Series A Preferred Stock for $1.00 per share to the following investors for an aggregate purchase price of $1,743,751: Kleiner Perkins Caufield & Byers Fund VII, KPCB Information Sciences Zaibatsu Fund II, Kleiner Perkins Caufield & Byers VII and WS Investment Company 96A. 8. On June 11, 1996, we sold 6,328,123 shares of Common Stock for $0.44 per share to the following investors for an aggregate purchase price of $281,249.90: Kleiner Perkins Caufield & Byers Fund VII, KPCB Information Sciences Zaibatsu Fund II, Kleiner Perkins Caufield & Byers VII and WS Investment Company 96A. 9. On August 5, 1996 and November 8, 1996, we sold 3,818,017 shares of our Series B Preferred Stock for $2.40 per share to the following private investors for an aggregate purchase price of $9,163,240.80: Benchmark Capital Partners, L.P., Benchmark Founders' Fund, L.P., Crosspoint Venture Partners 1996, Institutional Venture Management VII, L.P., IVP Founders Fund, I, L.P., Institutional Venture Partners VI, L.P., KPCB Informational Sciences Zaibatsu Fund II, Kleiner Perkins Caufield & Byers VII, Kriens 1996 Trust U/T/A October 29, 1996, McQuillan Consulting Self-Empowered Profit Sharing Plan, NEA Presidents Fund L.P., NEA Ventures 1996, L.P., New Enterprise Associates VI, Limited Partnership, O'Brien Family Trust, U/T/A dated 7/1/92, Larry Sonsini, Stensud Family Trust U/T/A September 16, 1993 and WS Investment Company 96B. 10. On December 16, 1996, in connection with an equipment lease, we issued a warrant to purchase 83,333 shares of our Series B Preferred Stock at an exercise price of $2.40 per share to Venture Lending & Leasing, Inc. 11. On December 30, 1996, we issued 3,958 shares of Series B Preferred Stock at $2.40 per share to William Gunning and Florin Oprescu as consideration for past services rendered. II-2 99 12. On June 18, 1997, in connection with a lease agreement, we issued a warrant to purchase 10,000 shares of our Series B Preferred Stock at an exercise price of $2.40 per share to Excite @Home. 13. On July 1, 1997 and September 30, 1997, we sold 5,151,178 shares of our Series C Preferred Stock at $8.93 per share to the following private investors for an aggregate purchase price of $46,000,020: 3Com Corporation, Anschutz Family Investment Company LLC, AT&T Venture Fund II, L.P., Crosspoint Venture Partners 1996, Ericsson Business Networks AB, Lucent Technologies, Inc., Newbridge Networks Corporation, Nortel Networks Corporation and UUNet Technologies, Inc. 14. On September 30, 1997, in connection with an equipment lease, we issued a warrant to purchase 23,516 shares of our Series C Preferred Stock at an exercise price of $8.93 per share to Venture Lending & Leasing, Inc. 15. On March 3, 1999, we issued 130,000 shares of common stock to an employee at an exercise price of $9.90 per share pursuant to a restricted stock purchase agreement. 16. On March 16, 1999, we sold 500,000 shares of our Series D Preferred Stock and 2,580,000 shares of Series D-1 Preferred Stock both for $11.03 per share to Ericsson Business Networks AB for an aggregate purchase price of $33,972,400. For additional information concerning these equity investment transactions, reference is made to the information contained under the caption "Certain Transactions" in the form of prospectus included herein. Except as indicated above, none of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.3** Amended and Restated Bylaws of the Registrant. 4.1 Form of Registrant's Common Stock certificate. 4.2** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.3** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to At Home Corporation. 4.4** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Venture Lending & Lending, Inc. 4.5** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Venture Lending & Lending, Inc.
II-3 100
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 4.6** Third Amended and Restated Registration Rights Agreement dated March 9, 1999. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati Professional Corporation. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** Amended and Restated 1996 Stock Plan. 10.3** 1999 Employee Stock Purchase Plan. 10.4** Sublease between Trident Microsystems, Inc. and the Registrant dated July 1, 1998. 10.5** Sublease between At Home Corporation and the Registrant dated June 4, 1998. 10.6** Severance Agreement between Scott Kriens and the Registrant dated October 1, 1996. 10.7** Change of Control Agreement between Marcel Gani and the Registrant dated February 18, 1997. 10.8+** Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated August 26, 1997. 10.8.1+** Amendment One to Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated January 5, 1998. 10.8.2+** Amendment Two to Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated March 2, 1998. 10.9+** Standard Manufacturing Agreement by and among Solectron California Corporation, Fine Pitch Technology Inc. and the Registrant dated June 10, 1998. 10.10 Lease by and between Mathilda Associates LLC and Registrant dated June 18, 1999. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of Counsel. Reference is made to Exhibit 5.1. 23.3** Consent of International Data Corporation. 23.4** Consent of Ryan, Hankin Kent. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- --------------- ** Previously filed. + Confidential treatment requested as to certain portions of this exhibit. (B) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS We hereby undertake to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by us for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, we have been advised that in the opinion II-4 101 of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer, or controlling person of Juniper Networks in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, we 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. We hereby undertake that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 102 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MOUNTAIN VIEW, STATE OF CALIFORNIA, ON THE 22ND DAY OF JUNE, 1999. JUNIPER NETWORKS, INC. By * ------------------------------------ Scott Kriens President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- * President and Chief Executive June 22, 1999 - --------------------------------------------------- Officer and Chairman of the Scott Kriens Board (Principal Executive Officer) * Chief Technical Officer and Vice June 22, 1999 - --------------------------------------------------- Chairman of the Board Pradeep Sindhu /s/ MARCEL GANI Chief Financial Officer June 22, 1999 - --------------------------------------------------- (Principal Financial and Marcel Gani Accounting Officer) * Director June 22, 1999 - --------------------------------------------------- William R. Hearst III * Director June 22, 1999 - --------------------------------------------------- Vinod Khosla * Director June 22, 1999 - --------------------------------------------------- C. Richard Kramlich * Director June 22, 1999 - --------------------------------------------------- William Stensrud *By: /s/ MARCEL GANI Attorney-in-fact June 22, 1999 ---------------------------------------------- Marcel Gani
II-6 103 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.3** Amended and Restated Bylaws of the Registrant. 4.1 Form of Registrant's Common Stock certificate. 4.2** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.3** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to At Home Corporation. 4.4** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Venture Lending & Lending, Inc. 4.5** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Venture Lending & Lending, Inc. 4.6** Third Amended and Restated Registration Rights Agreement dated March 9, 1999. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati Professional Corporation. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** Amended and Restated 1996 Stock Plan. 10.3** 1999 Employee Stock Purchase Plan. 10.4** Sublease between Trident Microsystems, Inc. and the Registrant dated July 1, 1998. 10.5** Sublease between At Home Corporation and the Registrant dated June 4, 1998. 10.6** Severance Agreement between Scott Kriens and the Registrant dated October 1, 1996. 10.7** Change of Control Agreement between Marcel Gani and the Registrant dated February 18, 1997. 10.8+** Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated August 26, 1997. 10.8.1+** Amendment One to Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated January 5, 1998. 10.8.2+** Amendment Two to Agreement for ASIC Design and Purchase of Products by and between IBM Microelectronics and the Registrant dated March 2, 1998. 10.9+** Standard Manufacturing Agreement by and among Solectron California Corporation, Fine Pitch Technology Inc. and the Registrant dated June 10, 1998. 10.10 Lease by and between Mathilda Associates LLC and Registrant dated June 18, 1999. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of Counsel. Reference is made to Exhibit 5.1. 23.3** Consent of International Data Corporation. 23.4** Consent of Ryan, Hankin Kent. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- --------------- ** Previously filed. + Confidential treatment requested as to certain portions of this exhibit. EX-4.1 2 FORM OF REGISTRANT'S COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 COMMON STOCK COMMON STOCK [SEAL] [LOGO] JUNIPER NETWORKS [SEAL] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS ON SHARES CUSIP 48203R 10 4 THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.00001 PAR VALUE PER SHARE, OF JUNIPER NETWORKS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. COUNTERSIGNED AND REGISTERED NORWEST BANK MINNESOTA, N.A. TRANSFER AGENT AND REGISTRAR DATED: BY AUTHORIZED SIGNATURE MARCEL GANI [CORPORATE SEAL] SCOTT KRIENS CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER 2 JUNIPER NETWORKS, INC. A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designation thereof, may be obtained by the holder hereof upon request and without charge from the Secretary of the Corporation at the principal office of the Corporation. The following abbreviation, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________ Custodian _______________ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act _________________________ JT TEN - as joint tenants with right of (State) survivorship and not as tenants in common UNIF TRF MIN ACT - _______________ Custodian (until age ____) COM PROP - as community property (Cust) __________________ under Uniform Transfers (Minor) to Minors Act _________________ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _________________________ X ______________________________________ X ______________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By ----------------------------- THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. - ---------------------------------------------------- AMERICAN BANK NOTE COMPANY 3804 ATLANTIC AVENUE MAY 18, 1999 fm SUITE 12 LONG BEACH, CA 90807 004967bk (562) 925-2233 (FAX) (562)426-7480 NEW - ---------------------------------------------------- EX-5.1 3 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 EXHIBIT 5.1 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Telephone (650) 493-9300 Facsimile (650) 493-6811 June 22, 1999 Juniper Networks, Inc. 385 Riverdale Drive Mountain View, CA 94043 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by you with the Securities and Exchange Commission on April 21, 1999 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of 5,520,000 shares of Common Stock of Juniper Networks, Inc. (the "Shares"). As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of various states, where required, the Shares when issued and sold in the manner referred to in the Registration Statement will be legally and 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 the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, and any amendment thereto. Very truly yours, /s/ WILSON SONSINI GOODRICH & ROSATI ---------------------------------------- WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.10 4 LEASE DATED JUNE 18,1999 1 EXHIBIT 10.10 LEASE BY AND BETWEEN MATHILDA ASSOCIATES LLC, A CALIFORNIA LIMITED LIABILITY COMPANY AS LANDLORD AND JUNIPER NETWORKS, INC. A DELAWARE CORPORATION AS TENANT JUNE 18, 1999 2 TABLE OF CONTENTS
PAGE ARTICLE 1 REFERENCE...................................................................................1 1.1 References......................................................................................1 ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION........................................................3 2.1 Demise Of Leased Premises.......................................................................3 2.2 Right To Use Outside Areas......................................................................3 2.3 Lease Commencement Date And Lease Term..........................................................3 2.4 Delivery Of Possession..........................................................................3 2.5 Performance Of Tenant Improvements; Acceptance Of Possession....................................3 2.6 Surrender Of Possession.........................................................................3 ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS....................................................4 3.1 Base Monthly Rent...............................................................................4 3.2 Additional Rent.................................................................................4 3.3 Year-End Adjustments............................................................................5 3.4 Late Charge, And Interest On Rent In Default....................................................5 3.5 Payment Of Rent.................................................................................5 3.6 Prepaid Rent....................................................................................5 3.7 Security Deposit................................................................................5 ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA.....................................................6 4.1 Permitted Use...................................................................................6 4.2 General Limitations On Use......................................................................6 4.3 Noise And Emissions.............................................................................6 4.4 Trash Disposal..................................................................................7 4.5 Parking.........................................................................................7 4.6 Signs...........................................................................................7 4.7 Compliance With Laws And Private Restrictions...................................................7 4.8 Compliance With Insurance Requirements..........................................................7 4.9 Landlord's Right To Enter.......................................................................7 4.10 Use Of Outside Areas............................................................................8 4.11 Environmental Protection........................................................................8 4.12 Rules And Regulations...........................................................................9 ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES................................................9 5.1 Repair And Maintenance..........................................................................9 (a) Tenant's Obligations...................................................................9 (b) Landlord's Obligation.................................................................10 5.2 Utilities......................................................................................10 5.3 Security.......................................................................................10 5.4 Energy And Resource Consumption................................................................10 5.5 Limitation Of Landlord's Liability.............................................................10 ARTICLE 6 ALTERATIONS AND IMPROVEMENTS...............................................................10 6.1 By Tenant......................................................................................10
i. 3 TABLE OF CONTENTS (CONTINUED)
PAGE 6.2 Ownership Of Improvements......................................................................11 6.3 Alterations Required By Law....................................................................11 6.4 Liens..........................................................................................11 ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT........................................................12 7.1 By Tenant......................................................................................12 7.2 Merger, Reorganization, or Sale of Assets......................................................12 7.3 Landlord's Election............................................................................12 7.4 Conditions To Landlord's Consent...............................................................13 7.5 Assignment Consideration And Excess Rentals Defined............................................13 7.6 Payments.......................................................................................14 7.7 Good Faith.....................................................................................14 7.8 Effect Of Landlord's Consent...................................................................14 ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY...........................................14 8.1 Limitation On Landlord's Liability And Release.................................................14 8.2 Tenant's Indemnification Of Landlord...........................................................14 ARTICLE 9 INSURANCE..................................................................................15 9.1 Tenant's Insurance.............................................................................15 9.2 Landlord's Insurance...........................................................................15 9.3 Mutual Waiver Of Subrogation...................................................................16 ARTICLE 10 DAMAGE TO LEASED PREMISES..................................................................16 10.1 Landlord's Duty To Restore.....................................................................16 10.2 Insurance Proceeds.............................................................................16 10.3 Landlord's Right To Terminate..................................................................16 10.4 Tenant's Right To Terminate....................................................................17 10.5 Tenant's Waiver................................................................................17 10.6 Abatement Of Rent..............................................................................17 ARTICLE 11 CONDEMNATION...............................................................................17 11.1 Tenant's Right To Terminate....................................................................17 11.2 Landlord's Right To Terminate..................................................................17 11.3 Restoration....................................................................................17 11.4 Temporary Taking...............................................................................17 11.5 Division Of Condemnation Award.................................................................17 11.6 Abatement Of Rent..............................................................................18 11.7 Taking Defined.................................................................................18 ARTICLE 12 DEFAULT AND REMEDIES.......................................................................18 12.1 Events Of Tenant's Default.....................................................................18 12.2 Landlord's Remedies............................................................................18 12.3 Landlord's Default And Tenant's Remedies.......................................................19 12.4 Limitation Of Tenant's Recourse................................................................19 12.5 Tenant's Waiver................................................................................20
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE 13 GENERAL PROVISIONS.........................................................................20 13.1 Taxes On Tenant's Property.....................................................................20 13.2 Holding Over...................................................................................20 13.3 Subordination To Mortgages.....................................................................20 13.4 Tenant's Attornment Upon Foreclosure...........................................................21 13.5 Mortgagee Protection...........................................................................21 13.6 Estoppel Certificate...........................................................................21 13.7 Tenant's Financial Information.................................................................21 13.8 Transfer By Landlord...........................................................................21 13.9 Force Majeure..................................................................................21 13.10 Notices........................................................................................21 13.11 Attorneys' Fees................................................................................22 13.12 Definitions....................................................................................22 (a) Real Property Taxes...................................................................22 (b) Landlord's Insurance Costs............................................................23 (c) Property Maintenance Costs............................................................23 (d) Property Operating Expenses...........................................................23 (e) Law...................................................................................23 (f) Lender................................................................................23 (g) Private Restrictions..................................................................23 (h) Rent..................................................................................23 13.13 General Waivers................................................................................23 13.14 Miscellaneous..................................................................................23 13.15 Cooperation....................................................................................24 ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT...........................................24 14.1 Corporate Authority............................................................................24 14.2 Brokerage Commissions..........................................................................24 14.3 Entire Agreement...............................................................................24 14.4 Landlord's Representations.....................................................................24 ARTICLE 15 OPTIONS TO EXTEND..........................................................................25 ARTICLE 16 FIRST EXPANSION OPTION.....................................................................26 ARTICLE 17 SECOND EXPANSION OPTION....................................................................27 ARTICLE 18 TELEPHONE SERVICE..........................................................................27
iii. 5 LEASE THIS LEASE, dated June 18, 1999 for reference purposes only, is made by and between MATHILDA ASSOCIATES LLC, a California limited liability company ("Landlord") and JUNIPER NETWORKS, INC., a Delaware corporation ("Tenant"), to be effective and binding upon the parties as of the date the last of the designated signatories to this Lease shall have executed this Lease (the "Effective Date of this Lease"). ARTICLE 1 REFERENCE 1.1 REFERENCES. All references in this Lease (subject to any further clarifications contained in this Lease) to the following terms shall have the following meaning or refer to the respective address, person, date, time period, amount, percentage, calendar year or fiscal year as below set forth: Tenant's Address for Notice: Prior to the Lease Commencement Date: Juniper Networks, Inc. 385 Ravendale Drive Mountain View, California 94043 After the Lease Commencement Date: At the Leased Premises. Tenant's Representative: General Counsel Landlord's Address for Notices: c/o Menlo Equities LLC 525 University Avenue Suite 100 Palo Alto, California 94301 Landlord's Representative: Henry Bullock/Richard Holmstrom Phone Number: (650) 326-9300 Intended Delivery Date: May 1, 2000 Intended Commencement Date: June 1, 2000 Lease Term: Twelve (12) years Lease Expiration Date: Twelve (12) Years from the Lease Commencement Date, unless earlier terminated in accordance with the terms of this Lease, or extended by Tenant pursuant to Article 15. Options to Renew: Two (2) option(s) to renew, each for a term of five (5) years. First Month's Prepaid Rent: $360,787.50 (applied to the first month in which Base Monthly Rent is due) Tenant's Security Deposit: $4,329,450.00 (subject to adjustment pursuant to Section 3.7) Late Charge Amount: Five Percent (5%) of the Delinquent Amount Tenant's Required Liability Coverage: $3,000,000 Combined Single Limit Tenant's Broker: Joan Haynes and Steve Gibson of Colliers International Landlord's Broker: Don Reimann, Gregg Von Thaden and Jon Condrey of Colliers International Property: That certain real property situated in the City of Sunnyvale, County of Santa Clara, State of California, to be improved with two (2) building(s), which real property is shown on the Site Plan attached hereto as Exhibit "A" and is commonly known as or otherwise described as follows: Mathilda Research Centre.
1. 6 Building: That certain building on the Property in which the Leased Premises are located commonly known as 1194 Mathilda Avenue (the "Building"), which Building is shown outlined on Exhibit "A" hereto (designated as Building A). The 1184 Building (as defined in Article 16) is shown as Building B on the Site Plan. Outside Areas: The "Outside Areas" shall mean all areas which are located outside of and contiguous to the Building, as shown the Site Plan attached as Exhibit A, such as pedestrian walkways, parking areas, landscaped area, open areas and enclosed trash disposal areas. Leased Premises: All the interior space within the Building, including stairwells, connecting walkways, and atriums, to consist of approximately rentable 144,315 square feet and, for purposes of this Lease, agreed to contain said number of square feet. Tenant's Expense Share: The term "Tenant's Expense Share" shall mean the percentage obtained by dividing the rentable square footage of the Leased Premises at the time of calculation by the rentable square footage of the Building. Such percentage is currently 100%. In the event that the rentable square footage of the Leased Premises is changed, Tenant's Expense Share shall be recalculated to equal the percentage described in the first sentence of this paragraph, so that the aggregate Tenant's Expense Share of all tenants of the Building shall equal 100%. Tenant's Property Share: The term "Tenant's Property Share" shall mean the percentage obtained by dividing the rentable square footage of the Leased Premises at the time of calculation by the rentable square footage of all buildings currently located or to be located on the Property. Such percentage is currently 54%. In the event that any portion of the Property is sold by Landlord, or the rentable square footage of the Leased Premises or the Property is otherwise changed, Tenant's Property Share shall be recalculated to equal the percentage described in the first sentence of this paragraph, so that the aggregate Tenant's Project Share of all tenants of the Property shall equal 100%. Base Monthly Rent: The term "Base Monthly Rent" shall mean the following:
Period Monthly Amount ------ -------------- Months 1-12 $360,787.50
Commencing with Month 13 of the Lease Term and at the end of each 12 month period thereafter (until the Lease Expiration Date), Base Monthly Rent shall be increased at a rate of 3.5% per annum compounded annually. Permitted Use: General Office, research and development, marketing, sales, manufacturing, distribution, warehouse and other related lawful uses. Exhibits: The term "Exhibits" shall mean the Exhibits of this Lease which are described as follows: Exhibit "A" - Site Plan showing the Property, the Outside Areas and delineating the Building in which the Leased Premises are to be located. Exhibit "B" - Work Letter Exhibit "C" - Lease Commencement Date Certificate Exhibit "D" - Form of Tenant Estoppel Certificate Exhibit "E" - Form of Letter of Credit Exhibit "F" - Form of Landlord Waiver
2. 7 ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION 2.1 DEMISE OF LEASED PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, for the Lease Term and upon the terms and subject to the conditions of this Lease, that certain interior space described in Article 1 as the Leased Premises, reserving and excepting to Landlord the right to fifty percent (50%) of all assignment consideration and excess rentals as provided in Article 7 below. Tenant's lease of the Leased Premises, together with the appurtenant right to use the Outside Areas as described in Paragraph 2.2 below, shall be conditioned upon and be subject to the continuing compliance by Tenant with (i) all the terms and conditions of this Lease, (ii) all Laws governing the use of the Leased Premises and the Property, (iii) all Private Restrictions, easements and other matters now of public record respecting the use of the Leased Premises and Property, and (iv) all reasonable rules and regulations from time to time established by Landlord. 2.2 RIGHT TO USE OUTSIDE AREAS. As an appurtenant right to Tenant's right to the use and occupancy of the Leased Premises, Tenant shall have the right to use the Outside Areas in conjunction with its use of the Leased Premises solely for the purposes for which they were designated and intended and for no other purposes whatsoever. Tenant's right to so use the Outside Areas shall be subject to the limitations on such use as set forth in Article 1 and shall terminate concurrently with any termination of this Lease. Tenant shall have the exclusive right to use the amphitheater located in the Outside Areas. In the event Tenant does not exercise the First Expansion Option (as defined in Article 16), Landlord will request approval from the tenant who occupies the 1184 Building for Tenant's use of the sport courts located adjacent to the 1184 Building, provided that such tenant shall be entitled to give or withhold its consent in it sole and absolute discretion. 2.3 LEASE COMMENCEMENT DATE AND LEASE TERM. Subject to Paragraph 2.4 below, the term of this Lease shall begin, and the Lease Commencement Date shall be deemed to have occurred on the date which is thirty (30) days after the actual Delivery Date, as determined pursuant to Section 2.4 below. The term of this Lease shall in all events end on the Lease Expiration Date (as set forth in Article 1). The Lease Term shall be that period of time commencing on the Lease Commencement Date and ending on the Lease Expiration Date (the "Lease Term"). 2.4 DELIVERY OF POSSESSION. Landlord shall deliver to Tenant possession of the Leased Premises upon Substantial Completion of the Tenant Improvements as that term is defined in the Work Letter attached hereto as Exhibit B. The date that the Leased Premises are so delivered to the Tenant shall be deemed the "Delivery Date." If Landlord is unable to so deliver possession of the Leased Premises to Tenant in the agreed condition on or before the Intended Delivery Date, Landlord shall have until the date that is thirty (30) days after the Intended Delivery Date (the "Delivery Grace Period") to deliver the Leased Premises. Additionally, the Delivery Grace Period above set forth shall be extended for such number of days as Landlord may be delayed in delivering possession of the Leased Premises to Tenant by reason of Force Majeure or the action or inaction of Tenant. If Landlord is unable to deliver possession of the Leased Premises in the agreed condition to Tenant within the Delivery Grace Period (including any extension thereof by reason of Force Majeure or the actions or inactions of Tenant), then Tenant shall receive as its sole remedy a credit of two (2) days of free rent for each day that the Leased Premises are not delivered to Tenant after expiration of the Delivery Grace Period (including any extension thereof by reason of Force Majeure or the actions or inactions of Tenant), which free rent shall apply to the first month in which Base Monthly Rent is due. If Landlord is unable to deliver possession of the Leased Premises in the agreed condition to Tenant within sixty (60) days after the expiration of the Delivery Grace Period (including any extension thereof by reason of Force Majeure or the actions or inactions of Tenant), Tenant may choose, as its sole remedy, to terminate this Lease, and in the event of such termination Landlord shall not be liable in damages to Tenant for any delay. Tenant may not terminate this Lease at any time after the date Landlord notifies Tenant that the Leased Premises have been put into the agreed condition and are available for delivery to Tenant, unless Landlord's notice is not given in good faith. Tenant may occupy the Leased Premises commencing on the Delivery Date for purposes of installing furniture, fixtures and equipment, provided that Tenant shall be responsible for Additional Rent during such period and Tenant shall comply with all other provisions of this Lease (other than the payment of Base Monthly Rent). 2.5 PERFORMANCE OF TENANT IMPROVEMENTS; ACCEPTANCE OF POSSESSION. Landlord shall, pursuant to the work letter attached to and made a part of this Lease (the "Work Letter"), perform the work and make the installations in the Leased Premises substantially as set forth in the Work Letter (such work and installations hereinafter referred to as the "Tenant Improvements"). It is agreed that by occupying the Leased Premises, Tenant formally accepts same and acknowledges that the Leased Premises are in the condition called for hereunder, subject to reasonable punchlist items and latent defects specified by Tenant to Landlord in writing within ten (10) days of such occupancy. 2.6 SURRENDER OF POSSESSION. Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all of Tenant's signs from the exterior of the Building and shall remove all of Tenant's equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from within the Leased Premises, the Building and the Outside Areas, and shall vacate and surrender the Leased Premises, the Building, the Outside Areas and the Property to Landlord in the same condition, broom clean, as existed at the Lease Commencement Date, damage by casualty or condemnation (which events shall be governed by Articles 10 and 11) and reasonable wear and tear excepted. Except for such reasonable wear and tear, Tenant shall (i) repair all damage to the Leased Premises, the exterior of the Building and the Outside Areas caused by Tenant's removal of Tenant's property, (ii) patch and refinish, to Landlord's reasonable satisfaction, all penetrations made by Tenant or its employees to the roof, floor, interior or exterior walls or ceiling of the Leased Premises and the Building, whether such penetrations were made with Landlord's approval or not, (iii) repair or replace all stained or damaged ceiling tiles, wall coverings and floor coverings to the reasonable satisfaction of Landlord, (iv) repair all damage caused by 3. 8 Tenant to the exterior surface of the Building and the paved surfaces of the Outside Areas and, where necessary, replace or resurface same. Additionally, to the extent that Landlord shall have notified or is deemed to have notified Tenant in writing at the time the improvements were completed that it desired to have certain improvements made by Tenant or at the request of Tenant removed at the expiration or sooner termination of the Lease, Tenant shall, upon the expiration or sooner termination of the Lease, remove any such improvements constructed or installed by Landlord or Tenant and repair all damage caused by such removal; provided however, Tenant shall not be required to remove the Tenant Improvements installed pursuant to the Work Letter. If the Leased Premises, the Building, the Outside Areas and the Property are not surrendered to Landlord in the condition required by this paragraph at the expiration or sooner termination of this Lease, Landlord may, at Tenant's expense, so remove Tenant's signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant's expense, independent contractors to perform such work. Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Leased Premises, the Building and the Outside Areas to the required condition, together with interest on all costs so incurred from the date paid by Landlord at the then maximum rate of interest not prohibited or made usurious by law until paid. Tenant shall pay to Landlord the amount of all costs so incurred plus such interest thereon, within ten (10) days of Landlord's billing Tenant for same. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in surrendering the Leased Premises, including, without limitation, any claims made by any succeeding Tenant or any losses to Landlord with respect to lost opportunities to lease to succeeding tenants. ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS 3.1 BASE MONTHLY RENT. Commencing on the Lease Commencement Date (as determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, Tenant shall pay to Landlord, without prior demand therefor, in advance on the first day of each calendar month, the amount set forth as "Base Monthly Rent" in Article 1 (the "Base Monthly Rent"). 3.2 ADDITIONAL RENT. Commencing on the Lease Commencement Date (as determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, in addition to the Base Monthly Rent and to the extent not required by Landlord to be contracted for and paid directly by Tenant, Tenant shall pay to Landlord as additional rent (the "Additional Rent") the following amounts: (a) An amount equal to all Property Operating Expenses (as defined in Article 13) incurred by Landlord. Payment shall be made by whichever of the following methods (or combination of methods) is (are) from time to time designated by Landlord: (i) Landlord may forward invoices or bills for such expenses to Tenant, and Tenant shall, no later than thirty (30) days following receipt of any such invoices or bills, pay such invoices or bills and deliver satisfactory evidence of such payment to Landlord, and/or (ii) Landlord may bill to Tenant, on a periodic basis not more frequently than monthly, the amount of such expenses (or group of expenses) as paid or incurred by Landlord, and Tenant shall pay to Landlord the amount of such expenses within thirty (30) days after receipt of a written bill therefor from Landlord, and/or (iii) Landlord may deliver to Tenant Landlord's reasonable estimate of any given expense (such as Landlord's Insurance Costs or Real Property Taxes), or group of expenses, which it anticipates will be paid or incurred for the ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall pay to Landlord an amount equal to the estimated amount of such expenses for such year in equal monthly installments during such year with the installments of Base Monthly Rent. Landlord reserves the right to change from time to time the methods of billing Tenant for any given expense or group of expenses or the periodic basis on which such expenses are billed. (b) Landlord's share of the consideration received by Tenant upon certain assignments and sublettings as required by Article 7. (c) Any legal fees and costs that Tenant is obligated to pay or reimburse to Landlord pursuant to Article 13; and (d) Any other charges or reimbursements due Landlord from Tenant pursuant to the terms of this Lease. Notwithstanding the foregoing, Landlord may elect by thirty (30) days prior written notice to Tenant (provided such written notice is received by Tenant at least thirty (30) days prior to delinquency) to have Tenant pay Real Property Taxes or any portion thereof directly to the applicable taxing authority, in which case Tenant shall make such payments and deliver satisfactory evidence of payment to Landlord no later than ten (10) days before such Real Property Taxes become delinquent. Tenant may cause an audit of Landlord's books and records to determine the accuracy of Landlord's billings for Property Operating Expenses under this Lease, provided Tenant commences such audit within sixty (60) days after Tenant's receipt of the year-end statement described in Section 3.3 above setting forth the annual reconciliation of the Property Operating Expenses or any change in estimated monthly expenses under Section 3.2(a)(iii) above. If 4. 9 such audit reveals that the actual Property Operating Expenses for any given year were less than the amount that Tenant paid for Property Operating Expenses for any such year, then Landlord shall pay to Tenant the excess. If such audit reveals a discrepancy of more than three (3%) percent of the actual amount of any Property Operating Expenses charges, then Landlord shall pay the cost of the audit. Additionally, Tenant shall have the right, by appropriate proceedings, to protest or contest any assessment, reassessment or allocation of Real Property Taxes or any change therein or any application of any Law to the Leased Premises or Tenant's use thereof. Landlord will reasonably cooperate with Tenant in the contest or proceedings. If Tenant does not pay the Real Property Taxes when due which are the subject of such protest or contest, Tenant shall post a bond in lieu thereof in an amount reasonably determined by Landlord but not less than one hundred twenty-five percent (125%) of the amount demanded by the taxing authorities which holds Landlord and the Property harmless from any damage arising out of the contest and ensuring the payment of any judgment that may be rendered. With respect to any contest of Real Property Taxes or Laws conducted by Tenant, Tenant shall hold Landlord and the Property harmless from any damage arising out of such protest or contest and shall pay any judgment that may be rendered in connection with such contest or protest. Any protest or contest conducted by Tenant under this paragraph shall be at Tenant's expense and if interest or late charges become payable as a result of such contest or protest, Tenant shall pay the same. Tenant shall receive a proportionate share of any refund applicable to the Lease Term based on the amount of Real Property Taxes paid by Tenant as Tenant's Property Share (if the refund is applicable to the land) or Tenant's Expense Share (if the refund is applicable to the Building or other improvements in the Outside Areas). 3.3 YEAR-END ADJUSTMENTS. If Landlord shall have elected to bill Tenant for the Property Operating Expenses (or any group of such expenses) on an estimated basis in accordance with the provisions of Paragraph 3.2(a)(iii) above, Landlord shall furnish to Tenant within three months following the end of the applicable calendar or fiscal year, as the case may be, a statement setting forth (i) the amount of such expenses paid or incurred during the just ended calendar or fiscal year, as appropriate, and (ii) the amount that Tenant has paid to Landlord for credit against such expenses for such period. If Tenant shall have paid more than its obligation for such expenses for the stated period, Landlord shall, at its election, either (i) credit the amount of such overpayment toward the next ensuing payment or payments of Additional Rent that would otherwise be due or (ii) refund in cash to Tenant the amount of such overpayment within thirty (30) days after it has been conclusively determined by Landlord that an overpayment has been made by Tenant. If such year-end statement shall show that Tenant did not pay its obligation for such expenses in full, then Tenant shall pay to Landlord the amount of such underpayment within ten days from Landlord's billing of same to Tenant. The provisions of this Paragraph shall survive the expiration or sooner termination of this Lease. 3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amounts of which are extremely difficult or impractical to fix. Such costs and expenses will include without limitation, administration and collection costs and processing and accounting expenses. Therefor, if any installment of Base Monthly Rent is not received by Landlord from Tenant when the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to the amount set forth in Article 1 as the "Late Charge Amount," and if any Additional Rent is not received by Landlord when the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to 5% of the Additional Rent not so paid; provided, however, that once but only once in any twelve (12) month period during the Lease Term, Tenant shall be entitled to written notice of non-receipt of Base Monthly Rent or Additional Rent from Landlord, and Tenant shall not be liable for any Late Charge Amount or other late charge hereunder if such installment of Base Monthly Rent or Additional Rent is received by Landlord within ten (10) days after Tenant's receipt of such notice from Landlord. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the anticipated loss Landlord would suffer by reason of Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay each rental installment due under this Lease when due, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of 10 calendar days, then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not so paid from said tenth day at the then maximum rate of interest not prohibited or made usurious by Law until paid. 3.5 PAYMENT OF RENT. Except as specifically provided otherwise in this Lease, all rent shall be paid in lawful money of the United States, without any abatement, reduction or offset for any reason whatsoever, to Landlord at such address as Landlord may designate from time to time. Tenant's obligation to pay Base Monthly Rent and all Additional Rent shall be appropriately prorated at the commencement and expiration of the Lease Term. The failure by Tenant to pay any Additional Rent as required pursuant to this Lease when due shall be treated the same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord shall have the same rights and remedies against Tenant as Landlord would have had Tenant failed to pay the Base Monthly Rent when due. 3.6 PREPAID RENT. Tenant shall, within ten (10) days following execution of this Lease, pay to Landlord the amount set forth in Article 1 as "First Month's Prepaid Rent" as prepayment of rent for credit against the first payment of Base Monthly Rent due hereunder. 3.7 SECURITY DEPOSIT. 5. 10 (a) Tenant , within ten (10) days following execution of this Lease, shall deposit with Landlord the amount set forth in Article 1 as the "Security Deposit" as security for the performance by Tenant of the terms of this Lease to be performed by Tenant, and not as prepayment of rent. Upon the commencement of the second year of the Lease Term, and at the commencement of each subsequent year, provided that Tenant is not then in default (and has never been in default beyond any applicable notice and cure periods) in its payment of Base Monthly Rent or Additional Rent, the amount of the Security Deposit shall be reduced by twenty percent (20%) of the outstanding amount. In the event (i) Tenant becomes a publicly traded company and (ii) Tenant reports net profits for three (3) consecutive quarters (as shown on its quarterly financial statements prepared in accordance with generally accepted accounting principles), and provided that Tenant is not then in default (and has never been in default beyond any applicable notice and cure periods) in its payment of Base Monthly Rent or Additional Rent, the Security Deposit shall be returned to Tenant and thereafter no Security Deposit will be required. In the event (1) Tenant becomes a publicly traded company and maintains a market capitalization of Two Billion Dollars ($2,000,000,000) for two consecutive quarters and (2) quarterly revenues exceed Twenty Five Million Dollars ($25,000,000) for two consecutive quarters (as shown on its quarterly financial statements prepared in accordance with generally accepted accounting principles), and provided that Tenant is not then in default (and has never been in default beyond any applicable notice and cure periods) in its payment of Base Monthly Rent or Additional Rent, the Security Deposit shall be reduced by an amount equal to fifty percent (50%) of the original amount. (b) Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of Base Monthly Rent or Additional Rent or a late charge or interest on defaulted rent, or any other monetary payment obligation of Tenant under this Lease; (ii) to repair damage to the Leased Premises, the Building or the Outside Areas caused or permitted to occur by Tenant; (iii) to clean and restore and repair the Leased Premises, the Building or the Outside Areas following their surrender to Landlord if not surrendered in the condition required pursuant to the provisions of Article 2, and (iv) to remedy any other default of Tenant to the extent permitted by Law including, without limitation, paying in full on Tenant's behalf any sums claimed by materialmen or contractors of Tenant to be owing to them by Tenant for work done or improvements made at Tenant's request to the Leased Premises. In this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be applied as contained in Section 1950.7(c) of the California Civil Code and/or any successor statute. In the event the Security Deposit or any portion thereof is so used, Tenant shall pay to Landlord, promptly upon demand, an amount in cash sufficient to restore the Security Deposit to the full original sum or shall replenish the letter of credit, if applicable. Landlord shall not be deemed a trustee of the Security Deposit. Landlord may use the Security Deposit in Landlord's ordinary business and shall not be required to segregate it from Landlord's general accounts. Tenant shall not be entitled to any interest on any cash Security Deposit held by Landlord. If Landlord transfers the Building or the Property during the Lease Term, Landlord may pay the Security Deposit to any subsequent owner in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, in which event the transferring landlord shall be released from all liability for the return of the Security Deposit. Tenant specifically grants to Landlord (and Tenant hereby waives the provisions of California Civil Code Section 1950.7 to the contrary) a period of ninety days following a surrender of the Leased Premises by Tenant to Landlord within which to inspect the Leased Premises, make required restorations and repairs, receive and verify workmen's billings therefor, and prepare a final accounting with respect to the Security Deposit. In no event shall the Security Deposit or any portion thereof, be considered prepaid rent. Notwithstanding the foregoing, in lieu of a cash Security Deposit, Tenant may deliver to Landlord a clean, unconditional, irrevocable, transferable letter of credit in the full amount of the Security Deposit required pursuant to Article 1 hereof (the "Letter of Credit") in form and issued by a financial institution ("Issuer") satisfactory to Landlord in its sole discretion, substantially in the form attached as Exhibit E. The Letter of Credit shall permit partial draws, and provide that draws thereunder will be honored upon receipt by Issuer of a written statement signed by Landlord or its authorized agent stating that Landlord is entitled to draw down on the Letter of Credit pursuant to the terms of the Lease. The Letter of Credit shall have an expiration period of one (1) year but shall automatically renew by its terms unless affirmatively cancelled by either Issuer or Tenant, in which case Issuer must provide Landlord 30 days' prior written notice of such expiration or cancellation. Any amount drawn under the Letter of Credit shall be held or used by Landlord in accordance with this Section 3.7. If the amount of the Letter of Credit is reduced in accordance with the terms of this Lease, Tenant shall have the right to replace the existing Letter of Credit with another Letter of Credit at the reduced amount. If the Tenant fails to renew or replace the Letter of Credit as required under this Lease at least thirty (30) days before its stated expiration date, Landlord may draw upon the entire amount of the Letter of Credit, provided that if Landlord so draws on the Letter of Credit, so long as Tenant is not otherwise in default, Landlord shall deliver the amount so drawn to Tenant upon Tenant's delivery to Landlord of a new Letter of Credit in the amount then required, provided that Tenant makes such delivery within ten (10) days of Landlord's draw. (c) In the event Mathilda Associates LLC transfers or sells its interest in the Property to person any entity other than an institutional buyer (a "Non-Institutional Buyer"), Tenant shall have the right to require that the Security Deposit be held by the lender, if any, providing the financing for such Non-Institutional Buyer to acquire the Property, or be held in an escrow account controlled by such Non-Institutional Buyer, which account shall be subject to escrow instructions specifying that (1) Landlord shall only have the right to draw on the Letter of Credit to the extent the Landlord is entitled to pursuant to this Section 3.7, (2) Landlord shall deliver a statement to the escrow holder prior to any draw down, certifying that Landlord is entitled to draw on the Letter of Credit pursuant to this Section 3.7, and (3) that within ninety (90) days after expiration of this Lease, the escrow holder shall release the Letter to Credit to Tenant consistent with the terms of this Lease. For purposes hereof, the term "institutional buyer" shall include, without limitation, life insurance companies, banks, pension funds, pension fund advisors, opportunity funds, hedge funds, private owners who directly or indirectly own more than $200,000,000 of real estate, or real estate investment trusts. 6. 11 ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA 4.1 PERMITTED USE. Tenant shall be entitled to use the Leased Premises solely for the "Permitted Use" as set forth in Article 1 and for no other purpose whatsoever. Tenant shall have the right to vacate the Leased Premises at any time during the Term of this Lease, provided Tenant maintains the Leased Premises in the same condition as if fully occupied and as otherwise required by the terms of this Lease. Tenant shall have the right to use the Outside Areas in conjunction with its Permitted Use of the Leased Premises solely for the purposes for which they were designed and intended and for no other purposes whatsoever. 4.2 GENERAL LIMITATIONS ON USE. Tenant shall not do or permit anything to be done in or about the Leased Premises, the Building, the Outside Areas or the Property which does or could (i) jeopardize the structural integrity of the Building or (ii) cause damage to any part of the Leased Premises, the Building, the Outside Areas or the Property. Tenant shall not operate any equipment within the Leased Premises which does or could (i) injure, vibrate or shake the Leased Premises or the Building, (ii) damage, overload or impair the efficient operation of any electrical, plumbing, heating, ventilating or air conditioning systems within or servicing the Leased Premises or the Building, or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the Leased Premises or the Building. Tenant shall not (i) install any equipment or antennas on or make any penetrations of the exterior walls or roof of the Building or (ii) affix any equipment or make any penetrations or cuts in the floors, ceiling or walls of the Leased Premises, without Landlord's prior written consent, which consent shall not be unreasonably withheld; provided, however, that it shall be reasonable for Landlord to withhold its consent if Tenant's proposed installations or penetrations impact the structural integrity of the Building. Any installations, penetrations or cuts in the interior or exterior walls, roof, floor or ceiling of the Building will be subject to Tenant's restoration obligations set forth in Section 2.6. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems which could endanger the structural integrity of the Building or damage its floors, foundations or supporting structural components. Tenant shall not place any explosive, flammable or harmful fluids or other waste materials in the drainage systems of the Leased Premises, the Building, the Outside Areas or the Property. Tenant shall not drain or discharge any fluids in the landscaped areas or across the paved areas of the Property. Tenant shall not use any of the Outside Areas for the storage of its materials, supplies, inventory or equipment and all such materials, supplies, inventory or equipment shall at all times be stored within the Leased Premises. Tenant shall not commit nor permit to be committed any waste in or about the Leased Premises, the Building, the Outside Areas or the Property. 4.3 NOISE AND EMISSIONS. All noise generated by Tenant in its use of the Leased Premises shall be confined or muffled so that it does not interfere with the businesses of or annoy the occupants and/or users of adjacent properties. All dust, fumes, odors and other emissions generated by Tenant's use of the Leased Premises shall be sufficiently dissipated in accordance with sound environmental practice and exhausted from the Leased Premises in such a manner so as not to interfere with the businesses of or annoy the occupants and/or users of adjacent properties, or cause any damage to the Leased Premises, the Building, the Outside Areas or the Property or any component part thereof or the property of adjacent property owners. 4.4 TRASH DISPOSAL. Tenant shall provide trash bins or other adequate garbage disposal facilities within the trash enclosure areas provided or permitted by Landlord outside the Leased Premises sufficient for the interim disposal of all of its trash, garbage and waste. All such trash, garbage and waste temporarily stored in such areas shall be stored in such a manner so that it is not visible from outside of such areas, and Tenant shall cause such trash, garbage and waste to be regularly removed from the Property. Tenant shall keep the Leased Premises in a clean, safe and neat condition and keep the Outside Areas (except the trash enclosure areas) free and clear of all of Tenant's trash, garbage, waste and/or boxes, pallets and containers containing same at all times. 4.5 PARKING. Tenant shall have the non-exclusive use of its proportionate share (calculated using the same method as Tenant's Expense Share) of parking spaces located in the Outside Areas (which, subject to any transportation management requirements of the City of Sunnyvale, shall be no less than 3.6 spaces per 1,000 rentable square feet in the Leased Premises). During construction of the 1184 Building (as defined in Article 16), Tenant shall have the non-exclusive use of all parking areas located on the Property, subject to Landlord's use thereof for construction activities. Notwithstanding the foregoing, Tenant shall have exclusive use of the thirty (30) parking spaces directly in front of the front door to the Leased Premises. Tenant shall not, at any time, park or permit to be parked any recreational vehicles, inoperative vehicles or equipment in the Outside Areas or on any portion of the Property. Tenant agrees to assume responsibility for compliance by its employees and invitees with the parking provisions contained herein. If Tenant or its employees park any vehicle within the Property in violation of these provisions, then Landlord may, upon prior written notice to Tenant giving Tenant one (1) day (or any applicable statutory notice period, if longer than one (1) day) to remove such vehicle(s). Landlord reserves the right to grant easements and access rights to others for use of the parking areas on the Property, provided that such grants do not materially interfere with Tenant's use of the parking areas. 4.6 SIGNS. Other than business identification signs allowed pursuant to this Section 4.6, Tenant shall not place or install on or within any portion of the Leased Premises, the exterior of the Building, the Outside Areas or the Property any sign, advertisement, banner, placard, or picture which is visible from the exterior of the Leased Premises. Subject to Landlord's prior written consent, which shall not be unreasonably withheld, and subject to approval by the City of Sunnyvale, Tenant shall have the right to install an illuminated business identification sign 7. 12 on the Building. Landlord shall cooperate with Tenant's efforts to obtain approval from the City of Sunnyvale for an illuminated sign. Any such sign shall be installed at Tenant's sole cost and expense and only in strict compliance with Landlord's approval (which shall not be unreasonably withheld), and all Laws and all requirements of the City of Sunnyvale, using a person approved by Landlord to install same. Subject to Landlord's prior written consent, which shall not be unreasonably withheld, and subject to approval by the City of Sunnyvale of the installation of no less than two (2) monument signs for the Property, Tenant shall have the right to its own business identification monument sign on the Property, in a location which indicates that such sign belongs to the Building (or, if Tenant occupies all buildings on the Property, Tenant shall have the exclusive right to all such monument signs), to be installed by Landlord at its sole cost and expense. In the event the City of Sunnyvale only approves the installation of one (1) monument sign for the Property, Tenant shall have the right to place its business identification signage on the top of said monument sign, which monument sign shall be installed by Landlord, at its sole cost and expense. Such monument sign shall comply with all requirements imposed by the City of Sunnyvale. Landlord may remove any signs (which have not been approved in writing by Landlord), advertisements, banners, placards or pictures so placed by Tenant on or within the Leased Premises, the exterior of the Building, the Outside Areas or the Property and charge to Tenant the cost of such removal, together with any costs incurred by Landlord to repair any damage caused thereby, including any cost incurred to restore the surface (upon which such sign was so affixed) to its original condition. Notwithstanding anything to the contrary contained herein, Tenant shall remove all of Tenant's signs, repair any damage caused thereby, and restore the surface upon which the sign was affixed to its original condition, all to Landlord's reasonable satisfaction, upon the termination of this Lease. 4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS. Tenant shall abide by and shall promptly observe and comply with, at its sole cost and expense, all Laws and Private Restrictions respecting the use and occupancy of the Leased Premises, the Building, the Outside Areas or the Property including, without limitation, all Laws governing the use and/or disposal of Hazardous Materials (except that Tenant shall not be responsible for any Hazardous Materials at the Leased Premises, the Building, the Outside Areas or the Property prior to the Delivery Date), and shall defend with competent counsel, indemnify and hold Landlord harmless from any claims, damages or liability resulting from Tenant's failure to so abide, observe, or comply. Tenant's obligations hereunder shall survive the expiration or sooner termination of this Lease. 4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS. With respect to any insurance policies required or permitted to be carried by Landlord in accordance with the provision of this Lease, copies of which have been or will, upon Tenant's written request therefor, be provided to Tenant, Tenant shall not conduct nor permit any other person to conduct any activities nor keep, store or use (or allow any other person to keep, store or use) any item or thing within the Leased Premises, the Building, the Outside Areas or the Property which (i) is prohibited under the terms of any such policies, (ii) could result in the termination of the coverage afforded under any of such policies, (iii) could give to the insurance carrier the right to cancel any of such policies, or (iv) could cause an increase in the rates (over standard rates) charged for the coverage afforded under any of such policies. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at standard rates, the insurance coverages carried by either Landlord or Tenant pursuant to this Lease. 4.9 LANDLORD'S RIGHT TO ENTER. Landlord and its agents shall have the right to enter the Leased Premises during normal business hours after giving Tenant reasonable notice and subject to Tenant's reasonable security measures for the purpose of (i) inspecting the same; (ii) showing the Leased Premises to prospective purchasers, mortgagees or tenants; (iii) making necessary alterations, additions or repairs; and (iv) performing any of Tenant's obligations when Tenant has failed to do so. Landlord shall have the right to enter the Leased Premises during normal business hours (or as otherwise agreed), subject to Tenant's reasonable security measures, for purposes of supplying any maintenance or services agreed to be supplied by Landlord. Landlord shall have the right to enter the Outside Areas during normal business hours for purposes of (i) inspecting the exterior of the Building and the Outside Areas; (ii) posting notices of nonresponsibility (and for such purposes Tenant shall provide Landlord at least thirty days' prior written notice of any work to be performed on the Leased Premises); and (iii) supplying any services to be provided by Landlord. Any entry into the Leased Premises or the Outside Areas obtained by Landlord in accordance with this paragraph shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises, or an eviction, actual or constructive of Tenant from the Leased Premises or any portion thereof. In exercising its rights under this Section 4.9, Landlord shall use commercially reasonable efforts to minimize interference with Tenant's use of the Leased Premises and the Outside Areas. 4.10 USE OF OUTSIDE AREAS. Tenant, in its use of the Outside Areas, shall at all times keep the Outside Areas in a safe condition free and clear of all materials, equipment, debris, trash (except within existing enclosed trash areas), inoperable vehicles, and other items which are not specifically permitted by Landlord to be stored or located thereon by Tenant. If, in the opinion of Landlord, unauthorized persons are using any of the Outside Areas by reason of, or under claim of, the express or implied authority or consent of Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest extent then allowed by Law, such unauthorized use, and shall initiate such appropriate proceedings as may be required to so restrain such use. Landlord reserves the right to grant easements and access rights to others for use of the Outside Areas and shall not be liable to Tenant for any diminution in Tenant's right to use the Outside Areas as a result; provided, however, that other than for construction of the 1184 Building and other requirements under the Use Permit, of which the Tenant has knowledge and which the Tenant recognizes will be taking place during the Lease Term, Landlord shall not exercise its rights pursuant to this Section 4.10 in a manner which materially and adversely affects Tenant's ability to use the Leased Premises and the Outside Areas for the Permitted Use or materially and adversely affects Tenant's parking rights. 4.11 ENVIRONMENTAL PROTECTION. Tenant's obligations under this Section 4.11 shall survive the expiration or termination of this Lease. 8. 13 (a) As used herein, the term "Hazardous Materials" shall mean any toxic or hazardous substance, material or waste or any pollutant or infectious or radioactive material, including but not limited to those substances, materials or wastes regulated now or in the future under any of the following statutes or regulations and any and all of those substances included within the definitions of "hazardous substances," "hazardous materials," "hazardous waste," "hazardous chemical substance or mixture," "imminently hazardous chemical substance or mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant," or "solid waste" in the (a) Comprehensive Environmental Response, Compensation and Liability Act of 1990 ("CERCLA" or "Superfund"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section 9601 et seq., (b) Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section 6901 et seq., (c) Federal Water Pollution Control Act ("FSPCA"), 33 U.S.C. Section 1251 et seq., (d) Clean Air Act ("CAA"), 42 U.S.C. Section 7401 et seq., (e) Toxic Substances Control Act ("TSCA"), 14 U.S.C. Section 2601 et seq., (f) Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., (g) Carpenter-Presley-Tanner Hazardous Substance Account Act ("California Superfund"), Cal. Health & Safety Code Section 25300 et seq., (h) California Hazardous Waste Control Act, Cal. Health & Safety code Section 25100 et seq., (i) Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"), Cal. Water Code Section 13000 et seq., (j) Hazardous Waste Disposal Land Use Law, Cal. Health & Safety codes Section 25220 et seq., (k) Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"), Cal. Health & Safety code Section 25249.5 et seq., (l) Hazardous Substances Underground Storage Tank Law, Cal. Health & Safety code Section 25280 et seq., (m) Air Resources Law, Cal. Health & Safety Code Section 39000 et seq., and (n) regulations promulgated pursuant to said laws or any replacement thereof, or as similar terms are defined in the federal, state and local laws, statutes, regulations, orders or rules. Hazardous Materials shall also mean any and all other biohazardous wastes and substances, materials and wastes which are, or in the future become, regulated under applicable Laws for the protection of health or the environment, or which are classified as hazardous or toxic substances, materials or wastes, pollutants or contaminants, as defined, listed or regulated by any federal, state or local law, regulation or order or by common law decision, including, without limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and other chlorinated solvents, (ii) any petroleum products or fractions thereof, (iii) asbestos, (iv) polychlorinted biphenyls, (v) flammable explosives, (vi) urea formaldehyde, (vii) radioactive materials and waste, and (viii) materials and wastes that are harmful to or may threaten human health, ecology or the environment. (b) Notwithstanding anything to the contrary in this Lease, Tenant, at its sole cost, shall comply with all Laws relating to the storage, use and disposal of Hazardous Materials by Tenant, its subtenants, their respective agents, employees, contractors or invitees (collectively, the "Tenant Parties"). Tenant shall not store, use or dispose of any Hazardous Materials except for those Hazardous Materials listed in a Hazardous Materials management plan ("HMMP") which Tenant shall deliver to Landlord upon execution of this Lease and update at least annually with Landlord ("Permitted Materials") which may be used, stored and disposed of provided (i) such Permitted Materials are used, stored, transported, and disposed of in strict compliance with applicable laws, (ii) such Permitted Materials shall be limited to the materials listed on and may be used only in the quantities specified in the HMMP, and (iii) Tenant shall provide Landlord with copies of all material safety data sheets and other documentation required under applicable Laws in connection with Tenant's use of Permitted Materials as and when such documentation is provided to any regulatory authority having jurisdiction, in no event shall Tenant cause or permit to be discharged into the plumbing or sewage system of the Building or onto the land underlying or adjacent to the Building any Hazardous Materials. Tenant shall be solely responsible for and shall defend, indemnify, and hold Landlord and its agents harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with Tenant's storage, use and/or disposal of Hazardous Materials. If the presence of Hazardous Materials on the Leased Premises caused or permitted by Tenant results in contamination or deterioration of water or soil, then Tenant shall promptly take any and all action necessary to clean up such contamination as required by Law, but the foregoing shall in no event be deemed to constitute permission by Landlord to allow the presence of such Hazardous Materials. At any time prior to the expiration of the Lease Term if Tenant has a reasonable basis to suspect that there has been any release or the presence of Hazardous Materials in the ground or ground water on the Leased Premises which did not exist upon commencement of the Lease Term, Tenant shall have the right to conduct appropriate tests of water and soil and to deliver to Landlord the results of such tests to demonstrate that no contamination in excess of permitted levels has occurred as a result of Tenant's use of the Leased Premises. Tenant shall further be solely responsible for, and shall defend, indemnify, and hold Landlord and its agents harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with any removal, cleanup and restoration work and materials required hereunder to return the Leased Premises and any other property of whatever nature to their condition existing prior to the appearance of the Hazardous Materials, to the extent such removal, cleanup and restoration work is required by Law. (c) Upon termination or expiration of the Lease, Tenant at its sole expense shall cause all Hazardous Materials placed in or about the Leased Premises, the Building and/or the Property by any Tenant Parties, and all installations (whether interior or exterior) made by or on behalf of Tenant relating to the storage, use, disposal or transportation of Hazardous Materials to be removed from the property and transported for use, storage or disposal in accordance and compliance with all Laws and other requirements respecting Hazardous Materials used or permitted to be used by Tenant. Tenant shall apply for and shall obtain from all appropriate regulatory authorities (including any applicable fire department or regional water quality control board) all permits, approvals and clearances necessary for the closure of the Property and shall take all other actions as may be required to complete the closure of the Building and the Property. In addition, prior to vacating the Leased Premises, Tenant shall undertake and submit to Landlord an environmental site assessment from an environmental consulting company reasonably acceptable to Landlord which site assessment shall evidence Tenant's compliance with this Paragraph 4.11. (d) At any time prior to expiration of the Lease term, subject to reasonable prior notice (not less than forty-eight (48) hours) and Tenant's reasonable security requirements and provided such activities do not 9. 14 unreasonably interfere with the conduct of Tenant's business at the Leased Premises, Landlord shall have the right to enter in and upon the Property, Building and Leased Premises in order to conduct appropriate tests of water and soil to determine whether levels of any Hazardous Materials in excess of legally permissible levels has occurred as a result of any Tenant Parties' use thereof . Landlord shall furnish copies of all such test results and reports to Tenant and, at Tenant's option and cost, shall permit split sampling for testing and analysis by Tenant. Such testing shall be at Tenant's expense if Landlord has a reasonable basis for suspecting and confirms the presence of Hazardous Materials in the soil or surface or ground water in, on, under, or about the Property, the Building or the Leased Premises, which has been caused by or resulted from the activities of any Tenant Parties. (e) Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies in reducing actual or potential environmental damage. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with the requirements and recommendations of governmental agencies regulating, or otherwise involved in, the protection of the environment. 4.12 RULES AND REGULATIONS. In the event Juniper Networks, Inc. is no longer the sole tenant of the Building, Landlord shall have the right from time to time to establish reasonable rules and regulations and/or amendments or additions thereto respecting the use of the Leased Premises and the Outside Areas for the care and orderly management of the Property. Upon delivery to Tenant of a copy of such rules and regulations or any amendments or additions thereto, Tenant shall comply with such rules and regulations. A violation by Tenant of any of such rules and regulations shall constitute a default by Tenant under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible or liable to Tenant for the violation of such rules and regulations by any other tenant of the Property. 4.13 RESERVATIONS. Landlord reserves the right from time to time to grant, without the consent or joinder of Tenant, such easements, rights of way and dedications that Landlord deems necessary, and to cause the recordation of parcel maps and covenants, conditions and restrictions, so long as such easements, rights of way, dedications and covenants, conditions and restrictions do not materially and adversely affect the use of the Leased Premises by Tenant, materially and adversely affect Tenant's parking rights, and do not prohibit any Permitted Use. Tenant agrees to execute any documents reasonably request by Landlord to effectuate any such easement rights, dedications, maps or covenants, conditions and restrictions. ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES 5.1 REPAIR AND MAINTENANCE. Except in the case of damage to or destruction of the Leased Premises, the Building, the Outside Areas or the Property caused by an act of God or other peril, in which case the provisions of Article 10 shall control, the parties shall have the following obligations and responsibilities with respect to the repair and maintenance of the Leased Premises, the Building, the Outside Areas, and the Property. (a) TENANT'S OBLIGATIONS. Tenant shall, at all times during the Lease Term and at its sole cost and expense, regularly clean and continuously keep and maintain in good order, condition and repair the Leased Premises and every part thereof including, without limiting the generality of the foregoing, (i) all interior walls, floors and ceilings, (ii) all windows, doors and skylights, (iii) all electrical wiring, conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures, bulbs and lamps and all heating, ventilating and air conditioning equipment, and (vi) all entranceways to the Leased Premises. Tenant shall hire, at Tenant's sole cost and expense, a licensed heating, ventilating and air conditioning contractor to regularly and periodically (not less frequently than every three months) inspect and perform required maintenance on the heating, ventilating and air conditioning equipment and systems serving the Leased Premises. Tenant shall hire, at Tenant's sole cost and expense, a licensed roofing contractor to regularly and periodically (not less frequently than semi-annually) inspect and perform required maintenance on the roof of the Building. If Tenant shall be in default of its obligations to maintain the heating, ventilating and air conditioning equipment and systems or roof, Landlord may, at its election, contract in its own name for such regular and periodic inspections and maintenance of the heating, ventilating and air conditioning equipment and systems and/or roof, and charge to Tenant, as Additional Rent, the cost thereof. Tenant shall, at its sole cost and expense, repair all damage to the Leased Premises, the Building, the Outside Areas or the Property caused by the activities of Tenant, its employees, invitees or contractors promptly following written notice from Landlord to so repair such damages (subject to Section 9.3 of this Lease). If Tenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this paragraph within a reasonable period of time following notice from Landlord to do so, then Landlord may, at its election and without waiving any other remedy it may otherwise have under this Lease or at law, perform such maintenance or make such repairs and charge to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All glass within or a part of the Leased Premises, both interior and exterior, is at the sole risk of Tenant and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality. Notwithstanding the foregoing, in the event that, due to normal wear and tear (and not due to other factors, including, without limitation, Tenant's misuse, overuse or Tenant's alterations, improvements or modifications to the Leased Premises, the Outside Areas or the Building), Tenant would be required by this Section 5.1(a) to make a repair or replacement that would be considered a "capital improvement" as determined in accordance with generally accepted accounting principles, Landlord shall make such repair or replacement and charge to Tenant, as Additional Rent, the cost thereof (provided that the cost of such repair or replacement shall be amortized over its useful life and only the amortizing portion of such cost shall be included in Additional Rent on a monthly basis). 10. 15 (b) LANDLORD'S OBLIGATION. Landlord shall at its sole cost and expense, at all times during the Lease Term, maintain in good condition and repair the foundation, the footings, the roof screen, the roof screen penetrations, the roof structure, load-bearing and exterior walls of the Building. Landlord shall, at all times during the Lease Term, regularly and continuously keep and maintain in good order and repair and in a clean and safe condition the Outside Areas, and charge to Tenant, as Additional Rent, the cost thereof. Landlord shall regularly and periodically sweep and clean the driveways and parking areas, and charge to Tenant, as Additional Rent, the cost thereof. 5.2 UTILITIES. Tenant shall arrange at its sole cost and expense and in its own name, for the supply of gas and electricity to the Leased Premises. In the event that such services are not separately metered, Tenant shall, at its sole expense, cause such meters to be installed. Landlord shall maintain the water meter(s) in its own name; provided, however, that if at any time during the Lease Term Landlord shall require Tenant to put the water service in Tenant's name, Tenant shall do so at Tenant's sole cost. Tenant shall be responsible for determining if the local supplier of water, gas and electricity can supply the needs of Tenant and whether or not the existing water, gas and electrical distribution systems within the Building and the Leased Premises are adequate for Tenant's needs. Tenant shall be responsible for determining if the existing sanitary and storm sewer systems now servicing the Leased Premises and the Property are adequate for Tenant's needs. Tenant shall pay all charges for water, gas, electricity and storm and sanitary sewer services as so supplied to the Leased Premises, irrespective of whether or not the services are maintained in Landlord's or Tenant's name. 5.3 SECURITY. Tenant acknowledges that Landlord has not undertaken any duty whatsoever to provide security for the Leased Premises, the Building, the Outside Areas or the Property and, accordingly, Landlord is not responsible for the security of same or the protection of Tenant's property or Tenant's employees, invitees or contractors. To the extent Tenant determines that such security or protection services are advisable or necessary, Tenant shall arrange for and pay the costs of providing same. 5.4 ENERGY AND RESOURCE CONSUMPTION. Landlord may voluntarily cooperate in a reasonable manner with the efforts of governmental agencies and/or utility suppliers in reducing energy or other resource consumption within the Property. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord (i) in order to maximize the efficient operation of the electrical, heating, ventilating and air conditioning systems and all other energy or other resource consumption systems with the Property and/or (ii) in order to comply with the requirements and recommendations of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources. 5.5 LIMITATION OF LANDLORD'S LIABILITY. Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees or contractors, damage to Tenant's property or loss of Tenant's business or profits, nor shall Tenant be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of (i) Landlord's failure to provide security services or systems within the Property for the protection of the Leased Premises, the Building or the Outside Areas, or the protection of Tenant's property or Tenant's employees, invitees, agents or contractors, or (ii) Landlord's failure to perform any maintenance or repairs to the Leased Premises, the Building, the Outside Areas or the Property until Tenant shall have first notified Landlord, in writing, of the need for such maintenance or repairs, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such maintenance or repairs, or (iii) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Leased Premises, the Building, the Outside Areas or the Property from whatever cause (other than to the extent caused by Landlord's active negligence or willful misconduct), or (iv) the unauthorized intrusion or entry into the Leased Premises by third parties (other than Landlord). ARTICLE 6 ALTERATIONS AND IMPROVEMENTS 6.1 BY TENANT. Tenant shall not make any alterations to or modifications of the Leased Premises or construct any improvements within the Leased Premises until Landlord shall have first approved, in writing, the plans and specifications therefor, which approval shall not be unreasonably withheld or delayed. Landlord's approval shall be deemed given if not denied by Landlord in a written notice to Tenant delivered within fifteen (15) days following receipt of Tenant's written request. Tenant's written request shall also contain a request for Landlord to elect whether or not it will require Tenant to remove the subject alterations, modifications or improvements at the expiration or earlier termination of this Lease. If such additional request is not included, Landlord may make such election at the expiration or earlier termination of this Lease (and for purposes of Tenant's removal obligations set forth in Section 2.6 above, Landlord shall be deemed to have made the election at the time the alterations, modifications or improvements were completed). Notwithstanding the foregoing, in the event Tenant exercises the First Expansion Option (as hereafter defined), Tenant shall have the right, at its sole cost and expense, subject to the prior written approval of Landlord (which approval shall not be unreasonably withheld or delayed) to construct a covered open walkway between the Building and the 1184 Building (as hereafter defined) and Tenant shall not be required to remove such walkway upon the termination of this Lease. All modifications, alterations or improvements, once approved by Landlord, shall be made, constructed or installed by Tenant at Tenant's expense (including all permit fees and governmental charges related thereto), using a licensed contractor first approved by Landlord, in substantial compliance with the Landlord-approved plans and specifications therefor. All work undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality. Tenant shall not commence the making of any such modifications or alterations or the 11. 16 construction of any such improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five business days prior written notice of its intention to commence such work so that Landlord may post and file notices of non-responsibility, and (iv) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder's risk insurance in an amount satisfactory to Landlord in its reasonable discretion to cover any perils relating to the proposed work not covered by insurance carried by Tenant pursuant to Article 9. In no event shall Tenant make any modification, alterations or improvements whatsoever to the Outside Areas or the exterior or structural components of the Building including, without limitation, any cuts or penetrations in the floor, roof or exterior walls of the Leased Premises (except to the extent Tenant has obtained Landlord's approval pursuant to Section 4.2). As used in this Article, the term "modifications, alterations and/or improvements" shall include, without limitation, the installation of additional electrical outlets, overhead lighting fixtures, drains, sinks, partitions, doorways, or the like. Notwithstanding the foregoing, Tenant, without Landlord's prior written consent, shall be permitted to make non-structural alterations to the Building, provided that: (a) such alterations do not exceed $20,000 individually, (b) Tenant shall timely provide Landlord the notice required pursuant to Paragraph 4.9 above, (c) Tenant shall notify Landlord in writing within thirty (30) days of completion of the alteration and deliver to Landlord a set of the plans and specifications therefor, either "as built" or marked to show construction changes made, and (d) Tenant shall, upon Landlord's request, remove the alteration at the termination of the Lease and restore the Leased Premises to their condition prior to such alteration. 6.2 OWNERSHIP OF IMPROVEMENTS. All modifications, alterations and improvements made or added to the Leased Premises by Tenant (other than Tenant's inventory, equipment, movable furniture, wall decorations and trade fixtures) shall be deemed real property and a part of the Leased Premises, but shall remain the property of Tenant during the Lease. Any such modifications, alterations or improvements, once completed, shall not be altered or removed from the Leased Premises during the Lease Term without Landlord's written approval first obtained in accordance with the provisions of Paragraph 6.1 above. At the expiration or sooner termination of this Lease, all such modifications, alterations and improvements other than Tenant's inventory, equipment, movable furniture, wall decorations and trade fixtures, shall automatically become the property of Landlord and shall be surrendered to Landlord as part of the Leased Premises as required pursuant to Article 2, unless Landlord shall require Tenant to remove any of such modifications, alterations or improvements in accordance with the provisions of Article 2, in which case Tenant shall so remove same. Landlord shall have no obligations to reimburse Tenant for all or any portion of the cost or value of any such modifications, alterations or improvements so surrendered to Landlord. All modifications, alterations or improvements which are installed or constructed on or attached to the Leased Premises by Landlord and/or at Landlord's expense shall be deemed real property and a part of the Leased Premises and shall be property of Landlord. All lighting, plumbing, electrical, heating, ventilating and air conditioning fixtures, partitioning, window coverings, wall coverings and floor coverings installed by Tenant shall be deemed improvements to the Leased Premises and not trade fixtures of Tenant. Landlord shall have no lien or interest whatsoever in any of Tenant's property or equipment located in the Leased Premises or elsewhere, and Landlord waives any such liens and interests and Landlord hereby agrees to execute a Landlord Waiver with respect thereto in favor of any lender or equipment lessor of Tenant strictly in the form attached as Exhibit F. 6.3 ALTERATIONS REQUIRED BY LAW. Tenant shall make all modifications, alterations and improvements to the Leased Premises, at its sole cost, that are required by any Law because of (i) Tenant's use or occupancy of the Leased Premises, the Building, the Outside Areas or the Property, (ii) Tenant's application for any permit or governmental approval, or (iii) Tenant's making of any modifications, alterations or improvements to or within the Leased Premises. If Landlord shall, at any time during the Lease Term, be required by any governmental authority to make any modifications, alterations or improvements to the Building or the Property, the cost incurred by Landlord in making such modifications, alterations or improvements, including interest at a rate equal to the greater of (a) 12%, or (b) the sum of that rate quoted by Wells Fargo Bank, N.T. & S.A. from time to time as its prime rate, plus two percent (2%) ("Wells Prime Plus Two") (but in no event more than the maximum interest rate permitted by law), shall be amortized by Landlord over the useful life of such modifications, alterations or improvements, as determined in accordance with generally accepted accounting principles, and the monthly amortized cost of such modifications, alterations and improvements as so amortized shall be considered a Property Maintenance Cost. 6.4 LIENS. Tenant shall keep the Property and every part thereof free from any lien, and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Property. If any such claim of lien is recorded against Tenant's interest in this Lease, the Property or any part thereof, Tenant shall bond against, discharge or otherwise cause such lien to be entirely released within ten days after the same has been recorded. Tenant's failure to do so shall be conclusively deemed a material default under the terms of this Lease. ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT 7.1 BY TENANT. Tenant shall not sublet the Leased Premises or any portion thereof or assign its interest in this Lease, whether voluntarily or by operation of Law, without Landlord's prior written consent which shall not be unreasonably withheld. Any attempted subletting or assignment without Landlord's prior written consent, at Landlord's election, shall constitute a default by Tenant under the terms of this Lease. The acceptance of rent by Landlord from any person or entity other than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of a violation of the provisions of this paragraph, shall not be deemed to be a waiver by Landlord of any provision of this Article or this Lease or to be a consent to any subletting by Tenant or any assignment of Tenant's interest in this Lease. Without limiting the circumstances in which it may be reasonable for Landlord to withhold its 12. 17 consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold its consent in the following instances: (a) the proposed assignee or sublessee is a governmental agency; (b) in Landlord's reasonable judgment, the use of the Leased Premises by the proposed assignee or sublessee would involve occupancy by other than a Permitted Use as set forth in Article 1, would entail any alterations which would lessen the value of the leasehold improvements in the Leased Premises, or would require increased services by Landlord; (c) in Landlord's reasonable judgment, the financial worth of the proposed assignee is less than that of Tenant or does not meet the credit standards applied by Landlord at the time of the proposed assignment; (d) the proposed assignee or sublessee (or any of its affiliates) has been in material default under a lease, has been in litigation with a previous landlord due to a default under a lease, or in the ten years prior to the assignment or sublease has filed for bankruptcy protection, has been the subject of an involuntary bankruptcy, or has been adjudged insolvent; (e) Landlord has experienced a previous default by or is in litigation with the proposed assignee or sublessee; (f) in Landlord's reasonable judgment, the Leased Premises, or the relevant part thereof, will be used in a manner that will violate any negative covenant as to use contained in this Lease; (g) the use of the Leased Premises by the proposed assignee or sublessee will violate any applicable law, ordinance or regulation; (h) the proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this Article 7; (i) Tenant is in default of any obligation of Tenant under this Lease, or Tenant has defaulted on any of its payment obligations under this Lease on three or more occasions during the 12 months preceding the date that Tenant shall request consent; or (j) in the case of a subletting of less than the entire Leased Premises, if the subletting would result in the division of any floor of the Building into more than two subleased parcels or would require improvements to be made outside of the Leased Premises. 7.2 MERGER, REORGANIZATION, OR SALE OF ASSETS. Each of the following shall be deemed a voluntary assignment of Tenant's interest in this Lease: (a) dissolution, merger, consolidation or other reorganization of Tenant; or (b) at any time that the capital stock of Tenant is not publicly traded on a recognized exchange, the sale or transfer in one or more transactions to one or more related parties of a controlling percentage of the capital stock of Tenant; or (c) or the sale or transfer of all or substantially all of the assets of Tenant. The phrase "controlling percentage" means the ownership of and the right to vote stock possessing more than fifty percent of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of Law, of any general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this Lease. Notwithstanding the foregoing, Tenant (or any Permitted Assignee, as defined herein) may, without Landlord's prior written consent and without being subject to any of the provisions of this Article 7, including without limitation, Landlord's right to recapture any portion of the Leased Premises, sublet the Leased Premises or assign this Lease to (individually, a "Permitted Assignee," collectively, "Permitted Assignees"): (i) a subsidiary, affiliate, division, corporation or joint venture controlling, controlled by or under common control with Tenant; or (ii) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization, or government action; or (iii) a purchaser of all or substantially all of the assets of Tenant; provided that either (1) Tenant shall remain primarily liable under the Lease (except in the event it is not the surviving entity in the merger) or (2) that any Permitted Assignee under (i), (ii) or (iii) above has a net worth equal to or greater than Tenant and does not have any contingent or off-balance sheet liabilities that make it less credit worthy than Tenant. In the event any proposed assignee or subtenant under (i), (ii) or (iii) above has a net worth less than Tenant or has contingent or off-balance sheet liabilities that make it less credit worthy than Tenant, Landlord's consent (pursuant to Section 7.1 above) shall be required and all of the terms and conditions of this Article 7 shall apply, except that Landlord shall not be entitled to terminate this Lease pursuant to Section 7.3, and Landlord shall not be entitled to any assignment consideration or excess rentals pursuant to Section 7.5 of this Lease. If any proposed assignee or subtenant under (i), (ii) or (iii) above does not qualify as a Permitted Assignee because it has a net worth which is less than Tenant or has contingent or off-balance sheet liabilities that make it less creditworthy than Tenant, then in the event Landlord nevertheless consents (pursuant to the provisions of Section 7.1 above) to such proposed assignee or subtenant, such proposed assignee or subtenant shall constitute a Permitted Assignee under this Lease. 7.3 LANDLORD'S ELECTION. If Tenant shall desire to assign its interest under the Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in writing, of its intent to so assign or sublet, at least thirty (30) days in advance of the date it intends to so assign its interest in this Lease or sublet the Leased Premises but not sooner than one hundred eighty days in advance of such date, specifying in detail the terms of such proposed assignment or subletting, including the name of the proposed assignee or sublessee, the property assignee's or sublessee's intended 13. 18 use of the Leased Premises, current financial statements (including a balance sheet, income statement and statement of cash flow, all prepared in accordance with generally accepted accounting principles) of such proposed assignee or sublessee, the form of documents to be used in effectuating such assignment or subletting and such other information as Landlord may reasonably request. Landlord shall have a period of ten (10) business days following receipt of such notice and the required information within which to do one of the following: (i) consent to such requested assignment or subletting subject to Tenant's compliance with the conditions set forth in Paragraph 7.4 below, or (ii) refuse to so consent to such requested assignment or subletting, provided that such consent shall not be unreasonably refused, or (iii) in the case of an assignment of this Lease or sublet of 100% of the Leased Premises, terminate this Lease. During such ten (10) business day period, Tenant covenants and agrees to supply to Landlord, upon request, all necessary or relevant information which Landlord may reasonably request respecting such proposed assignment or subletting and/or the proposed assignee or sublessee. Notwithstanding the foregoing, if Landlord elects to terminate the Lease as provided herein, Landlord shall notify Tenant thereof during such ten (10) business day period and Tenant shall have ten (10) business days thereafter to either (i) accept Landlord's termination or (ii) rescind its request for consent to the assignment or subletting, in which case the Lease shall continue in full force and effect between Tenant and Landlord. 7.4 CONDITIONS TO LANDLORD'S CONSENT. If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction, to such requested assignment or subletting, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth, and any purported assignment or subletting made or ordered prior to the full and complete satisfaction of each of the following conditions shall be void and, at the election of Landlord, which election may be exercised at any time following such a purported assignment or subletting but prior to the satisfaction of each of the stated conditions, shall constitute a material default by Tenant under this Lease until cured by satisfying in full each such condition by the assignee or sublessee. The conditions are as follows: (a) Landlord having approved in form and substance the assignment or sublease agreement and any ancillary documents, which approval shall not be unreasonably withheld by Landlord if the requirements of this Article 7 are otherwise complied with. (b) Each such sublessee or assignee having agreed, in writing satisfactory to Landlord and its counsel and for the benefit of Landlord, to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant which relate to space being subleased. (c) Tenant having fully and completely performed all of its obligations under the terms of this Lease through and including the date of such assignment or subletting. (d) Tenant having reimbursed to Landlord all reasonable costs and reasonable attorneys' fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting or assignment. (e) Tenant having delivered to Landlord a complete and fully-executed duplicate original of such sublease agreement or assignment agreement (as applicable) and all related agreements. (f) Tenant having paid, or having agreed in writing to pay as to future payments, to Landlord fifty percent (50%) of all assignment consideration or excess rentals to be paid to Tenant or to any other on Tenant's behalf or for Tenant's benefit for such assignment or subletting as follows: (i) If Tenant assigns its interest under this Lease and if all or a portion of the consideration for such assignment is to be paid by the assignee at the time of the assignment, that Tenant shall have paid to Landlord and Landlord shall have received an amount equal to fifty percent (50%) of the assignment consideration so paid or to be paid (whichever is the greater) at the time of the assignment by the assignee; or (ii) If Tenant assigns its interest under this Lease and if Tenant is to receive all or a portion of the consideration for such assignment in future installments, that Tenant and Tenant's assignee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to Landlord an amount equal to fifty percent (50%) of all such future assignment consideration installments to be paid by such assignee as and when such assignment consideration is so paid. (iii) If Tenant subleases the Leased Premises, that Tenant and Tenant's sublessee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant's sublessee jointly agree to pay to Landlord fifty percent (50%) of all excess rentals to be paid by such sublessee as and when such excess rentals are so paid. 7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED. For purposes of this Article, including any amendment to this Article by way of addendum or other writing, the term "assignment consideration" shall mean all consideration to be paid by the assignee to Tenant or to any other party on Tenant's behalf or for Tenant's benefit as consideration for such assignment, after deduction for reasonable leasing commissions and reasonable legal fees incurred by Tenant in connection with such assignment and, during the first six (6) years of the Lease Term, the cost of tenant improvements made by Tenant at Tenant's sole cost and expense to prepare the Leased Premises for the assignee, but without deduction for any other costs or expenses, and the term "excess rentals" shall mean all consideration to be paid by the sublessee to Tenant or to any other party on Tenant's behalf or for Tenant's benefit for the sublease of the Leased Premises in excess of the rent due to Landlord under the terms of this Lease for the 14. 19 same period, after deduction for reasonable leasing commissions and reasonable legal fees incurred by Tenant in connection with such sublease and, during the first six (6) years of the Lease Term, the cost of tenant improvements made by Tenant at Tenant's sole cost and expense to prepare the Leased Premises for the subtenant, but without deduction for any other costs or expenses. Tenant agrees that the portion of any assignment consideration and/or excess rentals arising from any assignment or subletting by Tenant which is to be paid to Landlord pursuant to this Article now is and shall then be the property of Landlord and not the property of Tenant. 7.6 PAYMENTS. All payments required by this Article to be made to Landlord shall be made in cash in full as and when they become due. At the time Tenant, Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord an itemized statement in reasonable detail showing the method by which the amount due Landlord was calculated and certified by the party making such payment as true and correct. 7.7 GOOD FAITH. The rights granted to Tenant by this Article are granted in consideration of Tenant's express covenant that all pertinent allocations which are made by Tenant between the rental value of the Leased Premises and the value of any of Tenant's personal property which may be conveyed or leased generally concurrently with and which may reasonably be considered a part of the same transaction as the permitted assignment or subletting shall be made fairly, honestly and in good faith. If Tenant shall breach this covenant, Landlord may immediately declare Tenant to be in default under the terms of this Lease and terminate this Lease and/or exercise any other rights and remedies Landlord would have under the terms of this Lease in the case of a material default by Tenant under this Lease. 7.8 EFFECT OF LANDLORD'S CONSENT. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay rent and to perform all of the other obligations to be performed by Tenant hereunder. Consent by Landlord to one or more assignments of Tenant's interest in this Lease or to one or more sublettings of the Leased Premises shall not be deemed to be a consent to any subsequent assignment or subletting. If Landlord shall have been ordered by a court of competent jurisdiction to consent to a requested assignment or subletting, or such an assignment or subletting shall have been ordered by a court of competent jurisdiction over the objection of Landlord, such assignment or subletting shall not be binding between the assignee (or sublessee) and Landlord until such time as all conditions set forth in Paragraph 7.4 above have been fully satisfied (to the extent not then satisfied) by the assignee or sublessee, including, without limitation, the payment to Landlord of all agreed assignment considerations and/or excess rentals then due Landlord. ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE. Landlord shall not be liable to Tenant for, and Tenant hereby releases Landlord and its partners, principals, members, officers, agents, employees, lenders, attorneys, and consultants from, any and all liability, whether in contract, tort or on any other basis, for any injury to or any damage sustained by Tenant, Tenant's agents, employees, contractors or invitees, any damage to Tenant's property, or any loss to Tenant's business, loss of Tenant's profits or other financial loss of Tenant resulting from or attributable to the condition of, the management of, the repair or maintenance of, the protection of, the supply of services or utilities to, the damage in or destruction of the Leased Premises, the Building, the Property or the Outside Areas, including without limitation (i) the failure, interruption, rationing or other curtailment or cessation in the supply of electricity, water, gas or other utility service to the Property, the Building or the Leased Premises; (ii) the vandalism or forcible entry into the Building or the Leased Premises; (iii) the penetration of water into or onto any portion of the Leased Premises; (iv) the failure to provide security and/or adequate lighting in or about the Property, the Building or the Leased Premises, (v) the existence of any design or construction defects within the Property, the Building or the Leased Premises; (vi) the failure of any mechanical systems to function properly (such as the HVAC systems); (vii) the blockage of access to any portion of the Property, the Building or the Leased Premises, except that Tenant does not so release Landlord from such liability to the extent such damage was proximately caused by Landlord's active negligence, willful misconduct, or Landlord's failure to perform an obligation expressly undertaken pursuant to this Lease after a reasonable period of time shall have lapsed following receipt of written notice from Tenant to so perform such obligation. In this regard, Tenant acknowledges that it is fully apprised of the provisions of Law relating to releases, and particularly to those provisions contained in Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding such statutory provision, and for the purpose of implementing a full and complete release and discharge, Tenant hereby (i) waives the benefit of such statutory provision and (ii) acknowledges that, subject to the exceptions specifically set forth herein, the release and discharge set forth in this paragraph is a full and complete settlement and release and discharge of all claims and is intended to include in its effect, without limitation, all claims which Tenant, as of the date hereof, does not know of or suspect to exist in its favor. 8.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall defend with competent counsel satisfactory to Landlord any claims made or legal actions filed or threatened against Landlord with respect to the violation of any Law, or the death, bodily injury, personal injury, property damage, or interference with contractual or property rights suffered by any third party, occurring within the Leased Premises or resulting from Tenant's use or occupancy of 15. 20 the Leased Premises, the Building or the Outside Areas, or resulting from Tenant's activities in or about the Leased Premises, the Building, the Outside Areas or the Property, and Tenant shall indemnify and hold Landlord, Landlord's partners, principals, members, employees, agents and contractors harmless from any loss liability, penalties, or expense whatsoever (including any loss attributable to vacant space which otherwise would have been leased, but for such activities) resulting therefrom, except to the extent proximately caused by the active negligence or willful misconduct of Landlord or Landlord's failure to perform an obligation expressly undertaken pursuant to this Lease after a reasonable period of time shall have lapsed following receipt of written notice from Tenant to so perform such obligation. This indemnity agreement shall survive the expiration or sooner termination of this Lease. ARTICLE 9 INSURANCE 9.1 TENANT'S INSURANCE. Tenant shall maintain insurance complying with all of the following: (a) Tenant shall procure, pay for and keep in full force and effect, at all times during the Lease Term, the following: (i) Comprehensive general liability insurance insuring Tenant against liability for personal injury, bodily injury, death and damage to property occurring within the Leased Premises, or resulting from Tenant's use or occupancy of the Leased Premises, the Building, the Outside Areas or the Property, or resulting from Tenant's activities in or about the Leased Premises or the Property, with coverage in an amount equal to Tenant's Required Liability Coverage (as set forth in Article 1), which insurance shall contain a "broad form liability" endorsement insuring Tenant's performance of Tenant's obligations to indemnify Landlord as contained in this Lease. (ii) Fire and property damage insurance in so-called "fire and extended coverage" form insuring Tenant against loss from physical damage to Tenant's personal property, inventory, trade fixtures and improvements within the Leased Premises with coverage for the full actual replacement cost thereof; (iii) Plate glass insurance, at actual replacement cost; (iv) Pressure vessel insurance, if applicable; (v) Workers' compensation insurance and any other employee benefit insurance sufficient to comply with all laws; and (vi) With respect to making of alterations or the construction of improvements or the like undertaken by Tenant, contingent liability and builder's risk insurance, in an amount and with coverage reasonably satisfactory to Landlord. (b) Each policy of liability insurance required to be carried by Tenant pursuant to this paragraph or actually carried by Tenant with respect to the Leased Premises or the Property: (i) shall, except with respect to insurance required by subparagraph (a)(vi) above, name Landlord, and such others as are designated by Landlord, as additional insureds; (ii) shall be primary insurance providing that the insurer shall be liable for the full amount of the loss, up to and including the total amount of liability set forth in the declaration of coverage, without the right of contribution from or prior payment by any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord with Best's ratings of at least A and XI; (v) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty days prior written notice to Landlord, and (vi) shall contain a so-called "severability" or "cross liability" endorsement. Each policy of property insurance maintained by Tenant with respect to the Leased Premises or the Property or any property therein (i) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty days prior written notice to Landlord and (ii) shall contain a waiver and/or a permission to waive by the insurer of any right of subrogation against Landlord, its partners, principals, members, officers, employees, agents and contractors, which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its partners, principals, members, officers, employees, agents and contractors. (C) Prior to the time Tenant or any of its contractors enters the Leased Premises, Tenant shall deliver to Landlord, with respect to each policy of insurance required to be carried by Tenant pursuant to this Article, a copy of such policy (appropriately authenticated by the insurer as having been issued, premium paid) or a certificate of the insurer certifying in form satisfactory to Landlord that a policy has been issued, premium paid, providing the coverage required by this Paragraph and containing the provisions specified herein. With respect to each renewal or replacement of any such insurance, the requirements of this Paragraph must be complied with not less than thirty days prior to the expiration or cancellation of the policies being renewed or replaced. Landlord may, at any time and from time to time, inspect and/or copy any and all insurance policies required to be carried by Tenant pursuant to this Article. If Landlord's Lender, insurance broker, advisor or counsel reasonably determines at any time that the amount of coverage set forth in Paragraph 9.1(a) for any policy of insurance Tenant is required to carry pursuant to this Article is not adequate, then Tenant shall increase the amount of coverage for such insurance to such greater amount as Landlord's Lender, insurance broker, advisor or counsel reasonably deems adequate. 9.2 LANDLORD'S INSURANCE. With respect to insurance maintained by Landlord: 16. 21 (a) Landlord shall maintain, as the minimum coverage required of it by this Lease, fire and property damage insurance in so-called "fire and extended coverage" form insuring Landlord (and such others as Landlord may designate) against loss from physical damage to the Building with coverage of not less than one hundred percent (100%) of the full actual replacement cost thereof and against loss of rents for a period of not less than six months. Such fire and property damage insurance, at Landlord's election but without any requirements on Landlord's behalf to do so, (i) may be written in so-called "all risk" form, excluding only those perils commonly excluded from such coverage by Landlord's then property damage insurer; (ii) may provide coverage for physical damage to the improvements so insured for up to the entire full actual replacement cost thereof; (iii) may be endorsed to cover loss or damage caused by any additional perils against which Landlord may elect to insure, including earthquake and/or flood; and/or (iv) may provide coverage for loss of rents for a period of up to twelve months. Landlord shall not be required to cause such insurance to cover any of Tenant's personal property, inventory, and trade fixtures, or any modifications, alterations or improvements made or constructed by Tenant to or within the Leased Premises. Landlord shall use commercially reasonable efforts to obtain such insurance at competitive rates. (b) Landlord shall maintain comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in, on or about, or resulting from the use or occupancy of the Property, or any portion thereof, with combined single limit coverage of at least Three Million Dollars ($3,000,000). Landlord may carry such greater coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel may from time to time determine is reasonably necessary for the adequate protection of Landlord and the Property. (c) Landlord may maintain any other insurance which in the opinion of its insurance broker, advisor or legal counsel is prudent in carry under the given circumstances, provided such insurance is commonly carried by owners of property similarly situated and operating under similar circumstances. 9.3 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective partners, principals, members, officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises or the Property which is caused by or results from a peril or event or happening which is covered by insurance actually carried and in force at the time of the loss by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby. ARTICLE 10 DAMAGE TO LEASED PREMISES 10.1 LANDLORD'S DUTY TO RESTORE. If the Leased Premises, the Building or the Outside Area are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the same, as and when required by this paragraph, unless this Lease is terminated by Landlord pursuant to Paragraph 10.3 or by Tenant pursuant to Paragraph 10.4. If this Lease is not so terminated, then upon the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, the Building or the Outside Area, as the case may be, to the extent then allowed by law, to substantially the same condition in which it existed as of the Lease Commencement Date. Landlord's obligation to restore shall be limited to the improvements constructed by Landlord. Landlord shall have no obligation to restore any Improvements made by Tenant to the Leased Premises or any of Tenant's personal property, inventory or trade fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith replace or fully repair all of Tenant's personal property, inventory, trade fixtures and other improvements constructed by Tenant to like or similar conditions as existed at the time immediately prior to such damage or destruction. 10.2 INSURANCE PROCEEDS. All insurance proceeds available from the fire and property damage insurance carried by Landlord shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either Paragraph 10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant which cover loss of property that is Landlord's property or would become Landlord's property on termination of this Lease shall be paid to and become the property of Landlord, and the remainder of such proceeds shall be paid to and become the property of Tenant. If this Lease is not terminated pursuant to either Paragraph 10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord's property shall be paid to and become the property of Landlord, and all proceeds available from such insurance which cover loss to property which would only become the property of Landlord upon the termination of this Lease shall be paid to and remain the property of Tenant. The determination of Landlord's property and Tenant's property shall be made pursuant to Paragraph 6.2. 10.3 LANDLORD'S RIGHT TO TERMINATE. Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty days after the date of such damage or destruction: (a) The Building is damaged by any peril covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction or by any peril which would have been covered by the insurance Landlord is required to maintain pursuant to Section 9.2 (an "Insured Peril") to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds available from insurance actually carried by Landlord (or which Landlord was required to carry pursuant to Section 9.2(a) hereof) plus the amount of any deductible (up to a maximum amount of five percent (5%) of the replacement cost of the Building), 17. 22 plus any amount that the Tenant agrees in writing to contribute towards restoration, or (ii) fifty percent of the then actual replacement cost of the Building; (b) The Building is damaged by an uninsured peril, which peril Landlord was not required to insure against pursuant to the provisions of Article 9 of this Lease, provided, however, that, subject to the requirements of the holder of any deed of trust encumbering the Property, Landlord shall not have the right to terminate this Lease if Tenant notifies Landlord, within thirty (30) days after Tenant receives Landlord's written notice of termination pursuant to this Section 10.3, that Tenant will pay for the cost of restoration of the Leased Premises, in excess of any insurance proceeds to be received by Landlord. (c) The Building is damaged by any peril and, because of the laws then in force, the Building (i) cannot be restored at reasonable cost or (ii) if restored, cannot be used for the same use being made thereof before such damage. 10.4 TENANT'S RIGHT TO TERMINATE. If the Leased Premises, the Building or the Outside Area are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be complete. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Landlord of a written notice of election to terminate within seven days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (a) If the time estimated to substantially complete the restoration exceeds nine (9) months from and after the date the architect's or construction consultant's written opinion is delivered; or (b) If the damage occurred within twelve months of the last day of the Lease Term and the time estimated to substantially complete the restoration exceeds one hundred eighty days from and after the date such restoration is commenced. 10.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph 10.4 above, captioned "Tenant's Right To Terminate", are intended to supersede and replace the provisions contained in California Civil Code, Section 1932, Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant hereby waives the provisions of such Civil Code Sections and the provisions of any successor Civil Code Sections or similar laws hereinafter enacted. 10.6 ABATEMENT OF RENT. In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent (and any Additional Rent) shall be temporarily abated during the period of restoration in proportion in the degree to which Tenant's use of the Leased Premises is impaired by such damage. ARTICLE 11 CONDEMNATION 11.1 TENANT'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph 11.4 below regarding temporary takings, Tenant shall have the option to terminate this Lease if, as a result of any taking, (i) all of the Leased Premises is taken, or (ii) twenty-five percent (25%) or more of the Leased Premises is taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of Tenant's business, or (iii) or a portion of the Outside Area is taken such that the parking available to Tenant is reduced by more than twenty percent (20%), and the Landlord does not, within a reasonable period of time, provide alternative parking arrangements within a reasonable walking distance of the Leased Premises. Tenant must exercise such option within a reasonable period of time, to be effective on the later to occur of (i) the date that possession of that portion of the Leased Premises that is condemned is taken by the condemnor or (ii) the date Tenant vacated the Leased Premises. 11.2 LANDLORD'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph 11.4 below regarding temporary takings, Landlord shall have the option to terminate this Lease if, as a result of any taking, (i) all of the Leased Premises is taken, (ii) twenty-five percent (25%) or more of the Leased Premises is taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of Tenant's business, or (iii) because of the laws then in force, the Leased Premises may not be used for the same use being made before such taking, whether or not restored as required by Paragraph 11.3 below. Any such option to terminate by Landlord must be exercised within a reasonable period of time, to be effective as of the date possession is taken by the condemnor. 11.3 RESTORATION. If any part of the Leased Premises or the Building is taken and this Lease is not terminated, then Landlord shall, to the extent not prohibited by laws then in force, repair any damage occasioned thereby to the remainder thereof to a condition reasonably suitable for Tenant's continued operations and otherwise, to the extent practicable, in the manner and to the extent provided in Paragraph 10.1. 11.4 TEMPORARY TAKING. If a portion of the Leased Premises is temporarily taken for a period of one year or less and such period does not extend beyond the Lease Expiration Date, this Lease shall remain in effect. If any portion of the Leased Premises is temporarily taken for a period which exceeds one year or which extends beyond the Lease 18. 23 Expiration Date, then the rights of Landlord and Tenant shall be determined in accordance with Paragraphs 11.1 and 11.2 above. 11.5 DIVISION OF CONDEMNATION AWARD. Any award made for any taking of the Property, the Building, or the Leased Premises, or any portion thereof, shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any portion of the award that is made specifically (i) for the taking of personal property, inventory or trade fixtures belonging to Tenant, (ii) for the interruption of Tenant's business or its moving costs, or (iii) for the value of any leasehold improvements installed and paid for by Tenant. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Supreme Court to terminate this Lease and/or otherwise allocate condemnation awards between Landlord and Tenant in the event of a taking of the Leased Premises. 11.6 ABATEMENT OF RENT. In the event of a taking of the Leased Premises which does not result in a termination of this Lease (other than a temporary taking), then, as of the date possession is taken by the condemning authority, the Base Monthly Rent shall be reduced in the same proportion that the area of that part of the Leased Premises so taken (less any addition to the area of the Leased Premises by reason of any reconstruction) bears to the area of the Leased Premises immediately prior to such taking. 11.7 TAKING DEFINED. The term "taking" or "taken" as used in this Article 11 shall mean any transfer or conveyance of all or any portion of the Property to a public or quasi-public agency or other entity having the power of eminent domain pursuant to or as a result of the exercise of such power by such an agency, including any inverse condemnation and/or any sale or transfer by Landlord of all or any portion of the Property to such an agency under threat of condemnation or the exercise of such power. ARTICLE 12 DEFAULT AND REMEDIES 12.1 EVENTS OF TENANT'S DEFAULT. Tenant shall be in default of its obligations under this Lease if any of the following events occur: (a) Tenant shall have failed to pay Base Monthly Rent or any Additional Rent within three (3) days after notice from Landlord that such rent is past due provided, however, that such notice shall be concurrent with, and not in addition to, any notice required by applicable Laws; or (b) Tenant shall have done or permitted to be done any act, use or thing in its use, occupancy or possession of the Leased Premises or the Building or the Outside Areas which is prohibited by the terms of this Lease or Tenant shall have failed to perform any term, covenant or condition of this Lease (except those requiring the payment of Base Monthly Rent or Additional Rent, which failures shall be governed by subparagraph (a) above) within thirty (30) days after written notice from Landlord to Tenant specifying the nature of such failure and requesting Tenant to perform same or within such longer period as is reasonably required in the event such default is curable but not within such thirty (30) day period, provided such cure is promptly commenced within such thirty (30) day period and is thereafter diligently prosecuted to completion; or (c) Tenant shall have sublet the Leased Premises or assigned or encumbered its interest in this Lease in violation of the provisions contained in Article 7, whether voluntarily or by operation of law; or (d) Tenant shall have abandoned the Leased Premises; or (e) Tenant or any Guarantor of this Lease shall have permitted or suffered the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property or assets of Tenant (or such Guarantor) or any property or asset essential to the conduct of Tenant's (or such Guarantor's) business, and Tenant (or such Guarantor) shall have failed to obtain a return or release of the same within thirty days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or (f) Tenant or any Guarantor of this Lease shall have made a general assignment of all or a substantial part of its assets for the benefit of its creditors; or (g) Tenant or any Guarantor of this Lease shall have allowed (or sought) to have entered against it a decree or order which: (i) grants or constitutes an order for relief, appointment of a trustee, or condemnation or a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor's relief law or similar statute of the United States or any state thereof; or (iii) otherwise directs the winding up or liquidation of Tenant; provided, however, if any decree or order was entered without Tenant's consent or over Tenant's objection, Landlord may not terminate this Lease pursuant to this Subparagraph if such decree or order is rescinded or reversed within thirty days after its original entry; or (h) Tenant or any Guarantor of this Lease shall have availed itself of the protection of any debtor's relief law, moratorium law or other similar law which does not require the prior entry of a decree or order. 19. 24 12.2 LANDLORD'S REMEDIES. In the event of any default by Tenant, and without limiting Landlord's right to indemnification as provided in Article 8.2, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative: (a) Landlord may, at Landlord's election, keep this Lease in effect and enforce, by an action at law or in equity, all of its rights and remedies under this Lease including, without limitation, (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required by Tenant, or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the then maximum rate of interest not prohibited by law from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to prevent Tenant from violating the terms of this Lease and/or to compel Tenant to perform its obligations under this Lease, as the case may be. (b) Landlord may, at Landlord's election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying the Leased Premises or any part thereof, without being liable for prosecution or any claim or damages therefor. Any termination under this subparagraph shall not relieve Tenant from its obligation to pay to Landlord all Base Monthly Rent and Additional Rent then or thereafter due, or any other sums due or thereafter accruing to Landlord, or from any claim against Tenant for damages previously accrued or then or thereafter accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease constitute a termination of this Lease: (i) Appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (ii) Consent to any subletting of the Leased Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (iii) Any action taken by Landlord or its partners, principals, members, officers, agents, employees, or servants, which is intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Leased Premises on any action taken to relet the Leased Premises or any portion thereof for the account at Tenant and in the name of Tenant. (c) In the event Tenant breaches this Lease and abandons the Leased Premises, Landlord may terminate this Lease, but this Lease shall not terminate unless Landlord gives Tenant written notice of termination. If Landlord does not terminate this Lease by giving written notice of termination, Landlord may enforce all its rights and remedies under this Lease, including the right and remedies provided by California Civil Code Section 1951.4 ("lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations"), as in effect on the Effective Date of this Lease. (d) In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to the rights and remedies provided in California Civil Code Section 1951.2, as in effect on the Effective Date of this Lease. For purposes of computing damages pursuant to Section 1951.2, an interest rate equal to the maximum rate of interest then not prohibited by law shall be used where permitted. Such damages shall include, without limitation: (i) The worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) 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, 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; and (iii) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including without limitation, the following: (i) expenses for cleaning, repairing or restoring the Leased Premises, (ii) expenses for altering, remodeling or otherwise improving the Leased Premises for the purpose of reletting, including removal of existing leasehold improvements and/or installation of additional leasehold improvements (regardless of how the same is funded, including reduction of rent, a direct payment or allowance to a new tenant, or otherwise), (iii) broker's fees allocable to the remainder of the term of this Lease, advertising costs and other expenses of reletting the Leased Premises; (iv) costs of carrying and maintaining the Leased Premises, such as taxes, insurance premiums, utility charges and security precautions, (v) expenses incurred in removing, disposing of and/or storing any of Tenant's personal property, inventory or trade fixtures remaining therein; (vi) reasonable attorney's fees, expert witness fees, court costs and other reasonable expenses incurred by Landlord (but not limited to taxable costs) in retaking possession of the Leased Premises, establishing damages hereunder, and releasing the Leased Premises; and (vii) any other expenses, costs or damages otherwise incurred or suffered as a result of Tenant's default. 20. 25 12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. In the event Landlord fails to perform its obligations under this Lease, Landlord shall nevertheless not be in default under the terms of this Lease until such time as Tenant shall have first given Landlord written notice specifying the nature of such failure to perform its obligations, and then only after Landlord shall have had thirty (30) days following its receipt of such notice within which to perform such obligations; provided that, if longer than thirty (30) days is reasonably required in order to perform such obligations, Landlord shall have such longer period. In the event of Landlord's default as above set forth, then, and only then, Tenant may then proceed in equity or at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform (except as and to the extent Tenant has waived its right to damages as provided in this Lease). 12.4 LIMITATION OF TENANT'S RECOURSE. If Landlord is a corporation, trust, partnership, joint venture, limited liability company, unincorporated association, or other form of business entity, Tenant agrees that (i) the obligations of Landlord under this Lease shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals of such business entity, and (ii) Tenant shall have recourse only to the property of such corporation, trust, partnership, joint venture, limited liability company, unincorporated association, or other form of business entity for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders or principals. Additionally, if Landlord is a partnership or limited liability company, then Tenant covenants and agrees: (a) No partner or member of Landlord shall be sued or named as a party in any suit or action brought by Tenant with respect to any alleged breach of this Lease (except to the extent necessary to secure jurisdiction over the partnership and then only for that sole purpose); (b) No service of process shall be made against any partner or member of Landlord except for the sole purpose of securing jurisdiction over the partnership; and (c) No writ of execution will ever be levied against the assets of any partner or member of Landlord other than to the extent of his or her interest in the assets of the partnership or limited liability company constituting Landlord. Tenant further agrees that each of the foregoing covenants and agreements shall be enforceable by Landlord and by any partner or member of Landlord and shall be applicable to any actual or alleged misrepresentation or nondisclosure made regarding this Lease or the Leased Premises or any actual or alleged failure, default or breach of any covenant or agreement either expressly or implicitly contained in this Lease or imposed by statute or at common law. 12.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph 12.3 above are intended to supersede and replace the provisions of California Civil Code Sections 1932(1), 1941 and 1942, and accordingly, Tenant hereby waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942 and/or any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. ARTICLE 13 GENERAL PROVISIONS 13.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay before delinquency any and all taxes, assessments, license fees, use fees, permit fees and public charges of whatever nature or description levied, assessed or imposed against Tenant or Landlord by a governmental agency arising out of, caused by reason of or based upon Tenant's estate in this Lease, Tenant's ownership of property, improvements made by Tenant to the Leased Premises or the Outside Areas, improvements made by Landlord for Tenant's use within the Leased Premises or the Outside Areas, Tenant's use (or estimated use) of public facilities or services or Tenant's consumption (or estimated consumption) of public utilities, energy, water or other resources (collectively, "Tenant's Interest"). Upon demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any such taxes, assessments, fees or public charges are levied against Landlord, Landlord's property, the Building or the Property, or if the assessed value of the Building or the Property is increased by the inclusion therein of a value placed upon Tenant's Interest, regardless of the validity thereof, Landlord shall have the right to require Tenant to pay such taxes, and if not paid and satisfactory evidence of payment delivered to Landlord at least ten days prior to delinquency, then Landlord shall have the right to pay such taxes on Tenant's behalf and to invoice Tenant for the same. Tenant shall, within the earlier to occur of (a) thirty (30) days of the date it receives an invoice from Landlord setting forth the amount of such taxes, assessments, fees, or public charge so levied, or (b) the due date of such invoice, pay to Landlord, as Additional Rent, the amount set forth in such invoice. Failure by Tenant to pay the amount so invoiced within such time period shall be conclusively deemed a default by Tenant under this Lease. Tenant shall have the right to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessments, fees or public charges so paid. 13.2 HOLDING OVER. This Lease shall terminate without further notice on the Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant after expiration of the Lease Term shall neither constitute a renewal nor extension of this Lease nor give Tenant any rights in or to the Leased Premises except as expressly provided in this Paragraph. Any such holding over to which Landlord has consented shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable, except that the Base Monthly Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Base Monthly Rent payable 21. 26 during the last full month immediately preceding such holding over. Tenant acknowledges that if Tenant holds over without Landlord's consent, such holding over may compromise or otherwise affect Landlord's ability to enter into new leases with prospective tenants regarding the Leased Premises. Therefore, if Tenant fails to surrender the Leased Premises upon the expiration or termination of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from and against all claims resulting from such failure, including, without limiting the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any losses suffered by Landlord, including lost profits, resulting from such failure to surrender. 13.3 SUBORDINATION TO MORTGAGES. This Lease is subject to and subordinate to all ground leases, mortgages and deeds of trust which affect the Building or the Property and which are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if the lessor under any such ground lease or any lender holding any such mortgage or deed of trust shall advise Landlord that it desires or requires this Lease to be made prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all customary or reasonable documents or instruments which Landlord and such lessor or lender deems necessary or desirable to make this Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the land underlying the Building or the Property and/or encumbering the Building or the Property as security for future loans on such terms as Landlord shall desire, all of which future ground leases, mortgages or deeds of trust shall be subject to and subordinate to this Lease. However, if any lessor under any such future ground lease or any lender holding such future mortgage or deed of trust shall desire or require that this Lease be made subject to and subordinate to such future ground lease, mortgage or deed of trust, then Tenant agrees, within ten (10) days after Landlord's written request therefor, to execute, acknowledge and deliver to Landlord any and all documents or instruments reasonably requested by Landlord or by such lessor or lender as may be necessary or proper to assure the subordination of this Lease to such future ground lease, mortgage or deed of trust, but only if such lessor or lender agrees to recognize Tenant's rights under this Lease and agrees not to disturb Tenant's quiet possession of the Leased Premises so long as Tenant is not in default under this Lease. If Landlord assigns the Lease as security for a loan, Tenant agrees to execute such documents as are reasonably requested by the lender and to provide reasonable provisions in the Lease protecting such lender's security interest which are customarily required by institutional lenders making loans secured by a deed of trust provided that such documents do not materially increase Tenant's obligations under this Lease. 13.4 TENANT'S ATTORNMENT UPON FORECLOSURE. Tenant shall, upon request, attorn (i) to any purchaser of the Building or the Property at any foreclosure sale or private sale conducted pursuant to any security instruments encumbering the Building or the Property, (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure of any security interest encumbering the Building or the Property, or (iii) to the lessor under an underlying ground lease of the land underlying the Building or the Property, should such ground lease be terminated; provided that such purchaser, grantee or lessor recognizes Tenant's rights under this Lease. 13.5 MORTGAGEE PROTECTION. In the event of any default on the part of Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease who shall have requested, in writing, to Tenant that it be provided with such notice, and Tenant shall offer such Lender or lessor a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if reasonably necessary to effect a cure. 13.6 ESTOPPEL CERTIFICATE. Tenant will, following any request by Landlord, promptly execute and deliver to Landlord an estoppel certificate substantially in form attached as Exhibit B, (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about this Lease as may be reasonably requested by Landlord, its Lender or prospective lenders, investors or purchasers of the Building or the Property. Tenant's failure to execute and deliver such estoppel certificate within ten days after Landlord's request therefor shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant's failure to so deliver such estoppel certificate in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend that any statement delivered pursuant to this paragraph may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Property, or any interest in them. 13.7 TENANT'S FINANCIAL INFORMATION. Tenant shall, within ten business days after Landlord's request therefor, deliver to Landlord a copy of Tenant's (and any guarantor's) current financial statements (including a balance sheet, income statement and statement of cash flow, all prepared in accordance with generally accepted accounting principles) and any such other information reasonably requested by Landlord regarding Tenant's financial condition. Landlord shall be entitled to disclose such financial statements or other information to its Lender, to any present or prospective principal of or investor in Landlord, or to any prospective Lender or purchaser of the Building, the Property, or any portion thereof or interest therein. Any such financial statement or other information which is marked "confidential" or "company secrets" (or is otherwise similarly marked by Tenant) shall be confidential and shall not be disclosed by Landlord to any third party except as specifically provided in this paragraph and then only if the person to whom disclosure is made first agrees to be bound by the requirements of this Section 13.7, unless the same becomes a part of the public domain without the fault of Landlord. 22. 27 13.8 TRANSFER BY LANDLORD. Landlord and its successors in interest shall have the right to transfer their interest in the Building, the Property, or any portion thereof at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and in the case of any subsequent transfer, the transferor), from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer so long as the Security Deposit (or the remaining amount of such Security Deposit after deductions made in accordance with Section 3.7 of this Lease) is transferred to the transferee (or returned to the Tenant) and the transferee has agreed to assume and perform all such obligations which may accrue after the date of such transfer and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such prior obligations of the Landlord hereunder. Tenant shall attorn to any such transferee. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Building or the Property. 13.9 FORCE MAJEURE. The obligations of each of the parties under this Lease (other than the obligations to pay money) shall be temporarily excused if such party is prevented or delayed in performing such obligations by reason of any strikes, lockouts or labor disputes; government restrictions, regulations, controls, action or inaction; civil commotion; or extraordinary weather, fire or other acts of God. 13.10 NOTICES. Any notice required or permitted to be given under this Lease shall be in writing and (i) personally delivered, (ii) sent by United States mail, registered or certified mail, postage prepaid, return receipt requested, (iii) sent by Federal Express or similar nationally recognized overnight courier service, or (iv) transmitted by facsimile with a hard copy sent within one (1) business day by any of the foregoing means, and in all cases addressed as follows, and such notice shall be deemed to have been given upon the date of actual receipt or delivery (or refusal to accept delivery) at the address specified below (or such other addresses as may be specified by notice in the foregoing manner) as indicated on the return receipt or air bill: IF TO LANDLORD: Mathilda Associates LLC c/o Menlo Equities LLC 525 University Avenue Suite 100 Palo Alto, California 94301 Attention: Henry Bullock/Richard Holmstrom with a copy to: Cooley Godward LLP One Maritime Plaza 20th Floor San Francisco, California 94111 Attention: Paul Churchill IF TO TENANT: Prior to Commencement Date: Juniper Networks, Inc. 385 Ravendale Drive Mountain View, California 94043 After the Commencement Date: At the Leased Premises. Attention: General Counsel with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Bradford C. O'Brien Any notice given in accordance with the foregoing shall be deemed received upon actual receipt or refusal to accept delivery. 13.11 ATTORNEYS' FEES. In the event any party shall bring any action, arbitration proceeding or legal proceeding alleging a breach of any provision of this Lease, to recover rent, to terminate this Lease, or to enforce, protect, determine or establish any term or covenant of this Lease or rights or duties hereunder of either party, the prevailing party shall be entitled to recover from the non-prevailing party as a part of such action or proceeding, or in a separate action for that purpose brought within one year from the determination of such proceeding, reasonable attorneys' fees, expert witness fees, court costs and other reasonable expenses incurred by the prevailing party. 13.12 DEFINITIONS. Any term that is given a special meaning by any provision in this Lease shall, unless otherwise specifically stated, have such meaning wherever used in this Lease or in any Addenda or amendment hereto. In addition to the terms defined in Article 1, the following terms shall have the following meanings: (a) REAL PROPERTY TAXES. The term "Real Property Tax" or "Real Property Taxes" shall each mean the sum of Tenant's Property Share (as to the land component of the Property) and Tenant's Expense Share (as to the 23. 28 Building and other improvements in the Outside Areas) of (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all instruments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed for whatever reason against the Property or any portion thereof, or Landlord's interest herein, or the fixtures, equipment and other property of Landlord that is an integral part of the Property and located thereon, or Landlord's business of owning, leasing or managing the Property or the gross receipts, income or rentals from the Property, (ii) all charges, levies or fees imposed by any governmental authority against Landlord by reason of or based upon the use of or number of parking spaces within the Property, the amount of public services or public utilities used or consumed (e.g. water, gas, electricity, sewage or waste water disposal) at the Property, the number of person employed by tenants of the Property, the size (whether measured in area, volume, number of tenants or whatever) or the value of the Property, or the type of use or uses conducted within the Property, and all costs and fees (including attorneys' fees) reasonably incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If, at any time during the Lease Term, the taxation or assessment of the Property prevailing as of the Effective Date of this Lease shall be altered so that in lieu of or in addition to any the Real Property Tax described above there shall be levied, awarded or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional use or charge (i) on the value, size, use or occupancy of the Property or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Property, or on Landlord's business of owning, leasing or managing the Property or (iii) computed in any manner with respect to the operation of the Property, then any such tax or charge, however designated, shall be included within the meaning of the terms "Real Property Tax" or "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is partly based upon property or rents unrelated to the Property, then only that part of such Real Property Tax that is fairly allocable to the Property shall be included within the meaning of the terms "Real Property Tax" or "Real Property Taxes." Notwithstanding the foregoing, the terms "Real Property Tax" or "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord's income from all sources. (b) LANDLORD'S INSURANCE COSTS. The term "Landlord's Insurance Costs" shall mean Tenant's Expense Share of the costs to Landlord to carry and maintain the policies of fire and property damage insurance for the Building and Tenant's Property Share of the costs to Landlord to carry and maintain the policies of fire and property damage insurance on the Property and general liability and any other insurance required or permitted to be carried by Landlord pursuant to Article 9, together with any deductible amounts paid by Landlord upon the occurrence of any insured casualty or loss. Any deductible amount in excess of twenty five (25%) of the total casualty shall be amortized over the useful life of the repair or replacement required to restore the Property after such casualty, and the amortized portion shall be included on a monthly basis in Landlord's Insurance Costs. Notwithstanding the foregoing, Landlord's Insurance Costs shall not include the cost of any course of construction insurance carried by Landlord for the construction of the 1184 Building. Notwithstanding the foregoing, if Tenant terminates this Lease pursuant to Section 10.4 hereof, Tenant shall not be required to pay for any insurance deductibles as part of Landlord's Insurance Costs or otherwise. (c) PROPERTY MAINTENANCE COSTS. The term "Property Maintenance Costs" shall mean Tenant's Property Share of all costs and expenses (except Landlord's Insurance Costs and Real Property Taxes) paid or incurred by Landlord in protecting, operating, maintaining, repairing and preserving the Property and all parts thereof, including without limitation, (i) market rate professional management fees of no more than two percent (2%) of Base Monthly Rent, (ii) the amortizing portion of any costs incurred by Landlord in the making of any modifications, alterations or improvements required by any governmental authority as set forth in Article 6, which are so amortized during the Lease Term, (iii) any and all on-going operation or maintenance costs imposed on the Property by or through any development agreement, use permit, site development agreement, traffic mitigation plan, entitlement, or Private Restrictions (including but not limited to shuttle and emergency transportation), and (iv) such other costs as may be paid or incurred with respect to operating, maintaining, and preserving the Property, repairing and resurfacing paved areas, and repairing and replacing, when necessary, electrical, plumbing, heating, ventilating and air conditioning systems serving the Building, provided that the cost of any capital improvement shall be amortized over the useful life of such improvement and the amortizing portion of the cost shall be included in Property Maintenance Costs. If any costs and expenses are partly based upon property or rents unrelated to the Property, then only that part of such Property Maintenance Costs that is fairly allocable to the Property shall be included within the meaning of the terms "Property Maintenance Costs." Notwithstanding the foregoing provisions of this Section 13.12(c), the following are specifically excluded from the definition of Property Maintenance Costs and Tenant shall have no obligation to pay directly or reimburse Landlord for all or any portion of the following except to the extent any of the foregoing are caused by the actions or inactions of Tenant, or result from the failure of Tenant to comply with the terms of the Lease: (a) costs of development or construction on the Property (other than on-going operation or maintenance costs as set forth in (iii) above); (b) the costs to repair or replace the structural portions of the Building or other buildings on the Property, including, without limitation, the foundation, footings, roof structure, roof screens, roof screen penetrations, and load bearing and exterior walls of the Building or any other building located on the Property; (c) depreciation, amortization or other expense reserves; (d) interest, charges and fees incurred on debt, payments on mortgages and rent under ground leases; (e) costs and expenses for which Tenant reimburses Landlord directly or which Tenant pays directly to a third person or costs for which Landlord has a right of reimbursement from others; (f) costs occasioned by the active negligence or willful misconduct of Landlord or any other occupant of the Property or violations of Law by Landlord or any other occupant of the Property, (g) or costs to correct any construction defect in the Leased Premises, the Building or the Property; or (h) capital costs incurred to bring the Building or the Property into compliance with the Use Permit, any CC&R's, underwriter's requirements, or Laws 24. 29 applicable to the Leased Premises, the Building or the Property at the time the building permit for the Base Building (as defined in the Work Letter) is issued. (d) PROPERTY OPERATING EXPENSES. The term "Property Operating Expenses" shall mean and include all Real Property Taxes, plus all Landlord's Insurance Costs, plus all Property Maintenance Costs. (e) LAW. The term "Law" shall mean any judicial decisions and any statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirements of any municipal, county, state, federal, or other governmental agency or authority having jurisdiction over the parties to this Lease, the Leased Premises, the Building or the Property, or any of them, in effect either at the Effective Date of this Lease or at any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g. a board of fire examiners or a public utility or special district). (f) LENDER. The term "Lender" shall mean the holder of any promissory note or other evidence of indebtedness secured by the Property or any portion thereof. (g) PRIVATE RESTRICTIONS. The term "Private Restrictions" shall mean (as they may exist from time to time) any and all covenants, conditions and restrictions, private agreements, easements, and any other recorded documents or instruments affecting the use of the Property, the Building, the Leased Premises, or the Outside Areas. (h) RENT. The term "Rent" shall mean collectively Base Monthly Rent and all Additional Rent. 13.13 GENERAL WAIVERS. One party's consent to or approval of any act by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. No waiver of any provision hereof, or any waiver of any breach of any provision hereof, shall be effective unless in writing and signed by the waiving party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach. No waiver of any provision of this Lease shall be deemed a continuing waiver unless such waiver specifically states so in writing and is signed by both Landlord and Tenant. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained. 13.14 MISCELLANEOUS. Should any provisions of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provisions hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any copy of this Lease which is executed by the parties shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. The term "party" shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the Laws of the State in which the Leased Premises are located. The captions in this Lease are for convenience only and shall not be construed in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership, corporation, limited liability company, joint venture, or other form of business entity, and the singular includes the plural. The terms "must," "shall," "will," and "agree" are mandatory. The term "may" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefor. Where Landlord's consent is required hereunder, the consent of any Lender shall also be required. Landlord and Tenant shall both be deemed to have drafted this Lease, and the rule of construction that a document is to be construed against the drafting party shall not be employed in the construction or interpretation of this Lease. Where Tenant is obligated not to perform any act or is not permitted to perform any act, Tenant is also obligated to restrain any others reasonably within its control, including agents, invitees, contractors, subcontractors and employees, from performing such act. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of any of the provisions of this Lease. 13.15 COOPERATION. Notwithstanding anything to the contrary contained herein, Tenant consents to and agrees to fully cooperate with Landlord and Landlord's agents, employees and contractors in Landlord's efforts, if any, to improve the Property with an additional building and divide the Property into separate legal parcels, which efforts may include, without limitation, the elimination of landscaping, the restriping or reconfiguration of the parking areas, application for building permits and other development approvals, parcelization of the Property and construction of buildings. Tenant agrees to execute such documents and take such actions as reasonably necessary to assist Landlord with such efforts and actions. Tenant agrees that such efforts and actions of Landlord shall not constitute constructive eviction of Tenant from the Property or Leased Premises. Following any parcelization of the Property, Landlord and Tenant agree to amend this Lease to conform the descriptions of the Property, Site Plan, and Outside Areas, and, subject to Section 4.5, the parking areas contained herein to the parcelization and reconfiguration. Landlord agrees to minimize the disruption of Tenant's use of the Leased Premises, the Building, the Outside Areas and the Property to the extent reasonable, given Landlord's efforts and actions described herein. Specifically, during construction of the 1184 Building, Landlord shall cause all construction trucks to enter the Property from the drive furthest from the Building on 5th Avenue and all grading on the Property for construction of the Building and the 1184 Building (other than grading for landscaping) shall be done at the same time. 25. 30 ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT 14.1 CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing this Lease on behalf of such corporation represents and warrants that Tenant is validly formed and duly authorized and existing, that Tenant is qualified to do business in the State in which the Leased Premises are located, that Tenant has the full right and legal authority to enter into this Lease, and that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with its terms. Tenant shall, within thirty days after execution of this Lease, deliver to Landlord a certified copy of the resolution of its board of directors authorizing or ratifying the execution of this Lease and if Tenant fails to do so, Landlord at its sole election may elect to terminate this Lease. 14.2 BROKERAGE COMMISSIONS. Tenant represents, warrants and agrees that it has not had any dealings with any real estate broker(s), leasing agent(s), finder(s) or salesmen, other than the Brokers (as named in Article 1) with respect to the lease by it of the Leased Premises pursuant to this Lease, and that it will assume all obligations and responsibility with respect to the payment of such Brokers, and that it will indemnify, defend with competent counsel, and hold Landlord harmless from any liability for the payment of any real estate brokerage commissions, leasing commissions or finder's fees claimed by any other real estate broker(s), leasing agent(s), finder(s), or salesmen to be earned or due and payable by reason of Tenant's agreement or promise (implied or otherwise) to pay (or to have Landlord pay) such a commission or finder's fee by reason of its leasing the Leased Premises pursuant to this Lease. 14.3 ENTIRE AGREEMENT. This Lease and the Exhibits (as described in Article 1), which Exhibits are by this reference incorporated herein, constitute the entire agreement between the parties, and there are no other agreements, understandings or representations between the parties relating to the lease by Landlord of the Leased Premises to Tenant, except as expressed herein. No subsequent changes, modifications or additions to this Lease shall be binding upon the parties unless in writing and signed by both Landlord and Tenant. 14.4 LANDLORD'S REPRESENTATIONS. Tenant acknowledges that neither Landlord nor any of its agents made any representations or warranties respecting the Property, the Building or the Leased Premises, upon which Tenant relied in entering into the Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the Leased Premises may be used for Tenant's intended use under existing Law, or (ii) the suitability of the Leased Premises for the conduct of Tenant's business, or (iii) the exact square footage of the Leased Premises, and that Tenant relies solely upon its own investigations with respect to such matters. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord's agent(s), if any, not contained in this Lease or in any Exhibit attached hereto. ARTICLE 15 OPTIONS TO EXTEND 15.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant hereunder, and subject to the condition set forth in clause (b) below, Tenant shall have two options to extend the term of this Lease with respect to the entirety of the Leased Premises, the first for a period of five (5) years from the expiration of the last year of the Lease Term (the "First Extension Period"), and the second (the "Second Extension Period") for a period of five (5) years from the expiration of the First Extension Period, subject to the following conditions: (a) Each option to extend shall be exercised, if at all, by notice of exercise given to Landlord by Tenant not more than twelve (12) months nor less than nine (9) months prior to the expiration of the last year of the Lease Term or the expiration of the First Extension Period, as applicable; (b) Anything herein to the contrary notwithstanding, if Tenant is in default under any of the material terms, covenants or conditions of this Lease, either at the time Tenant exercises either extension option or on the commencement date of the First Extension Period or the Second Extension Period, as applicable, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate such option(s) to extend upon notice to Tenant. 15.2 In the event the applicable option is exercised in a timely fashion, the Lease shall be extended for the term of the applicable extension period upon all of the terms and conditions of this Lease, provided that the Base Monthly Rent for each extension period shall be the "Fair Market Rent" for the Leased Premises, determined as set forth below, with annual increases as determined as part of the process set forth below. 15.3 Within 30 days after receipt of Tenant's notice of exercise, Landlord shall notify Tenant in writing of Landlord's estimate of the Base Monthly Rent for the first year of the applicable extension period, and Landlord's estimate of annual increases. For purposes hereof, "Fair Market Rent" shall mean collectively, (1) Base Monthly Rent for the first year of the applicable extension period and (2) the annual increases determined at the time Base Monthly Rent for the first year is determined. Within 30 days after receipt of such notice from Landlord, Tenant shall have the right either to (i) accept Landlord's estimate of Fair Market Rent or (ii) elect to arbitrate Landlord's estimate of Fair Market Rent, such arbitration to be conducted pursuant to the provisions hereof. Failure on the part of Tenant to require arbitration of Fair Market Rent within such 30-day period shall constitute acceptance of the Fair 26. 31 Market Rent for the applicable extension period as calculated by Landlord. If Tenant elects arbitration, the arbitration shall be concluded within 90 days after the date of Tenant's election, subject to extension for an additional 30-day period if a third arbitrator is required and does not act in a timely manner. To the extent that arbitration has not been completed prior to the expiration of any preceding period for which Base Monthly Rent has been determined, Tenant shall pay Base Monthly Rent at the rate calculated by Landlord, with the potential for an adjustment to be made once Fair Market Rent is ultimately determined by arbitration. 15.4 In the event of arbitration, the judgment or the award rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding between the parties. The arbitration shall be conducted and determined in the City and County of San Francisco in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes except to the extent that the procedures mandated by such rules shall be modified as follows: (a) Tenant shall make demand for arbitration in writing within 30 days after service of Landlord's determination of Fair Market Rent given under Paragraph 15.3 above, specifying therein the name and address of the person to act as the arbitrator on its behalf. The arbitrator shall be qualified as a real estate appraiser familiar with the Fair Market Rent of similar industrial, research and development, or office space in the Silicon Valley area who would qualify as an expert witness over objection to give opinion testimony addressed to the issue in a court of competent jurisdiction. Failure on the part of Tenant to make a proper demand in a timely manner for such arbitration shall constitute a waiver of the right thereto. Within 15 days after the service of the demand for arbitration, Landlord shall give notice to Tenant, specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator, within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. (b) In the event that two arbitrators are chosen pursuant to Paragraph 15.4(a) above, the arbitrators so chosen shall, within 15 days after the second arbitrator is appointed determine the Fair Market Rent. If the two arbitrators shall be unable to agree upon a determination of Fair Market Rent within such 15-day period, they, themselves, shall appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators pursuant to Paragraph 15.4(a). In the event they are unable to agree upon such appointment within seven days after expiration of such 15-day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon, within a further period of 15 days. If the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by the then Chief Judge of the United States District Court having jurisdiction over the County of Santa Clara, acting in his private and not in his official capacity, and the other party shall not raise any question as to such Judge's full power and jurisdiction to entertain the application for and make the appointment. The three arbitrators shall decide the dispute if it has not previously been resolved by following the procedure set forth below. (c) Where an issue cannot be resolved by agreement between the two arbitrators selected by Landlord and Tenant or settlement between the parties during the course of arbitration, the issue shall be resolved by the three arbitrators within 15 days of the appointment of the third arbitrator in accordance with the following procedure. The arbitrator selected by each of the parties shall state in writing his determination of the Fair Market Rent supported by the reasons therefor with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his determination of Fair Market Rent. The third arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions. The resolution he chooses as most closely approximating his determination shall constitute the decision of the arbitrators and be final and binding upon the parties. (d) In the event of a failure, refusal or inability of any arbitrator to act, his successor shall be appointed by him, but in the case of the third arbitrator, his successor shall be appointed in the same manner as provided for appointment of the third arbitrator. The arbitrators shall decide the issue within 15 days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and the arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expenses of its respective arbitrator and both shall share the fee and expenses of the third arbitrator, if any, and the attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. (e) The arbitrators shall have the right to consult experts and competent authorities to obtain factual information or evidence pertaining to a determination of Fair Market Rent, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render their decision and award in writing with counterpart copies to each party. The arbitrators shall have no power to modify the provisions of this Lease. ARTICLE 16 FIRST EXPANSION OPTION 16.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant hereunder as of its exercise of the option granted herein, and subject to the conditions set forth below, Tenant shall have one option to lease from Landlord (the "First Expansion Option"), the 122,435 square foot building (the "1184 Building") to be built on the Property, which building's shell shall, subject to compliance with all Laws and Private Restrictions, be built to the 27. 32 same or substantially similar quality as the Base Building (as defined in the Work Letter) based on the specifications for the Base Building contained in the Base Building Plans, subject to the following conditions: (a) The First Expansion Option shall be exercised, if at all, by notice of exercise given to Landlord by Tenant prior to December 31, 2000; (b) Notwithstanding anything to the contrary contained herein, if Tenant is in default under any of the material terms, covenants or conditions of this Lease at the time Tenant exercises the First Expansion Option, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate such First Expansion Option upon notice to Tenant. 16.2 In the event the First Expansion Option is exercised in a timely fashion, Landlord and Tenant shall enter into a new lease for the 1184 Building, which lease shall be upon all of the terms and conditions of this Lease, including, without limitation, a twelve (12) year term, first month's prepaid rent, thirty (30) day early delivery date prior to rent and lease commencement, signage rights and options to extend, provided, however, that (i) the Base Monthly Rent for the 1184 Building shall be the Fair Market Rent (as defined in Section 15.3) as determined pursuant to the procedure set forth in Article 15 (which initial rent for the first year shall in no event be more than five percent (5%) above or less than five percent (5%) below the Base Monthly Rent in effect under this Lease for the same period in time), and (ii) the tenant improvement allowance will be $50.00 per square foot. For purposes of determining fair market rent for the 1184 Building, Landlord and Tenant (and, if applicable, the arbitrators) shall take into account that the 1184 Building is a new office/R&D building in the Santa Clara - Mountain View corridor, and shall reflect the $50.00 per square foot tenant improvement allowance to be included in the new lease. In addition, the following terms shall be incorporated into any new lease for the 1184 Building: (a) the security deposit shall be the lesser of (1) one year's base monthly rent or (2) a percentage of one year's base monthly rent equal to the percentage of one year's Base Monthly Rent then held by Landlord under this Lease and shall have the same criteria for reduction as set forth in this Lease; (b) the lease term shall commence thirty (30) days after the delivery date, which delivery date shall be the date of substantial completion of the tenant improvements to be constructed in accordance with a new work letter to be signed by Landlord and Tenant, which work letter shall be in the same form as the Work Letter attached as Exhibit B (changing only the applicable dates); and (c) the intended delivery date shall be that date reasonably estimated by Landlord as the date at which Landlord can deliver the 1184 Building with the tenant improvements substantially complete, which date shall be no sooner than seven (7) months and no later than eleven (11) months after Tenant's exercise of the First Expansion Option, and which intended delivery date shall be subject to a delivery grace period of thirty (30) days and the other provisions contained in Section 2.4. In the event the parties fail to execute a new lease for the 1184 Building prior to the intended commencement date of such new lease (which shall be thirty (30) days after the intended delivery date) due to a failure to agree on Fair Market Rent, Tenant shall commence paying both Base Monthly Rent (at the rate then in effect for the same period under this Lease) and Additional Rent, provided that the Base Monthly Rent shall be adjusted upon determination of Fair Market Rent, with Tenant receiving from Landlord a refund for any overpayment or paying any shortfall promptly after determination of the Fair Market Rent as provided herein. ARTICLE 17 SECOND EXPANSION OPTION 17.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant hereunder as of its exercise of the option granted herein, and subject to the conditions set forth below, Tenant shall have one option to lease from Landlord (the "Second Expansion Option"), the 1220 Building (defined below) which may be built on the property acquired by Landlord, which building's shell shall, subject to compliance with all Laws and Private Restrictions, be built to the same or substantially similar quality as the Base Building (as defined in the Work Letter), subject to the following conditions: (a) Landlord's acquisition of the property known as 1220 Mathilda Avenue, Sunnyvale, California (the "1220 Building"), which acquisition shall be Landlord's sole and absolute discretion; (b) Tenant shall have exercised the First Expansion Option, Landlord and Tenant have entered into a lease for the 1184 Building and Tenant shall have exercised the Second Expansion Option by notice of exercise is given to Landlord by Tenant prior to December 31, 2002; provided however, if the Tenant fails to exercise the First Expansion Option within the time period required pursuant to Article 16, after expiration of such period Tenant may exercise the Second Expansion Option by notice of exercise is given to Landlord by Tenant prior to December 31, 2001. (c) Notwithstanding anything to the contrary contained herein, if Tenant is in default under any of the material terms, covenants or conditions of this Lease at the time Tenant exercises the Second Expansion Option, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate such Second Expansion Option upon notice to Tenant. 17.2 In the event the Second Expansion Option is exercised in a timely fashion, Landlord and Tenant shall enter into a new lease for the 1220 Building, which lease shall be upon all of the terms and conditions of this Lease including, 28. 33 without limitation, a twelve (12) year term, first month's prepaid rent, thirty (30) day early delivery date prior to rent and lease commencement, signage rights and options to extend, provided, however, that (i) the Base Monthly Rent for the 1220 Building shall be the Fair Market Rent (as defined in Section 15.3) as determined pursuant to the procedure set forth in Article 15 (which initial rent for the first year shall in no event be more than five percent (5%) above or less than five percent (5%) below the Base Monthly Rent in effect under this Lease for the same period in time), (ii) the tenant improvement allowance will be $50.00 per square foot. For purposes of determining fair market rent for the 1220 Building, Landlord and Tenant (and, if applicable, the arbitrators) shall take into account that the 1220 Building is a new office/R&D building in the Santa Clara - Mountain View corridor, and shall reflect the $50.00 per square foot tenant improvement allowance to be included in the new lease. In addition, the following terms shall be incorporated into any new lease for the 1220 Building: (a) the security deposit shall be the lesser of (1) one year's base monthly rent or (2) a percentage of one year's base monthly rent equal to the percentage of one year's Base Monthly Rent then held by Landlord under this Lease; (b) the lease term shall commence thirty (30) days after the delivery date, which delivery date shall be the date of substantial completion of the tenant improvements to be constructed in accordance with a new work letter to be signed by Landlord and Tenant, which work letter shall be in the same form as the Work Letter attached as Exhibit B (changing only the applicable dates); and (c) the intended delivery date shall be that date reasonably estimated by Landlord as the date at which Landlord can deliver the 1220 Building with the tenant improvements substantially complete, which date shall be no sooner than seven (7) months and no later than twelve (12) months after Tenant's exercise of the Second Expansion Option, provided that such period shall be extended for up to four (4) months for final determination from the City of Sunnyvale of the FAR for the 1220 Building (Tenant specifically acknowledging that Landlord intends to request approval for 50% FAR), and which intended delivery date shall be subject to a delivery grace period of thirty (30) days and the other provisions contained in Section 2.4. In the event the parties fail to execute a new lease for the 1220 Building prior to the intended commencement date of such new lease (which shall be thirty (30) days after the intended delivery date) due to a failure to agree on Fair Market Rent, Tenant shall commence paying both Base Monthly Rent (at the rate then in effect for the same period under this Lease) and Additional Rent, provided that the Base Monthly Rent shall be adjusted upon determination of Fair Market Rent, with Tenant receiving from Landlord a refund for any overpayment or paying any shortfall promptly after determination of the Fair Market Rent as provided herein. ARTICLE 18 TELEPHONE SERVICE Notwithstanding any other provision of this Lease to the contrary: (a) So long as the entirety of the Building is leased to Tenant: (i) Landlord shall have no responsibility for providing to Tenant any telephone equipment, including wiring, within the Leased Premises or for providing telephone service or connections from the utility to the Leased Premises; and (ii) Landlord makes no warranty as to the quality, continuity or availability of the telecommunications services in the Building, and Tenant hereby waives any claim against Landlord for any actual or consequential damages (including damages for loss of business) in the event Tenant's telecommunications services in any way are interrupted, damaged or rendered less effective, except to the extent caused by the grossly negligent or willful act or omission by Landlord, its agents or employees. Tenant accepts the telephone equipment (including, without limitation, the INC, as defined below) in its "AS-IS" condition, and Tenant shall be solely responsible for contracting with a reliable third party vendor to assume responsibility for the maintenance and repair thereof (which contract shall contain provisions requiring such vendor to inspect the INC periodically (the frequency of such inspections to be determined by such vendor based on its experience and professional judgment), and requiring such vendor to meet local and federal requirements for telecommunications material and workmanship). Landlord shall not be liable to Tenant and Tenant waives all claims against Landlord whatsoever, whether for personal injury, property damage, loss of use of the Leased Premises, or otherwise, due to the interruption or failure of telephone services to the Leased Premises. Tenant hereby holds Landlord harmless and agrees to indemnify, protect and defend Landlord from and against any liability for any damage, loss or expense due to any failure or interruption of telephone service to the Leased Premises for any reason. Tenant agrees to obtain loss of rental insurance adequate to cover any damage, loss or expense occasioned by the interruption of telephone service. (b) At such time as the entirety of the Building is no longer leased to Tenant, Landlord shall in its sole discretion have the right, by written notice to Tenant, to elect to assume limited responsibility for INC, as provided below, and upon such assumption of responsibility by Landlord, this subparagraph (b) shall apply prospectively. (i) Landlord shall provide Tenant access to such quantity of pairs in the Building intra-building network cable ("INC") as is determined to be available by Landlord in its reasonable discretion. Tenant's access to the INC shall be solely by arrangements made by Tenant, as Tenant may elect, directly with Pacific Bell or Landlord (or such vendor as Landlord may designate), and Tenant shall pay all reasonable charges as may be 29. 34 imposed in connection therewith. Pacific Bell's charges shall be deemed to be reasonable. Subject to the foregoing, Landlord shall have no responsibility for providing to Tenant any telephone equipment, including wiring, within the Leased Premises or for providing telephone service or connections from the utility to the Leased Premises, except as required by law. (ii) Tenant shall not alter, modify, add to or disturb any telephone wiring in the Leased Premises or elsewhere in the Building without the Landlord's prior written consent, which consent shall not be unreasonably withheld. Tenant shall be liable to Landlord for any damage to the telephone wiring in the Building due to the act, negligent or otherwise, of Tenant or any employee, contractor or other agent of Tenant. Tenant shall have no access to the telephone closets within the Building, except in the manner and under procedures established by Landlord. Tenant shall promptly notify Landlord of any actual or suspected failure of telephone service to the Leased Premises. (iii) All costs incurred by Landlord for the installation, maintenance, repair and replacement of telephone wiring in the Building shall be a Property Maintenance Cost. (iv) Landlord makes no warranty as to the quality, continuity or availability of the telecommunications services in the Building, and Tenant hereby waives any claim against Landlord for any actual or consequential damages (including damages for loss of business) in the event Tenant's telecommunications services in any way are interrupted, damaged or rendered less effective, except to the extent caused by the grossly negligent or willful act or omission by Landlord, its agents or employees. Tenant acknowledges that Landlord meets its duty of care to Tenant with respect to the Building INC by contracting with a reliable third party vendor to assume responsibility for the maintenance and repair thereof (which contract shall contain provisions requiring such vendor to inspect the INC periodically (the frequency of such inspections to be determined by such vendor based on its experience and professional judgment), and requiring such vendor to meet local and federal requirements for telecommunications material and workmanship). Subject to the foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims against Landlord whatsoever, whether for personal injury, property damage, loss of use of the Leased Premises, or otherwise, due to the interruption or failure of telephone services to the Leased Premises. Tenant hereby holds Landlord harmless and agrees to indemnify, protect and defend Landlord from and against any liability for any damage, loss or expense due to any failure or interruption of telephone service to the Leased Premises for any reason. Tenant agrees to obtain loss of rental insurance adequate to cover any damage, loss or expense occasioned by the interruption of telephone service. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the respective dates below set forth with the intent to be legally bound thereby as of the Effective Date of this Lease first above set forth. LANDLORD: MATHILDA ASSOCIATES LLC, a California limited liability company By: Menlo Equities LLC, a California limited liability company, Manager Dated:__________ By: Diamant Investments LLC, a Delaware limited liability company, Member By:____________________________________________ Richard J. Holmstrom, Managing Member (SIGNATURES CONTINUED ON NEXT PAGE) 30. 35 TENANT: JUNIPER NETWORKS, INC., a Delaware corporation Dated:___________ By: ________________________________ Title:______________________________ Dated:___________ By: ________________________________ Title:______________________________ 31. 36 EXHIBIT A SITE PLAN (To be attached) 1. 37 EXHIBIT B WORK LETTER THIS WORK LETTER, dated June 18, 1999, is entered into by and between MATHILDA ASSOCIATES LLC ("Landlord"), and JUNIPER NETWORKS, INC., a Delaware corporation ("Tenant"). On or about the date hereof, Landlord and Tenant entered into that certain Lease (the "Lease") for certain premises (the "Leased Premises") commonly known as 1194 Mathilda Avenue, Sunnyvale, California. This Work Letter sets forth the agreement of Landlord and Tenant with respect to the improvements to be constructed in the Leased Premises. All defined terms used herein shall have the meaning set forth in the Lease, unless otherwise defined in this Work Letter. 1. CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall, through a general contractor to be selected pursuant to Paragraph 4 of this Work Letter, furnish and install within the Building, substantially in accordance with the Work Letter, certain items of general construction as described herein (the "Tenant Improvements"). The quantities, character and manner of installation of all of the Tenant Improvements shall be subject to the limitations imposed by any applicable governmental regulations relating to conservation of energy and by applicable building codes and regulations. In addition, Tenant agrees that the Tenant Improvements shall not require Landlord to perform work which would (i) require changes to structural components of the Building or the exterior design of the Building; (ii) be incompatible with the Base Building Plans (defined below) or the use permit to be issued by the City of Sunnyvale (the "Use Permit"); or (iii) delay the completion of the Tenant Improvements beyond the Intended Delivery Date. 2. BASE BUILDING PLANS. Robinson Mills + Williams (the "Architect") has prepared building plans and specifications on behalf of Landlord described as Mathilda Research Centre "Revised Permit Issue" plans dated June 15, 1999, ("Base Building Plans") which have been approved by Tenant prior to the date hereof. Landlord hereby agrees to construct the Base Building in accordance with the Base Building Plans and the cost thereof shall not be deducted from the Tenant Improvement Allowance. 3. PREPARATION AND APPROVAL OF SPACE PLAN. Commencing on July 5, 1999, Tenant shall make its representatives available to meet with the Architect in order to begin the programming process. The Tenant shall work with the Architect to complete the programming and preliminary design for Architect's preparation of space plans (the "Space Plans"). Such Space Plans shall be approved by Tenant and submitted for Landlord's review no later than August 13, 1999. Within five (5) business days after Landlord receives the Space Plans, Landlord shall either approve or disapprove the Space Plans. In such event, the Architect shall make the minimum changes necessary in order to correct any design problems identified by the Landlord and shall submit to Landlord and Tenant revised Space Plans, which Landlord and Tenant shall approve or disapprove within two (2) business days after receipt of the revised Space Plans. This procedure shall be repeated until the Space Plans are finally approved by Landlord and Tenant. 4. SELECTION OF CONTRACTOR. Landlord's contractor shall be the contractor selected pursuant to a procedure whereby the Space Plans are submitted to three (3) contractors (one of which shall be LE Wentz), selected by Landlord and approved by Tenant, who are requested to each submit a proposal containing the contractor's fee and general conditions for construction of the improvements designated on the Space Plans. Landlord and Tenant shall jointly open and review the fees and general conditions and the qualifications of each contractor, and shall select the contractor reasonably acceptable to both Landlord and Tenant ("Contractor"). Landlord and Contractor shall enter into a construction contract (the "Construction Contract") consistent with the terms of the bid to construct the Tenant Improvements. The Construction Contract shall require that all subtrades be competitively bid with at least three (3) subcontractors. Tenant shall have the right to propose subcontractors to be used by the Contractor. Subcontracts shall be awarded to the lowest qualified bidder, unless otherwise agreed by Landlord and Tenant. 5. DESIGN DEVELOPMENT. As soon as possible after Landlord's approval of the Space Plans, Tenant shall commence working with the Architect to determine Tenant's design specifications and requirements, such that the Architect can incorporate such specifications and requirements into plans (the "Design Development Plans") no later than September 17, 1999. The Design Development Plans shall include specifications for mechanical, electrical, plumbing, HVAC and cabling, as developed by Architect and its subconsultants on a "design-build" basis. Within five (5) business days Landlord receives the Design Development Plans, Landlord shall either approve or disapprove the Design Development Plans. In such event, the Architect shall make the minimum changes necessary in order to correct any design problems identified by the Landlord and shall submit to Landlord and Tenant revised Design Development Plans, which Landlord and Tenant shall approve or disapprove within two (2) business days after receipt of the revised Design Development Plans. This procedure shall be repeated until the Design Development Plans are finally approved by Landlord and Tenant. 6. APPROVAL OF WORKING DRAWINGS. (a) After approval of the Design Development Plans and selection of the Contractor, the Architect shall prepare complete and coordinated architectural plans and specifications required for the construction of the Tenant Improvements in conformance with such Space Plans (the "Working Drawings"), and to prepare drawings and specifications for Changes (as defined below), if any, requested or required pursuant to Paragraph 8 below. (b) Landlord shall submit the completed and coordinated Working Drawings to Tenant for Tenant's approval. Tenant will provide written approval of the Working Drawings within five (5) business days after such submission. If Tenant disapproves any part of the submission, the disapproval shall include written instructions 1. 38 adequate for the Architect to revise the Working Drawings. Such revisions shall be subject to Landlord's approval, which shall not be unreasonably withheld. Tenant will finally approve the revised Working Drawings within five (5) business days after submission thereof to Tenant. If Tenant's instructions necessitate (i) revisions to the Working Drawings (as originally submitted) which do not conform with the Design Development Plans, or (ii) a change of scope relative to the Space Plans, the costs incurred by Landlord as a result of such instructions (including, without limitation, the cost of revising the Working Drawings) shall be promptly borne and paid by Tenant upon demand by Landlord. (c) If Tenant fails to approve the Working Drawings within the applicable periods set forth in subparagraph 5(b) above, then (A) Landlord shall not be obligated to commence construction of the Tenant Improvements, (B) Tenant shall be responsible for any resulting delay, and the cost of such delay, in Landlord's completion of the Tenant Improvements and delivery of the Leased Premises, and (C) any such delay shall be deemed a Tenant Delay (as defined below). 7. COST OF TENANT IMPROVEMENTS. Unless specified otherwise herein, Landlord shall bear and pay the cost of the Tenant Improvements (which cost shall include, without limitation, the costs of construction, the cost of permits and permit expediting, and all architectural and engineering services obtained by Landlord in connection with the Tenant Improvements, the Contractor's fees, Landlord's fee for construction administration in an amount equal to the amount charged by any construction manager retained by Landlord (the "Construction Manager") up to a maximum of $7,215,750 (the "Tenant Improvement Allowance"). The Tenant Improvement Allowance shall be utilized only for building improvements to the Building (and Tenant's architect fees), and not for signage, furniture costs, any third party consulting or contracting fees, any telecom/cabling costs, or any other purpose. Tenant shall bear and pay the cost of the Tenant Improvements (including but not limited to all of the foregoing fees and costs) in excess of the Tenant Improvement Allowance, if any. The cost of the Tenant Improvements shall exclude the cost of furniture, fixtures and inventory and other items of Tenant's Work (as defined below). Notwithstanding the foregoing, the Tenant Improvement Allowance shall not be used for (and Tenant shall have no responsibility for) the following costs except to the extent any of the foregoing are caused by Tenant, are due to Tenant Delays or result from the failure of Tenant to comply with the terms of the Lease or this Work Letter: (1) Property Maintenance Costs prior to the Delivery Date; (2) charges for overtime, except to the extent approved by Tenant; (3) costs to correct construction defects; (4) costs incurred to enforce contracts or cure contractor or subcontractor defaults (including legal fees); or (5) principal or interest on construction loan obtained by Landlord for construction of the Tenant Improvements. 8. CHANGES. (a) Any request by Tenant for a change in the Tenant Improvements after approval of the Final Plans (a "Change") shall be accompanied by all information necessary to clearly identify and explain the proposed Change. As soon as practicable after receipt of such an Estimate Request form, Landlord shall notify Tenant of the estimated cost of such Change as well as the estimated increase in construction time caused by the Change, if any. Tenant shall approve in writing such estimates within two (2) business days after receipt of Landlord's notice. Upon receipt of such written request, Landlord shall be authorized to cause the Contractor to proceed with the implementation of the requested Change. (b) The increased cost and time, as determined by Landlord, of all Changes, including the cost of architectural and engineering services required to revise the Working Drawings to reflect such Changes, the Contractor's overhead and fee, and Landlord's fee for construction administration services, shall be treated as costs of the Tenant Improvements, and shall be as determined by Landlord upon completion of the Tenant Improvements, subject only to Landlord's furnishing to Tenant appropriate back-up information from the Contractor concerning the increased costs and increased construction time. 9. TENANT'S WORK. Landlord and Tenant acknowledge and agree that certain work required for Tenant's occupancy of the Leased Premises, including but not limited to the procurement and installation of furniture, fixtures, equipment, artwork and interior signage are beyond the scope of the Tenant Improvements and shall be performed by Tenant or its contractors at Tenant's sole cost and expense. All such work ("Tenant's Work") shall be subject to Landlord's prior written approval. Tenant shall adopt a construction schedule for Tenant's Work in conformance with the Contractor's schedule, and shall perform Tenant's Work in such a way as not to hinder or delay the operations of Landlord or the Contractor in the Building. Any costs incurred by Landlord as a result of any interference with Landlord's operations by Tenant or its contractors shall be promptly paid by Tenant to Landlord upon demand. Landlord shall make all reasonable efforts to notify Tenant of any such interference of which Landlord has actual knowledge, but failure to provide such notice shall in no way limit Landlord's right to demand payment for such costs. Tenant's contractors shall be subject to Landlord's prior written approval, and to the administrative supervision of the Contractor. Tenant's Work shall comply with all of the following requirements: (a) Tenant's Work shall not proceed until Landlord has approved in writing: (i) Tenant's contractors, (ii) proof of the amount and coverage of public liability and property damage insurance carried by Tenant's contractors in the form of an endorsed insurance certificate naming Landlord, the Contractor, and the agents of Landlord and the Contractor as additional insureds, in an amount not less than two million dollars, and (iii) complete and detailed plans and specifications for Tenant's Work. 2. 39 (b) Tenant's Work shall be performed in conformity with a valid permit when required, a copy of which shall be furnished to Landlord before such work is commenced. In any event, all Tenant's Work shall comply with all applicable laws, codes and ordinances of any governmental entity having jurisdiction over the Building. Landlord shall have no responsibility for Tenant's failure to comply with such applicable laws. Any and all delay in obtaining a certificate of occupancy due to Tenant's vendors is the responsibility of Tenant and shall be a Tenant Delay. (c) In connection with Tenant's Work (e.g., delivering or installing furniture or equipment to the second floor of the Leased Premises), Tenant or its contractors shall arrange for any necessary hoisting or elevator service with Landlord and shall pay such reasonable costs for such services as may be charged by Landlord. (d) Tenant shall promptly pay Landlord upon demand for any extra expense incurred by Landlord by reason of faulty work done by Tenant or its contractors, by reason of damage to existing work caused by Tenant or its contractors, or by reason of inadequate cleanup by Tenant or its contractors. 10. COMPLETION; TENANT DELAY. (a) As used herein, the term "Substantial Completion of the Tenant Improvements" shall be deemed to mean the date when all of the following shall have occurred: (i) Landlord shall have delivered to Tenant a certificate of occupancy issued by the City of Sunnyvale for the Leased Premises, or Tenant may legally occupy the Leased Premises for the operation of its business without violating any law or regulation or voiding or adversely affecting its insurance coverage, whether pursuant to a temporary certificate of occupancy or otherwise; and (ii) Landlord shall have substantially completed construction of the Base Building substantially in accordance with the Base Building Plans and all Tenant Improvements substantially in accordance with the Final Plans, subject only to the completion of reasonable punch list items, which, in the absence of manifest error, shall be established by a certificate executed by Landlord's architect certifying that such state of completion has been achieved. Without limiting the generality of the foregoing, "Substantial Completion of the Tenant Improvements" shall not be deemed to have been achieved unless and until (i) the building systems, including roof, plumbing, HVAC, sprinkler, electrical (including panels and outlets), doors (both personnel and shipping), lighting, ceiling tiles, and window coverings are in good working order, (ii) the interior and exterior of the Building are in compliance with all applicable Laws, (iii) all debris and clutter has been removed from the Leased Premises and final cleanup completed, (iv) exterior windows are washed inside and out, and (v) parking lot and landscaping are in good condition and free of debris, clutter and all construction equipment. After substantial completion of the Tenant Improvements and delivery of the Leased Premises to Tenant, Landlord and Tenant shall execute a Lease Commencement Date Certificate in the form attached as Exhibit "C" to the Lease. (b) If Landlord shall be delayed in substantially completing the Tenant Improvements as a result of: (i) Tenant's failure to furnish the information, instructions and plans required in paragraph 3 or approve the Working Drawings, within the applicable time periods specified in paragraph 5; or (ii) Any changes in the scope of the Tenant Improvements from that set forth in the Space Plans, or any Changes to the Final Plans requested by Tenant after approval thereof pursuant to paragraph 7; or (iii) Any interruption or interference in Landlord's construction of the Tenant Improvements caused by Tenant, its contractors or its vendors; or (iv) Tenant's failure to timely pay any amounts which Tenant is obligated to pay under this Work Letter; or (v) Any other act, neglect, failure or omission of Tenant, its agents, employees or contractors (items (i) through (v) above being collectively referred to as "Tenant Delays"); then the date upon which the payment of rental under the Lease, shall commence shall be advanced by the cumulative duration of such Tenant Delays. 11. CONSTRUCTION WARRANTY. Landlord shall construct the Tenant Improvements substantially in accordance with this Work Letter and the Final Plans, all Laws and Private Restrictions, and in a good and workmanlike manner, and all materials and equipment furnished will substantially conform to said plans and shall be new and otherwise of good quality. Landlord's Contractor and subcontractors shall be responsible for the correction of defects in design, workmanship, materials and equipment supplied, and the cost of correction shall not be charged against the Tenant Improvement Allowance or be a Property Maintenance Expense. 12. OWNERSHIP OF TENANT IMPROVEMENTS. All of the Tenant Improvements which are constructed with the Tenant Improvement Allowance shall become the property of Landlord upon installation and shall not be removed or altered by Tenant, except to the extent permitted by the Lease. Any part of the Tenant Improvements which are constructed by Landlord with funds of Tenant shall become the property of Tenant upon installation and Tenant shall have the right to depreciate and claim and collect investment tax credits in such improvements; provided, however, that (i) Tenant shall not remove or alter such improvements except in accordance with the terms of the Lease; (ii) such improvements shall be surrendered to Landlord, and title to such improvements shall vest in 3. 40 Landlord, at the expiration or earlier termination of the Lease Term; and (iii) in no event shall Landlord have any obligation to pay Tenant for the cost or value of such improvements. As soon as reasonably practicable, Landlord and Tenant shall agree in writing which of such improvements are to be constructed using the Tenant Improvement Allowance (and therefore are Landlord's property) and which of them are to be installed with Tenant's funds (and therefore are Tenant's property) during the Lease Term. IN WITNESS WHEREOF, Landlord and Tenant have executed this Work Letter as of the respective dates set forth below. LANDLORD: MATHILDA ASSOCIATES LLC, a California limited liability company By: Menlo Equities LLC, a California limited liability company, Manager Dated:__________ By: Diamant Investments LLC, a Delaware limited liability company, Member By:____________________________________________ Richard J. Holmstrom, Managing Member (SIGNATURES CONTINUED ON NEXT PAGE) 4. 41 TENANT: JUNIPER NETWORKS, INC., a Delaware corporation Dated:___________ By:_________________________________ Title:______________________________ Dated:___________ By:_________________________________ Title:______________________________ 5. 42 EXHIBIT C LEASE COMMENCEMENT DATE CERTIFICATE This Lease Commencement Date Certificate is entered into by Landlord and Tenant pursuant to the Work Letter attached as Exhibit B to the Lease. 1. (a) Landlord: Mathilda Associates LLC, a California limited liability company (b) Tenant: Juniper Networks, Inc., a Delaware corporation (c) Lease: Lease dated June 18, 1999 between Landlord and Tenant. (d) Leased Premises: 1194 Mathilda Avenue, Sunnyvale, California 2. CONFIRMATION OF LEASE COMMENCEMENT. Landlord and Tenant confirm that the Lease Commencement Date is ____________ and the Expiration Date is ______________ and that Article 1 of the Lease is amended accordingly. Landlord and Tenant have executed this Lease Commencement Date Certificate as of the dates set forth below. LANDLORD: MATHILDA ASSOCIATES LLC, a California limited liability company By: Menlo Equities LLC, a California limited liability company Dated:__________ By:____________________________ Member TENANT: JUNIPER NETWORKS, INC., a Delaware corporation Dated:__________ By:___________________________________________ Title:________________________________________ Dated:__________ By:___________________________________________ Title:________________________________________ 1. 43 EXHIBIT D FORM OF ESTOPPEL CERTIFICATE ____________________ , 19____ _____________________________ _____________________________ _____________________________ _____________________________ Re 1194 Mathilda Avenue Sunnyvale, California Ladies and Gentlemen: Reference is made to that certain Lease, dated as of June 18, 1999, between MATHILDA ASSOCIATES LLC, a California limited liability company ("Landlord"), and the undersigned (herein referred to as the "Lease"). A copy of the Lease [and all amendment thereto] is[are] attached hereto as EXHIBIT A. At the request of Landlord in connection with [ State reasons for request for estoppel certificate ], the undersigned hereby certifies to Landlord and to [ State names of other parties requiring certification ] and each of your respective successors and assigns as follows: 1. The undersigned is the tenant under the Lease. 2. The Lease is in full force and effect and has not been amended, modified, supplemented or superseded except as indicated in Exhibit A. 3. There is no defense, offset, claim or counterclaim by or in favor of the undersigned against Landlord under the Lease or against the obligations of the undersigned under the Lease. The undersigned has no renewal, extension or expansion option, no right of first offer or right of first refusal and no other similar right to renew or extend the term of the Lease or expand the property demised thereunder except as may be expressly set forth in the Lease. 4. The undersigned is not aware of any default now existing of the undersigned or of Landlord under the Lease, nor of any event which with notice or the passage of time or both would constitute a default of the undersigned or of Landlord under the Lease except____________________________________________. 5. The undersigned has not received notice of a prior transfer, assignment, hypothecation or pledge by Landlord of any of Landlord's interest in the Lease. 6. The monthly rent due under the Lease is $____________ and has been paid through __________________, and all additional rent due and payable under the Lease has been paid through _________________. 7. The term of the Lease commenced on __________________, and expires on ___________________, unless sooner terminated pursuant to the provisions of the Lease. Landlord has performed all work required by the Lease for the undersigned's initial occupancy of the demised property. 8. The undersigned has deposited the sum of $____________ with Landlord as security for the performance of its obligations as tenant under the Lease, and no portion of such deposit has been applied by Landlord to any obligation under the Lease. 9. Except as set forth in the Lease, there is no free rent period pending, nor is Tenant entitled to any Landlord's contribution. The above certifications are made to Landlord and Lender knowing that Landlord and Lender will rely thereon in accepting an assignment of the Lease. Very truly yours, JUNIPER NETWORKS, INC., a Delaware corporation By:___________________________________________ Name:_________________________________________ Title:________________________________________ 1. 44 EXHIBIT E FORM OF LETTER OF CREDIT Date: ____________________, 1999 Irrevocable Standby Letter of Credit Number: ____________ Beneficiary: Applicant: Mathilda Associates LLC Juniper Networks, Inc. 525 University Avenue, Suite 100 __________________________________ Palo Alto, California 94301 __________________________________ __________________________________ Amount: USD $4,329,450.00 (FOUR MILLION THREE HUNDRED TWENTY-NINE THOUSAND FOUR HUNDRED FIFTY AND 00/100 U.S. DOLLARS) Expiration: _____________________ We hereby establish our Irrevocable Standby Letter of Credit No. _______________ in your favor for the account of ______________________________________________, ____________________________, on behalf of______________________________________ _________________________________, available for drawings for up to an aggregate amount of U.S. $4,329,450.00 (FOUR MILLION THREE HUNDRED TWENTY-NINE THOUSAND FOUR HUNDRED FIFTY AND 00/100 U.S. DOLLARS). This Letter of Credit is available by payment upon your draft drawn at sight on us, submitted at the office of ____________________________________________________________, Attention: Letter of Credit Services, and expires at our close of business on the expiration date or any automatically extended expiration date as hereinafter set forth. This Letter of Credit shall expire on ________________________, but such expiration date shall be automatically extended for a period of one (1) year on ______________________ and on each successive expiration date, unless at least sixty (60) days before the current expiration date we notify you by overnight courier that this Letter of Credit is not extended beyond the current expiration date. In the event you are so notified, any unused portion of the Letter of Credit shall be available upon presentation of a sight draft by Mathilda Associates LLC, within the current expiration date. We give our undertaking to the Beneficiary that sums drawn under and in compliance with the terms of this Letter of Credit will be duly honored by our bank on presentation of drawings in accordance with the terms of this credit. This Letter of Credit is transferable by the Beneficiary. Transfer of this Letter of Credit is subject to our consent and receipt of Beneficiary's instructions in the form attached hereto as Exhibit A accompanied by the original Letter of Credit and amendment(s) if any. Cost or expenses of such transfer shall be for the account of the Beneficiary. This Letter of Credit is subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500 and engages us to the terms herein. Yours very truly, Authorized Signature Letter of Credit Services (_____) _________________ 1. 45 EXHIBIT A _____________________________________ _____________________________________ _____________________________________ _____________________________________ Attention: Letter of Credit Services Re: Irrevocable Letter of Credit No. ______________ Dear Sirs: The undersigned acknowledges receipt of your advice No. ____________________ of a credit issued in our favor, the terms of which are satisfactory. We now return the original advice of the said credit with all amendments and extensions, if any, and hereby irrevocably transfer the said credit and all amendments and extensions thereof, if any, to: __________________________________________ [Name of Transferee] __________________________________________ [Address] You are to inform the transferee of this transfer and such transferee shall have sole rights as beneficiary under the credit, including any amendments, extension or increases thereof, without notice to or further assent from us. Yours very truly, By:_________________________________________ (The above signature with title as stated with that on file with us and is authorized for execution of this instrument.) ____________________________________________ (Bank) 2. 46 EXHIBIT F FORM OF LANDLORD WAIVER THIS LANDLORD WAIVER (this "Waiver") dated _______________, 19__, is entered into by and between MATHILDA ASSOCIATES LLC, a California limited liability company ("Landlord") and ___________________ ("Secured Party"). RECITALS WHEREAS, Landlord is the owner and landlord of the premises described as 1194 Mathilda Avenue, Sunnyvale, California (the "Property"); and WHEREAS, Landlord and Juniper Networks, Inc. ("Tenant") have entered into that certain lease dated June 18, 1999 (as previously and/or hereafter amended, the "Real Property Lease") pursuant to which Tenant has leased approximately 144,315 square feet of space at the Property (the "Premises"); and WHEREAS, Tenant has entered into an equipment lease and/or financing agreement pursuant to which Tenant has granted a security interest in the personal property described on Schedule 1 attached hereto (the "Personal Property") to Secured Party under that certain [Equipment Lease and/or Financing Agreement] between Tenant and Secured Party dated __________ (the "Financing Agreement"); and WHEREAS, Secured Party and Landlord desire to establish their respective rights regarding the Personal Property and Secured Party's access to the Premises; AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. During the term of the Real Property Lease, and subject to Landlord's interest in the Personal Property, if any, at the expiration or earlier termination of the Real Property Lease, the Personal Property shall remain personal property and severable from the Premises and shall not become part of the Premises or construed as a fixture at the Premises to the extent that the Tenant Improvement Allowance (as defined in the Real Property Lease) has not been utilized to pay for the Personal Property or the financing thereof. 2. So long as Tenant occupies the Premises and is not in default under the Real Property Lease, Secured Party may enter the Premises at any time or from time to time upon reasonable written notice to Landlord and in compliance with the terms of the Financing Agreement for purposes of inspecting and/or removing any and all of the Personal Property in the exercise of its rights and remedies arising from the Financing Agreement. In the event of a default by Tenant under the Real Property Lease, Secured Party shall obtain Landlord's prior written consent prior to entering the Premises. 3. Landlord shall notify Secured Party in the event the Personal Property remains at the Premises after either (i) Tenant is evicted from the Premises or (ii) Tenant abandons (as opposed to vacates) the Premises prior to the expiration of the Real Property Lease. Secured Party shall have 15 days to remove the Personal Property from the Premises after notification of such action from Landlord. If Secured Party has not removed the Personal Property within such 15 day period, Landlord shall have all rights regarding the Personal Property accorded to it by law and/or pursuant to the Real Property Lease and Secured Party shall have no further rights regarding such Personal Property. After Tenant has abandoned or been evicted from the Premises, Secured Party shall be liable for holdover rent for the total amount of time the Personal Property remains at the Premises after such eviction or abandonment. For purposes hereof, "holdover rent" shall mean 200% of the rent in effect under the Real Property Lease for the period immediately prior to such vacation or eviction. 4. If Secured Party exercises its right to remove the Personal Property from the Premises as provided herein, Secured Party shall repair any damage to the Premises caused by such removal. Landlord shall have the right to require Secured Party to post a bond acceptable to Landlord to cover the potential cost of such repair prior to removing any such Personal Property. 5. No auction or sale of the Personal Property shall be conducted by Secured Party from the Premises without Landlord's prior written consent, which consent Landlord may withhold in Landlord's sole and absolute discretion. 6. This waiver shall be binding upon the heirs, administrators, executors, successors and assigns of the Landlord, and shall inure to the benefit of the successors and assigns of the Secured Party. 1. 47 IN WITNESS WHEREOF, the parties hereto have executed, sealed and delivered this Waiver this __________ day of ________________, 199__. MATHILDA ASSOCIATES LLC, a California limited liability company By: Menlo Equities LLC, a California limited liability company By:____________________________ Member SECURED PARTY: By:_______________________________________ Title:____________________________________ By:_______________________________________ Title:____________________________________ 2. 48 SCHEDULE 1 PERSONAL PROPERTY 3. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated February 26, 1999, in the Amendment No. 4 to Registration Statement (Form S-1) and related prospectus of Juniper Networks, Inc. for the registration of shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California June 22, 1999 -----END PRIVACY-ENHANCED MESSAGE-----