-----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, Aw3Nz8exXIzzQvIU0c6a2j8NuEEaRkD8Ns8Mcjilji3JzfEPg+wc3ABBiARgxflz n4D0rd3sY8aA8WrsEqfo4Q== 0000891618-99-000961.txt : 19990317 0000891618-99-000961.hdr.sgml : 19990317 ACCESSION NUMBER: 0000891618-99-000961 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDBACK NETWORKS INC CENTRAL INDEX KEY: 0001081290 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770438443 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-74479 FILM NUMBER: 99566254 BUSINESS ADDRESS: STREET 1: 1389 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4085483500 MAIL ADDRESS: STREET 1: 1389 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1999. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 REDBACK NETWORKS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3576 77-0438443 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1389 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 548-3500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DENNIS L. BARSEMA PRESIDENT AND CHIEF EXECUTIVE OFFICER REDBACK NETWORKS INC. 1389 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 548-3500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: ROBERT V. GUNDERSON, JR. JEFFREY D. SAPER RENEE F. LANAM KURT J. BERNEY BRETT A. NISSENBERG ANIL P. PATEL DAVID B. DAVIS WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH PROFESSIONAL CORPORATION VILLENEUVE FRANKLIN & HACHIGIAN, LLP 650 PAGE MILL ROAD 155 CONSTITUTION DRIVE PALO ALTO, CALIFORNIA 94304 MENLO PARK, CALIFORNIA 94025 (650) 493-9300 (650) 321-2400
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 statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, $0.0001 par value............... $37,375,000 $10,391 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT 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 SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued , 1999 Shares [REDBACK NETWORKS LOGO] COMMON STOCK ------------------------ REDBACK NETWORKS IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------ WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "RBAK." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS REDBACK NETWORKS ---------- ------------- ---------------- Per Share................................. $ $ $ Total..................................... $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Redback Networks has granted the underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ MORGAN STANLEY DEAN WITTER BANCBOSTON ROBERTSON STEPHENS DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated , 1999 3 [GRAPHIC -- INSIDE FRONT COVER] The heading for the page reads "All Services. All Users. One Solution." The left third of the page graphically illustrates a variety of uses for the Internet access infrastructure including a web page and an interactive video game. In the center of the page is a picture of a large crowd of people. On the right third of the page is a picture of the SMS 1000. Across the bottom of the page runs the following text: "The Internet is exploding. Thousands of new users go on-line each month. New high-speed data, audio and video services are constantly being created. However, bringing large numbers of new users and bandwidth-intensive services together compromises network performance and can delay the introduction of new services. Fortunately, Redback Networks has a solution. Our Subscriber Management System, or SMS, enables service providers to deploy high-speed services more quickly and at lower cost than is currently possible. The SMS bridges the operational gap between high-speed access concentrators and backbone routers. By providing the missing elements of subscriber management and traffic translation, the SMS allows service providers to deploy high-speed services without costly new investments in routers. At the same time, the SMS allows service providers to use existing management systems to manage subscribers, regardless of the access technology or equipment. In addition, the SMS architecture immediately scales to support 4,000 simultaneous subscribers, over 15 times the number available through most large routers. Carriers can create wholesale services for multiple service providers. Service providers can deliver multiple services -- and generate multiple revenue streams -- through a single connection. With so many features for speeding the deployment of high-speed services, it's not surprising that the SMS is the choice of many of the largest U.S. carriers, and leading service providers." Also on the bottom of the page is a graphic. On the left side of this graphic, three distinct Internet access modes, DSL, cable and wireless, are all connected to our SMS 1000 product in the center, which is connected to both the Internet and a corporate network. In the bottom right corner is our logo. 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 5 Use of Proceeds..................... 17 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 19 Selected Financial Data............. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 21 Business............................ 28
PAGE ---- Management.......................... 39 Certain Transactions................ 50 Principal Stockholders.............. 53 Description of Capital Stock........ 55 Shares Eligible for Future Sale..... 58 Underwriters........................ 60 Legal Matters....................... 62 Experts............................. 62 Additional Information.............. 63 Index to Financial Statements....... F-1
------------------------- We were incorporated in Delaware in August 1996. Our principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089 and our telephone number is (408) 548-3500. We have filed for trademark protection for "REDBACK." This prospectus also contains trademarks of other companies. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or any sale of the common stock. In this prospectus, unless the context indicates otherwise, the "Company," "Redback Networks," "Redback," "we," "us," and "our" refer to Redback Networks Inc. Unless otherwise indicated, all information in this prospectus (1) gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of the offering, (2) assumes no exercise of the underwriters' over-allotment option and (3) assumes no exercise of outstanding warrants to purchase, as of the closing, 129,471 shares of our common stock. UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. 2 5 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Financial Statements and related notes appearing elsewhere in this prospectus. REDBACK NETWORKS Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable multiple system operators, or MSOs, and service providers to rapidly deploy high-speed broadband access to the Internet and corporate networks. Our Subscriber Management System, or SMS, connects and manages large numbers of subscribers using any of the major high-speed access technologies, including digital subscriber line, or DSL, cable and wireless. We sell our SMS product family through our direct sales force, value-added resellers and distribution partners, such as Nokia and Nortel Networks. Bridging the gap between high-speed access concentrators and backbone routers, our SMS is currently being used by many of the largest carriers and service providers, including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE, Ameritech, Bell South, Concentric, Earthlink, Flashcom, Korea Telecom, Verio and @Work, a division of @Home. In recent years, there has been a significant increase in demand by businesses and consumers for broadband, or high-speed, access to the Internet and to corporate networks. While carriers, cable MSOs and service providers are attempting to provide inexpensive and comprehensive broadband access, there are several major challenges associated with scaling and configuring existing network architectures to accommodate large numbers of new high-speed subscribers. We believe widespread deployment of broadband services requires a new network model for subscriber management, which efficiently terminates subscriber connections, manages broadband subscribers, provides flexibility for typical point-to-point broadband connections, and supports multiple broadband access technologies simultaneously. Our SMS meets the above requirements. Whether deployed by telecommunications carriers at their regional access points, by cable MSOs at a headend or by service providers at a point-of-presence, or POP, the SMS accepts a large concentration of high-speed data traffic from such devices as DSL access multiplexers, or DSLAMs, Cable Modem Termination Systems, or CMTSs, and wireless termination systems. Our SMS reduces the processing requirements placed on backbone routers in broadband networks. Our SMS product family includes the SMS 1000, our flagship solution, which today supports up to 4,000 simultaneous subscribers, and the recently introduced SMS 500, designed for points-of-presence with smaller numbers of subscribers. The key benefits of our solution include: - Enhances Broadband Operations. Our SMS bridges the operational gap between "last mile" access networks that serve businesses and homes and the backbone routers to the Internet and corporate networks. - Supports All Major Access Technologies. Our SMS provides a consistent operational model and supports all major access technologies, including DSL, cable, wireless and dial. - Facilitates Rapid and Scalable Deployment. Our SMS leverages service providers' existing access, accounting and management control systems, including RADIUS databases, enabling them to quickly deploy high-speed access and achieve rapid time-to-market for significant revenue-generating services. - Provides Platform for the Delivery of Value-Added Services. Our solution enables carriers, cable MSOs and service providers to create and market new service offerings that leverage broadband connectivity and capabilities. For example, our solution enables service selection and tiered services. - Simplifies End-User Administration and Support. Our solution allows easy configuration and administration of end-user broadband modems, further reducing the cost of providing service. We are focused on delivering subscriber management solutions to carriers and service providers and intend to leverage our position in the DSL market to penetrate the cable and wireless broadband markets. We believe our software differentiates our solution and provides a competitive advantage by delivering advanced subscriber management services and functionality. We will continue to develop features and functionality that further enhance the ability of carriers, cable MSOs and service providers to deliver profitable services. We intend to expand our product family to address a range of functionality, density and application requirements. 3 6 THE OFFERING Common stock offered.......... shares Common stock to be outstanding after the offering.......... shares Over-allotment option......... shares Use of proceeds............... We intend to use the proceeds for general corporate purposes, including capital expenditures and working capital. See "Use of Proceeds." Dividend Policy............... We do not anticipate paying cash dividends. Proposed Nasdaq National Market symbol................. RBAK The foregoing information excludes 2,104,725 shares of common stock issuable upon exercise of outstanding options as of December 31, 1998 at an average exercise price of $1.49 per share, 129,471 shares of common stock issuable upon exercise of outstanding warrants at an average exercise price of $1.51 per share and 1,273,100 shares of common stock reserved for issuance under our stock plan as of December 31, 1998. SUMMARY FINANCIAL DATA
THREE MONTHS ENDED ------------------------------------------ MAR. 31, JUN. 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues........................................ $ 478 $ 1,294 $ 2,933 $ 4,501 Gross profit........................................ 212 618 1,761 3,012 Loss from operations................................ (2,007) (2,153) (2,574) (3,145) Net loss............................................ (1,981) (2,173) (2,579) (3,143) Pro forma basic and diluted net loss per share...... $ (.18) $ (.18) $ (.19) $ (.22) Shares used in computing pro forma basic and diluted net loss per share................................ 11,254 11,899 13,398 14,185
The following table presents summary balance sheet data at December 31, 1998, which has been adjusted for the conversion of Redback Networks preferred stock outstanding as of December 31, 1998 into 10,456,621 shares of common stock and our sale of shares of our common stock in this offering and the application of the estimated proceeds, less estimated expenses. See "Use of Proceeds" and "Capitalization."
AT DECEMBER 31, 1998 ---------------------- ACTUAL AS ADJUSTED ------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................... $ 8,189 $ Working capital............................................. 4,461 Total assets................................................ 14,682 Long-term obligations, less current portion................. 1,275 Total stockholders' equity.................................. 6,254
4 7 RISK FACTORS This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the following risk factors and the other information in this prospectus before investing in our common stock. Our business, results of operations and financial condition could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of any investment you make in our common stock. RISKS RELATED TO OUR BUSINESS OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY We are an early stage company. We were founded in August 1996 and have a very limited operating history. We did not sell any products or services until the end of 1997. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies in a new and rapidly evolving market. From February 28, 1998 to February 28, 1999, we have experienced significant growth -- from 39 employees to 117 employees. Our ability to sell products and services, and the level of success, if any, we achieve, depends, among other things, on the level of demand for broadband access services, which is a new and rapidly evolving market. See "Risk Factors -- Sales of our products are dependent on the widespread adoption of broadband access services." We cannot be certain that our business strategy will be successful or that we will successfully address the risks we face. WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES We incurred net losses of $142,000 from our inception in August 1996 through December 31, 1996, $4.4 million for the year ended December 31, 1997 and $9.9 million for the year ended December 31, 1998. As of December 31, 1998, we had an accumulated deficit of approximately $14.4 million. We have not achieved profitability and we expect to continue to incur net losses in the future. To date, we have funded our operations from the sale of equity securities, from bank borrowings and by means of equipment lease financing. We expect to continue to incur significant product development, sales and marketing, and general and administrative expenses and, as a result, we would need to generate significant revenues to achieve profitability. Although our revenues have grown in recent quarters, we cannot be certain that we can sustain recent growth rates or that we will ever achieve sufficient revenue levels to achieve profitability. If we do achieve profitability in some future period, we cannot be certain that we would sustain profitability on a quarterly or annual basis in the future. WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY Our revenues and operating results are likely to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, including: - Fluctuations in demand for broadband access services; - The timing and size of sales of our products and services; - The lack of any significant backlog; - Announcements of new products and product enhancements by competitors; - The entry of new competitors into our market, including by acquisition; - Unexpected delays in introducing new or enhanced products, including manufacturing delays; - Our ability to control expenses; - Our ability to ship products on a timely basis and at a reasonable cost; and 5 8 - The mix of our products sold and the mix of distribution channels through which our products are sold. A high percentage of our expenses, including those related to engineering, sales and marketing, research and development, and general administrative functions, are essentially fixed in the short term. As a result, if we experience delays in generating or recognizing revenue, our quarterly operating results are likely to be materially adversely affected. In addition, we plan to increase our operating expenses to expand our engineering and sales and marketing operations, broaden our customer support capabilities, develop new distribution channels, fund increased levels of research and development and build our operational infrastructure. If growth in our revenues does not outpace the increase in these expenses, our business, results of operations and financial condition could be materially adversely affected. We rely on a single third-party manufacturer to build our products. Any interruption in the operations of this manufacturer would adversely affect our ability to meet our scheduled product deliveries to our customers. This would cause significant variations in our quarterly operating results and our business, results of operations and financial condition would be materially adversely affected. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for one quarter as any indication of our future performance. It is likely that in some future quarter our operating results may be below the expectations of public market analysts or investors. If this occurs, the price of our common stock would likely decrease. OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT TO PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE The timing of our sales revenue is difficult to predict because of the length and variability of the sales cycle for our products. Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically undertake significant procedures relating to the evaluation, testing, implementation and acceptance of our products. This evaluation process frequently results in a lengthy sales cycle, typically ranging from three months to over one year. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing expenses and expend significant management efforts. In addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for whom our products represent a very small percentage of overall purchase activity. As a result, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, our business, results of operations and financial condition could be materially adversely affected. OUR QUARTERLY RESULTS DEPEND ON A SMALL NUMBER OF LARGE ORDERS To date, a significant portion of our quarterly revenues has resulted from a small number of relatively large orders. For example, in each of the last four quarters in the period ended December 31, 1998, we had at least one customer that accounted for 15% or more of our total revenue in such quarter. In the fourth quarter of 1998, UUNET, Nortel Networks and GTE and its affiliated entities accounted for 28%, 13% and 12%, respectively, of our total revenue. We anticipate that our operating results for any given period will continue to depend to a significant extent on large orders from a small number of customers. If we fail to receive a large order in any future period, our business, results of operations and financial condition would be materially adversely affected. WE ARE ENTIRELY DEPENDENT ON THE SUCCESS OF THE SMS PRODUCT FAMILY, INCLUDING THE SMS 1000, THE RECENTLY INTRODUCED SMS 500 AND THE INTRODUCTION OF FUTURE PRODUCTS To date, the SMS product family is the only product family that we have. The SMS 1000 and SMS 500 are the only products that we currently sell. We intend to extend the offerings under the SMS 6 9 product family in the future, both by introducing new SMS products and by introducing enhancements to existing SMS products. Our inability to timely and successfully introduce new SMS products and SMS product enhancements, or the failure of these new products or enhancements to achieve market acceptance, could materially adversely affect our business, results of operations and financial condition. To date, substantially all of our revenues have been derived from sales and service related to the SMS 1000 product. The SMS 1000 and any other new high-end SMS product that we may develop and introduce in the future are marketed primarily to large customers. There are only a limited number of large existing and potential customers and this number is not expected to increase significantly in the future. We recently introduced the SMS 500, which is designed for use by customers that intend to provide services to a smaller number of subscribers than those using the SMS 1000. Given this targeted market, sales of the SMS 500 may involve sales to smaller customers. Sales to smaller customers entail certain risks, including increased credit risks and the need for additional sales and support personnel to support an increased volume of customers. Our business, results of operations and financial condition could be materially adversely affected if any of these risks materialize. The SMS 500 may not achieve a significant degree of market acceptance. If the SMS 500 is not successful, our ability to generate revenues will be limited to sales of the SMS 1000 to our customers with a large number of subscribers, which will have a material adverse effect on our business, results of operations and financial condition. Many of our customers require product features and capabilities that our SMS products may not have. The requirement that we add features to our products in order to achieve a sale may result in a longer sales cycle, increased research and development expenses and reduced margins on our products. To achieve market acceptance for our products, we must effectively and timely anticipate and adapt to customer requirements and offer products and services that meet customer demands. Our failure to develop products or offer services that satisfy customer requirements would materially adversely affect our business, results of operations and financial condition. We intend to continue to invest in product and technology development. The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. The introduction of new or enhanced products also requires that we manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Our inability to effectively manage this transition would materially adversely affect our business, results of operations and financial condition. WE NEED TO GAIN ACCEPTANCE IN OTHER BROADBAND ACCESS MARKETS To date, we have derived substantially all of our revenues from sales of the SMS 1000 for use in the DSL market for broadband access. We intend to expend a substantial amount of time and resources to achieve market acceptance of our products in other markets, including the cable and wireless markets. We cannot be certain that we will be able simultaneously or effectively to address evolving demands in these markets, or that customers in these markets will not choose to implement competing technologies or products. In addition, if we are not first in these markets, there is a risk that competitors will gain market acceptance first, thereby making it difficult, if not impossible, for us to gain subsequent market acceptance. If we are unable to achieve acceptance of our products in these markets, our ability to generate revenues will be limited, and our business, results of operations and financial condition would be materially adversely affected. 7 10 WE EXPECT INCREASED COMPETITION We may not be able to compete successfully with current or future competitors. If we do not compete successfully against current or future competitors, our business, results of operations and financial condition will be materially adversely affected. Currently, competition in our market is intense. The broadband access markets we are targeting, including DSL, cable and wireless, are new and rapidly evolving and we expect these markets to become highly competitive in the future. In addition, we expect new competitors to emerge in the broadband access market as that market evolves due to technological innovation and regulatory changes. We face actual and potential competition from public and private companies providing backbone routers, access concentrators and subscriber aggregation systems. Cisco, the leading provider of backbone routers, offers products that compete directly with our SMS products, and also provides a comprehensive range of broadband access systems. We expect companies that offer access concentrators and routers, such as Ascend, which recently announced its pending acquisition by Lucent, to incorporate some subscriber management functionality into their products. In addition, there are private companies that provide subscriber management features in access concentrators or routing platforms. Many of our principal competitors, including Cisco, Alcatel and Lucent/Ascend, and some companies that may compete with us in the future, are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalizations or cash reserves are much better positioned than we are to acquire other companies, including our competitors, and thereby acquire new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage that would materially adversely affect our business, results of operations and financial condition. Many of our competitors have significantly more established customer support and professional services organizations than we do. In addition, many of our competitors have much greater name recognition and have a more extensive customer base, broader customer relationships and broader product offerings than our company. These companies can leverage their customer bases and broader product offerings and adopt aggressive pricing policies to gain market share. We have encountered, and expect to continue to encounter, potential customers that, due to existing relationships with certain of our larger competitors, are committed to the product offerings of these competitors. As a result, these potential customers may not consider purchasing our products. We expect to face competition in the following areas: - Product pricing; - Breadth of product lines; - Sales and distribution capability; - Product features and enhancements, including product performance, reliability, size, compatibility and scalability; - Product ease of deployment; - Conformance to industry standards; and - Technical support and service. We expect that competitive pressures may result in price reductions, reduced margins and loss of market share, which would materially adversely affect our business, results of operations and financial condition. 8 11 WE ARE DEPENDENT ON A SINGLE CONTRACT MANUFACTURER AND SOME OF THE KEY COMPONENTS IN OUR PRODUCTS COME FROM SINGLE OR LIMITED SOURCES OF SUPPLY We rely on a single third-party manufacturer, Electromax, to build our products. We may not be able to effectively manage our relationship with Electromax and Electromax may not meet our future requirements for timely delivery. We have no written agreement with Electromax. Any interruption in the operations of Electromax would adversely affect our ability to meet our scheduled product deliveries to our customers, which could cause the loss of existing or potential customers and could materially adversely affect our business, results of operations and financial condition. In addition, the products that Electromax builds for us may be insufficient in quality or in quantity to meet our needs. Electromax or any other manufacturer may not meet the technological or delivery requirements of our current products or any future products that we may develop and introduce. The inability of Electromax or any other of our contract manufacturers in the future to provide us with adequate supplies of high-quality products, or the loss of Electromax or any other of our contract manufacturers in the future, would cause a delay in our ability to fulfill customer orders while we obtain a replacement manufacturer and would have a material adverse effect on our business, results of operations and financial condition. We currently purchase several key components used in the manufacture of our SMS 1000 product from single or limited sources of supply. We have no guaranteed supply arrangement with these suppliers. Although we currently maintain, and expect to continue to maintain, an inventory of these supplies in an amount equal to our projected needs based on a rolling 3-month forecast, our manufacturers may fail to obtain these supplies in a timely manner in the future. Financial or other difficulties faced by these suppliers or significant changes in demand for these components could limit the availability to us of these components. Any interruption or delay in the supply of any of these components, or the inability to obtain these components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect our ability to meet scheduled product deliveries to our customers and would materially adversely affect our business, results of operations and financial condition. In addition, qualifying additional suppliers is time-consuming and expensive. We currently use a rolling 6-month forecast based on anticipated product orders, product order history and backlog to determine our materials requirements. Lead times for the materials and components that we order vary significantly and depend on numerous factors, including the specific supplier, contract terms and demand for a component at a given time. If actual orders do not match our forecasts, we may have excess or inadequate inventory of certain materials and components, which could materially adversely affect our business, results of operations and financial condition. WE MAY BE UNABLE TO PROPERLY MANAGE GROWTH We have expanded our operations rapidly since our inception. The number of our employees increased from 39 in February 1998 to 117 in February 1999. We currently intend to continue to expand in order to pursue existing and potential market opportunities. We are currently in the process of hiring additional engineering and sales personnel. We intend to hire a significant number of engineers in 1999. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is intense, especially in the San Francisco Bay Area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. If we are unable to do so, our business, results of operations and financial condition could be materially adversely affected. Our planned rapid growth places a significant demand on management and financial and operational resources. In order to grow and achieve future success, we will be required to: - Retain existing personnel; - Hire, train, manage and retain additional qualified personnel; and - Effectively manage multiple relationships with our customers, suppliers and other third parties. 9 12 We are currently seeking to lease additional office space to accommodate our growing operations. We may not be able to locate necessary office space on commercially reasonable terms or in a timely manner. Failure to do so would have a material adverse effect on our business, results of operations and financial condition. Our current office lease expires in September 1999. Any required relocation may be disruptive to our business. OUR PLANNED EXPANSION TO INTERNATIONAL MARKETS WILL INVOLVE NEW RISKS In 1998, we derived approximately 15% of our revenues from sales to customers outside of the United States. Our ability to achieve future success will depend in part on the expansion of our international sales and operations. International operations are generally subject to a number of risks, including: - Expenses associated with customizing products for foreign countries; - Protectionist laws and business practices that favor local competition; - Dependence on local vendors; - Multiple, conflicting and changing governmental laws and regulations; - Longer sales cycles; - Longer accounts receivable cycles; - Increased difficulties in collecting accounts receivable; - Difficulties in managing operations across disparate geographic areas; - Difficulties associated with enforcing agreements through foreign legal systems; - Reduced or limited protection of our intellectual property rights in some countries; - Foreign currency exchange rate fluctuations; and - Political and economic instability. In addition, if we grow internationally, we will need to expand our worldwide operations and enhance our communications infrastructure. If we fail to implement and improve these systems, our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information would be adversely affected. This could materially adversely affect our business, results of operations and financial condition. UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD HAVE A MATERIAL ADVERSE EFFECT ON US Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. We have experienced minor errors in the past in connection with new products. We expect that errors will be found from time to time in new or enhanced products after we begin commercial shipments. 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. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely have a material adverse effect on our business, results of operations and financial condition. Since our customers use our products to provide broadband access to their customers, defects or other performance problems in our products could result in financial or other damages to our customers. They could seek damages for losses from us, which, if they were successful, could have a material adverse effect on our business, results of operations and financial condition. We have not experienced any product 10 13 liability claims to date. However, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly. OUR FAILURE AND THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS The Year 2000 computer issue creates a variety of risks for us. If systems do not correctly recognize date information when the year changes to 2000, our business, results of operations and financial condition could be materially adversely affected. The risks involve: - Potential warranty or other claims by our customers; - Errors in systems we use to run our business; - Errors in systems used by our suppliers; - Errors in systems used by our customers; and - Potential reduced spending by other companies on broadband Internet access products as a result of significant information systems spending on Year 2000 remediation. Our internal systems include both our information technology, or IT, and non-IT systems. We have conducted an initial audit of our material internal IT systems, including both our own software products and third-party software and hardware technology. We have not yet initiated an assessment of our non-IT systems. To the extent that we are unable to test the technology provided by third-party vendors, we are seeking assurances from these vendors that their systems are Year 2000 compliant. We may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal IT and non-IT systems. These unanticipated problems and costs could have a material adverse effect on our business, results of operations and financial condition. We intend to contact our critical suppliers to determine if the suppliers' operations and the products and services provided to us are Year 2000 compliant. Where practicable, we will attempt to mitigate our risks with respect to the failure of our suppliers to be Year 2000 compliant by locating Year 2000 compliant replacement suppliers. However, our failure to mitigate our Year 2000 risks remains a possibility and could have a material adverse impact on our business, results of operations and financial condition. We have been informed by Electromax, our contract manufacturer, that its manufacturing systems are Year 2000 compliant. However, Electromax may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in their internal IT and non-IT systems. These unanticipated problems and costs could cause manufacturing delays or difficulties for our products and harm Electromax's operations. Additionally, Electromax has not yet ascertained whether any of its suppliers is Year 2000 compliant. The failure of a supplier of Electromax to be Year 2000 compliant could also adversely affect Electromax's operations. Any of these events could materially adversely affect our business, results of operations and financial condition. We believe that the SMS 1000 is Year 2000 compliant. However, despite testing by us and by current and potential customers, and despite assurances from developers of products incorporated into the SMS 1000, the SMS 1000 may contain undetected errors or defects associated with Year 2000 date functions. We believe that, based solely on internal testing, the recently introduced SMS 500 is Year 2000 compliant. We have made assurances to our customers that the SMS 1000 and the SMS 500 are Year 2000 compliant. The failure of our SMS products to be Year 2000 compliant would result in numerous customer claims, which could have a material adverse impact on our business, results of operations and financial condition. 11 14 We do not currently have any information concerning the Year 2000 compliance status of our customers. Our current or potential customers may incur significant expenses to achieve Year 2000 compliance. If our customers are not Year 2000 compliant, they may experience material costs to remedy problems, or they may face litigation costs. In either case, spending on Year 2000 issues could reduce or eliminate the budgets that our current or potential customers could have for purchases of our products. As a result, our business, results of operations and financial condition could be materially adversely affected. To date, our Year 2000 related costs have not been material. We have funded these costs from available cash without separately accounting for these costs. Although our future Year 2000 compliance costs are not expected to be significant, we may experience unanticipated material problems and costs associated with Year 2000 compliance that could adversely affect our business, results of operations and financial condition. We have not yet developed any contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing a Year 2000 contingency plan may be material. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We have filed one U.S. patent application. There can be no assurance that this application will be approved, that any issued patents will protect our intellectual property or that any issued patents will not be challenged by third parties. Furthermore, other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We attempt to protect our intellectual property rights by limiting access to the distribution of our software, documentation and other proprietary information. In addition, we enter into confidentiality agreements with our employees and certain customers, vendors and strategic partners. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Others may allege that our products infringe upon their proprietary rights. Any parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves or our customers, manufacturers or suppliers against alleged infringement of intellectual property rights. We could incur substantial costs to prosecute or defend this litigation. In addition, intellectual property litigation could force us to do one or more of the following: - Cease selling, incorporating or using products or services that incorporate the challenged intellectual property; - Obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on acceptable terms, if at all; or - Redesign those products or services that incorporate the disputed technology. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed technology on acceptable terms and on a timely basis, our business, results of operations and financial condition would be materially adversely affected. We may be subject to these claims in the future. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel. As a result, our business, results of operations and financial condition could be materially adversely affected. 12 15 WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE At December 31, 1998, we had approximately $8.2 million in cash, cash equivalents and short-term investments. At December 31, 1998, we had a line of credit in the amount of $2.0 million that expires at the end of July 1999, upon which we had drawn down $1.5 million, and a term loan in the amount of $750,000 that expires at July 31, 2000, $391,000 of which was outstanding. Subsequent to December 31, 1998, we increased the line of credit to $5.0 million. We believe that these amounts, combined with proceeds from this offering and cash anticipated to be available from future operations, will enable us to meet our working capital requirements for at least the next 12 months. We do not currently anticipate the need for additional capital but if cash from available sources is insufficient, or if cash is used for acquisitions or other unanticipated uses, we may need additional capital. The development and marketing of new products and the expansion of reseller channels and associated support personnel will require a significant commitment of resources. In addition, if the market for broadband access develops at a slower pace than anticipated or if we fail to establish significant market share and achieve a meaningful level of revenue, we may continue to incur significant operating losses and utilize significant amounts of capital. As a result, we could be required to raise substantial additional capital. We cannot be certain that additional capital will be available to us at all, or that, if it is available, it will be on terms favorable to us. Any inability to raise additional capital when we require it would materially adversely affect our business, results of operations and financial condition. Any additional issuance of equity or equity-related securities will be dilutive to our stockholders. RISKS RELATED TO THE BROADBAND ACCESS INDUSTRY SALES OF OUR PRODUCTS ARE DEPENDENT ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS SERVICES Sales of our products depend on the increased use and widespread adoption of broadband access services, and the ability of our customers to market and sell broadband access services. Our business, results of operations and financial condition would be materially adversely affected if the use of broadband access services does not increase as anticipated or if our customers' broadband access services are not received well by the marketplace. Certain critical issues concerning use of broadband access services are unresolved and will likely affect use of broadband access services. These issues include: - Security; - Reliability; - Bandwidth; - Congestion; - Cost; - Ease of access; and - Quality of service. Even if these issues are resolved, if the market for products that provide broadband access to the Internet and to corporate networks fails to develop, or develops at a slower pace than anticipated, our business, results of operations and financial condition would be materially adversely affected. THE BROADBAND ACCESS SERVICES MARKET IS SUBJECT TO RAPID CHANGE The broadband access services market is new and is characterized by rapid technological change, frequent enhancements to existing products and new product introductions, changes in customer requirements and evolving industry standards. We may not be able to respond quickly or effectively to these developments. The introduction of new products by competitors, market acceptance of products based on new or alternative technologies, or the emergence of new industry standards, could render our existing products obsolete, which would materially adversely affect our business, results of operations and financial condition. 13 16 The emergence of new industry standards might require us to redesign our products. If our products are not in compliance with industry standards that become widespread, our customers and potential customers may not purchase our products. This would have a material adverse effect on our business, results of operations and financial condition. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION OF THE COMMUNICATIONS INDUSTRY The jurisdiction of the Federal Communications Commission, or FCC, extends to the communications industry, to our customers and to the products and services that our customers sell. Future FCC regulations, or regulations set forth by other regulatory bodies, may adversely affect the broadband access services industry. Regulation of our customers may have a material adverse affect on our business, results of operations and financial condition. For example, FCC regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into certain markets. In addition, international regulatory bodies are beginning to adopt standards for the communications industry. The delays that these governmental processes entail may cause order cancellations or postponements of product purchases by our customers, which would materially adversely affect our business, results of operations and financial condition. RISKS RELATED TO THE SECURITIES MARKETS OUR STOCK PRICE MAY BE VOLATILE 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. We will negotiate and determine the initial public offering price with the representatives of the underwriters based on several factors. This price may vary from the market price of the common stock after this offering. The market price of the common stock may fluctuate significantly in response to the following factors: - Variations in our quarterly operating results; - Changes in financial estimates by securities analysts; - Changes in market valuations of broadband access technology companies; - Changes in market valuations of networking and telecommunications companies; - Announcements by us or our competitors of significant contracts, new products or product enhancements, acquisitions, strategic partnerships, joint ventures or capital commitments; - Loss of a major customer; - Additions or departures of key personnel; - Sales of common stock or other securities in the future; and - Fluctuations in stock market prices and volumes. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of the company's securities. We may in the future be the target of similar litigation. If we become engaged in securities class action litigation, our management's attention and resources may be diverted and we may incur substantial costs, resulting in a material adverse effect to our business, results of operations and financial condition. CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND CERTAIN TRANSACTIONS Upon completion of this offering, our executive officers, directors and principal stockholders and their affiliates will beneficially own approximately % of our outstanding common stock ( % if the 14 17 underwriters' over-allotment option is exercised in full). These stockholders, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE Sales of a substantial number of shares of our common stock after this offering could adversely affect the market price of our common stock by potentially introducing a large number of sellers of our common stock into a market in which our common stock price is already volatile, thus driving our common stock price down. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities. Based on shares outstanding as of December 31, 1998, upon completion of this offering, we will have shares of common stock outstanding, or shares if the underwriters' over-allotment option is exercised in full. Our directors, executive officers and current stockholders have executed lock-up agreements that limit their ability to sell shares of our common stock. These stockholders have agreed, subject to limited exceptions, not to sell or otherwise dispose of any shares of our common stock for a period of at least 180 days after the date of this prospectus without the prior written approval of Morgan Stanley & Co. Incorporated. When these lock-up agreements expire, these shares and the shares of common stock underlying any options held by these individuals will become eligible for sale, in some cases pursuant only to the volume, manner of sale and notice requirements of Rule 144. See "Management -- Stock Plans" and "Shares Eligible for Future Sale." INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION The initial public offering price of our common stock is expected to be substantially higher than the book value per share of our outstanding common stock immediately after the offering. Accordingly, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $ in the book value per share of our common stock from the price you pay for our common stock. This calculation assumes that you purchased our common stock for $ per share. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY Provisions in our bylaws and in our certificate of incorporation, both as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in management of our company. These provisions include: - The stipulation that a special meeting of stockholders may only be called by stockholders owning at least 50% of our outstanding shares; - The ability of our board of directors to issue preferred stock without stockholder approval; and - The right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors. Furthermore, we are subject to the provisions of section 203 of the Delaware General Corporation Law. These provisions prohibit a stockholder owning 15% or more of our outstanding voting stock from consummating a merger or combination with us unless this stockholder receives board approval for the transaction or unless 66 2/3% of the outstanding shares of our voting stock not owned by this stockholder approve the merger or combination. 15 18 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "intend" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations. 16 19 USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock we are offering will be approximately $ , or $ if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $ and after deducting estimated underwriting discounts and commissions and our estimated offering expenses of $ . We expect to use the net proceeds from this offering for general corporate purposes, including capital expenditures and working capital. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, product lines or products. We have no current plans, agreements or commitments with respect to any such acquisitions or investments, and are not engaged in any negotiations with respect to any such acquisitions or investments. Our management will have broad discretion concerning the use of the net proceeds of this offering. We intend to invest the net proceeds of this offering in investment grade, interest-bearing securities pending their use. DIVIDEND POLICY We have never declared or paid cash dividends on our common stock or other securities and do not currently anticipate paying cash dividends in the future. Our bank line of credit currently prohibits the payment of dividends. 17 20 CAPITALIZATION - - The following table sets forth our capitalization as of December 31, 1998. - - The pro forma information reflects the filing of an amendment to our amended and restated certificate of incorporation to provide for authorized capital stock of 80,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock and the conversion of all outstanding shares of preferred stock into 10,456,621 shares of common stock on the closing of this offering. - - The pro forma as adjusted information reflects the sale of the shares of common stock offered hereby after deducting estimated underwriting discounts and commissions and our estimated offering expenses. The outstanding share information excludes 2,104,725 shares of common stock issuable upon exercise of outstanding options as of December 31, 1998 at an average exercise price of $1.49 per share, 129,471 shares of common stock issuable upon exercise of outstanding warrants at an average exercise price of $1.51 per share and 1,273,100 shares of common stock reserved for issuance under our stock plan as of December 31, 1998. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the related notes.
AS OF DECEMBER 31, 1998 ------------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ------------- --------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term obligations, less current portion..... $ 1,275 $ 1,275 $ -------- -------- -------- Stockholders' equity (deficit): Preferred stock, $.0001 par value; 13,500,000 shares authorized; 10,456,621 shares issued and outstanding, actual; 10,000,000 shares authorized, pro forma and pro forma as adjusted; no shares issued or outstanding, pro forma and pro forma as adjusted........ 18,884 -- Common stock, $.0001 par value; 22,500,000 shares authorized; 7,825,302 shares issued and outstanding, actual; 80,000,000 shares authorized, 18,281,923 shares issued and outstanding, pro forma; 80,000,000 shares authorized, issued and outstanding, pro forma as adjusted......... 6,741 25,625 Deferred stock compensation................... (4,731) (4,731) Notes receivable from stockholders............ (211) (211) Accumulated deficit........................... (14,429) (14,429) -------- -------- -------- Total stockholders' equity............ 6,254 6,254 -------- -------- -------- Total capitalization.................. $ 7,529 $ 7,529 $ ======== ======== ========
18 21 DILUTION The pro forma net tangible book value of our common stock as of December 31, 1998, giving effect to the conversion of all shares of preferred stock outstanding as of December 31, 1998 into common stock on the closing of this offering, was $6,254,000, or approximately $.34 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities divided by 18,281,923 shares of common stock outstanding after giving effect to the conversion of the preferred stock outstanding as of December 31, 1998 into common stock. After giving effect to the issuance and sale of shares of our common stock in this offering and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma net tangible book value as of December 31, 1998 would have been $ , or approximately $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates the per share dilution: Assumed initial public offering price per share............. $ $ Pro forma net tangible book value per share as of December 31, 1998..................................... .34 Increase in pro forma net tangible book value per share attributable to new investors......................... ---- Pro forma net tangible book value per share after the offering.................................................. ------- Dilution per share to new investors......................... $ =======
The following table summarizes on a pro forma basis, giving effect to the conversion of all outstanding shares of preferred stock into common stock on the closing of this offering, as of December 31, 1998, the difference between the number of shares of common stock purchased from Redback Networks by existing stockholders and by new investors, the total consideration paid to Redback Networks by existing stockholders and new investors and the average price per share paid by existing stockholders and by new investors, before deduction of estimated underwriting discounts and commissions and our estimated offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders........... 18,281,923 $20,014,000 $1.10 New investors................... ---------- ----- ----------- ----- Totals................ 100.0% 100.0% ========== ===== =========== =====
As of December 31, 1998, there were options outstanding to purchase a total of 2,104,725 shares of common stock at a weighted average exercise price of approximately $1.49 per share; 129,471 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.51 per share; and 1,273,100 shares of common stock reserved for issuance under our stock plan. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management -- Stock Plans." 19 22 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the period from August 30, 1996 (inception) through December 31, 1996 and for the fiscal years ended December 31, 1997 and December 31, 1998, and the balance sheet data at December 31, 1997 and December 31, 1998 are derived from audited financial statements included elsewhere in this prospectus. The balance sheet data at December 31, 1996 is derived from audited financial statements not included in this prospectus.
PERIOD FROM AUGUST 30, 1996 YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, ------------------ 1996 1997 1998 ------------------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues...................................... $ -- $ 48 $ 9,206 Cost of revenues.................................. -- 29 3,603 ----- ------- ------- Gross profit...................................... -- 19 5,603 ----- ------- ------- Operating expenses: Research and development........................ 124 3,249 5,727 Selling, general and administrative............. 19 1,317 8,875 Amortization of deferred stock compensation..... -- -- 880 ----- ------- ------- Total operating expenses................ 143 4,566 15,482 ----- ------- ------- Loss from operations.............................. (143) (4,547) (9,879) Interest and other income......................... 1 221 254 Interest expense.................................. -- (85) (251) ----- ------- ------- Net loss.......................................... $(142) $(4,411) $(9,876) ===== ======= ======= Basic and diluted net loss per share.............. $(.22) $ (4.10) $ (3.57) ===== ======= ======= Shares used in computing net loss per share....... 658 1,076 2,769 ===== ======= ======= Pro forma net loss per share: Basic and diluted net loss per share............ $ (.78) ======= Shares used in computing net loss per share..... 12,684 =======
DECEMBER 31, ---------------------------- 1996 1997 1998 ----- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................. $ 119 $ 3,084 $ 8,189 Working capital........................................... 12 5,630 4,461 Total assets.............................................. 216 7,849 14,682 Long-term obligations, less current portion............... -- 827 1,275 Accumulated deficit....................................... (142) (4,553) (14,429) Total stockholders' equity................................ 83 6,081 6,254
20 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the Financial Statements and related notes contained elsewhere in this prospectus. The discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "intend" or "continue," or the negative of such terms and other comparable terminology. These statements are only predictions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW Redback Networks provides advanced networking solutions that enable carriers, cable MSOs and service providers to rapidly deploy high-speed broadband access technologies such as DSL, cable and wireless. We sell our products to a number of different types of carriers, including incumbent local exchange carriers, or ILECs, competitive local exchange carriers, or CLECs, cable MSOs and service providers. Our products are sold through a direct sales force, value-added resellers, or VARs, and strategic distribution partners. We recognize revenues, net of allowances, when we ship products to our customers, provided no significant outstanding vendor obligations remain and collection is considered probable. We recognize support revenue ratably over the support period and service revenues as services are performed. Currently, all of our product sales and service arrangements provide for pricing and payment in U.S. dollars. Since we have no other product line, our business, financial condition and results of operations are dependent on acceptance of our SMS solution in the broadband market. From inception through December 1997, our operating activities consisted primarily of research and development activities and building our management team. We shipped our first products in December 1997, but did not begin shipping our products in material quantities until the second quarter of 1998. To date, we have derived substantially all of our revenues from sales of our flagship product, the SMS 1000, in the DSL market. Our success will depend on our ability to sell products not only in the DSL market, but also in other markets, including the cable and wireless markets. We released the SMS 500 in early March 1999. The SMS 500 is targeted at service provider facilities supporting a smaller number of subscribers than facilities using the SMS 1000. We cannot be certain that the SMS 1000, the SMS 500 or any future products will achieve widespread market acceptance. To date, a significant portion of our revenues has resulted from a small number of relatively large orders. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. If we are unable to sell products to which we have devoted significant resources or if orders for our products are cancelled or delayed, our inventory levels could become excessive. Any subsequent write-off of inventory could have a material adverse effect on our business, results of operations and financial condition. We anticipate that our operating results for any given period will continue to be dependent to a significant extent on large purchase orders, which can be delayed or cancelled by our customers without penalty. In addition, we anticipate that our operating results for a given period will continue to be dependent on a small number of customers. Sales to UUNET, a subsidiary of MCI Worldcom, Nortel Networks and GTE and its affiliated entities accounted for 28%, 13% and 12%, respectively, of our total revenues for the quarter ended December 31, 1998. If we fail to receive a significant purchase order that 21 24 we expected for a given quarter, our revenues for that quarter, or following quarters, will be adversely affected. This could adversely affect our business, results of operations and financial condition. Furthermore, if any of our customers experience financial difficulties, our sales to these customers may be reduced and we may have difficulty in collecting accounts receivable from these customers. Any delay in large customer orders or customer financial difficulties could have a material adverse effect on our business, results of operations and financial condition. We currently use Electromax to assemble our products. We also rely on single or limited source suppliers to manufacture certain key components of our products. A significant portion of our cost of revenues is related to these outsourcing arrangements. These relationships are subject to a variety of risks. Currently, competition in our market is intense. We continue to add features to our products based on the needs of our customers. This has resulted in increased research and development expenses and may result in reduced operating margins on our products and a longer sales cycle. We expect competition to increase in the future. This competition may also result in price reductions and loss of market share. We expect that product life cycles will remain relatively short and that the average selling price and gross margins for our products will decline as each product matures. Accordingly, we must introduce new products on a timely basis with improved performance characteristics. Further, we must reduce production costs and sell sufficient volumes in order to maintain gross margins. If we fail to reduce our production costs or achieve volume shipment requirements, our product margins will decline rapidly. Any of the above events could have a material adverse effect on our business, results of operations and financial condition. In 1998, we recorded total deferred stock compensation of $5.6 million in connection with stock and stock options granted during 1998 at prices subsequently deemed to be below fair market value on the date of grant. Options granted are typically subject to a four year vesting period. Stock grants are generally subject to our right to repurchase the stock, which lapses over a four year period. We are amortizing the deferred stock compensation over the vesting periods of the applicable options and the repurchase periods for the restricted stock. We amortized $880,000 of deferred stock compensation in the year ended December 31, 1998, leaving approximately $4.7 million to be amortized over the remaining vesting periods. In 1999, we recorded approximately $3.0 million in additional deferred stock compensation for stock options granted in January and February 1999 at prices subsequently deemed to be below fair market value on the date of grant. 22 25 RESULTS OF OPERATIONS QUARTERLY RESULTS OF OPERATIONS The following table sets forth our unaudited quarterly results of operations, in dollars and as a percentage of net revenues, for the four quarters ended December 31, 1998. You should read the following table in conjunction with the Financial Statements and related notes contained elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited Financial Statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.
THREE MONTHS ENDED --------------------------------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 -------- -------- --------- -------- (IN THOUSANDS) Net revenues........................................ $ 478 $ 1,294 $ 2,933 $ 4,501 Cost of revenues.................................... 266 676 1,172 1,489 ------- ------- ------- ------- Gross profit........................................ 212 618 1,761 3,012 ------- ------- ------- ------- Operating expenses: Research and development.......................... 863 1,062 1,583 2,219 Selling, general and administrative............... 1,333 1,656 2,519 3,367 Amortization of deferred stock compensation....... 23 53 233 571 ------- ------- ------- ------- Total operating expenses.................. 2,219 2,771 4,335 6,157 ------- ------- ------- ------- Loss from operations................................ (2,007) (2,153) (2,574) (3,145) Other income (expense).............................. 26 (20) (5) 2 ------- ------- ------- ------- Net loss............................................ $(1,981) $(2,173) $(2,579) $(3,143) ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUES --------------------------------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 -------- -------- --------- -------- Net revenues........................................ 100.0% 100.0% 100.0% 100.0% Cost of revenues.................................... 55.6 52.2 40.0 33.1 ------- ------- ------- ------- Gross profit........................................ 44.4 47.8 60.0 66.9 ------- ------- ------- ------- Operating expenses: Research and development.......................... 180.5 82.1 54.0 49.3 Selling, general and administrative............... 278.9 128.0 85.9 74.8 Amortization of deferred stock compensation....... 4.8 4.1 7.9 12.7 ------- ------- ------- ------- Total operating expenses.................. 464.2 214.2 147.8 136.8 ------- ------- ------- ------- Loss from operations................................ (419.8) (166.4) (87.8) (69.9) Other income (expense).............................. 5.4 (1.5) (.1) .1 ------- ------- ------- ------- Net loss............................................ (414.4)% (167.9)% (87.9)% (69.8)% ======= ======= ======= =======
Net Revenues. Our net revenues increased in each of the four quarters ended December 31, 1998 due to the sale of an increasing number of SMS 1000s, our principal product. Significant revenues from GTE began in the third quarter of 1998 and from UUNET and Nortel Networks in the fourth quarter of 1998. 23 26 Cost of Revenues; Gross Profit. Cost of revenues includes all costs associated with the production of our product, including cost of materials, manufacturing and assembly costs paid to contract manufacturers and related overhead costs associated with our manufacturing personnel. Additionally, all warranty costs and any inventory provisions or write-downs are expensed as cost of revenues. Cost of revenues, expressed in absolute dollars, increased in each of the four quarters ended December 31, 1998 primarily as a result of increased product sales. Gross margin, expressed as a percentage of net revenues, increased in each quarter primarily due to reduced costs of certain key components, a decrease in related overhead costs resulting from shipments of our products in material quantities and changes in product configuration. Specifically, over the last two quarters of 1998, our customers have been purchasing the SMS 1000 with more interface slots filled, which increases gross margins. Changes in product configuration will cause our gross margins to vary in future periods. Research and Development. Research and development expenses consist primarily of salaries and related costs of employees engaged in research and development activities, as well as related cost of materials. Our research and development expenditures increased in absolute dollars in each of the four quarters ended December 31, 1998 primarily as a result of increased personnel costs. This increase reflects research and development efforts associated with new products, such as the SMS 500, and new features and functionality for the SMS 1000. To date, we have expensed research and development expenses as incurred. Because the market for our products is characterized by rapidly changing technology, industry standards and customer demands, we expect our research and development expenses to increase in absolute dollars. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of employee-related expenses, including commissions paid to sales representatives and marketing and facility-related expenses. During each of the four quarters ended December 31, 1998, selling, general and administrative expenses increased in absolute dollars. These increases were mainly due to the hiring of additional sales and administrative personnel, the payment to sales representatives of increased commissions resulting from increased sales, and additional marketing expenses. We anticipate that selling, general and administrative expenses will continue to increase in absolute dollars as a result of increases in sales force personnel, commissions on higher revenues, additional marketing activities and costs associated with public company reporting requirements. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation increased during each of the four quarters ended December 31, 1998. This increase was a result of a greater number of shares of stock and stock options granted during the last two quarters of the year, which was associated with our increased hiring efforts and the amortization of deferred compensation on prior grants. Other Income (Expense). Our other income consists of interest earned on our cash and cash equivalents offset by other expenses, principally interest expense paid on our capital leases and borrowings. We have not recorded a provision for income taxes because we experienced net losses from inception through 1998. As of December 31, 1998, we had net operating loss carryforwards of approximately $11.6 million. These carryforwards will expire at various dates beginning in 2004 through 2018, if not utilized. Utilization of the net operating losses may be subject to a substantial annual limitation due to the ownership change limitations contained in the Internal Revenue Code and similar state provisions. There is sufficient uncertainty regarding the reliability of the deferred tax assets such that a full valuation allowance has been recorded. The annual limitation may result in the expiration of the net operating loss and credits before utilization. See note 4 of the notes to Financial Statements. 24 27 INCEPTION TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998 Net Revenues. We did not generate any revenues until December 1997. Our net revenues increased from $48,000 in 1997 to $9.2 million in 1998 as we began shipping the SMS 1000 in volume. Cost of Revenues; Gross Profit. Our cost of revenues increased from $29,000 in 1997 to $3.6 million in 1998 as we began shipping the SMS 1000 in material quantities. Gross margin increased from 40% in 1997 to 61% in 1998 primarily due to reduced costs of certain key components, a decrease in related overhead costs as a percentage of revenues resulting from an increase in shipments, and changes in product configuration. Research and Development. Our research and development expenses increased from $124,000 for the period from inception to December 31, 1996 to $3.2 million in 1997 and $5.7 million in 1998. These increases were due mainly to an increase in the number of research and development personnel and related costs associated with the development of the SMS 500 and new features and functionality of the SMS 1000. Selling, General and Administrative. Our selling, general and administrative expenses for the period from inception to December 31, 1996 were not material. These expenses increased from $1.3 million in 1997 to $8.9 million in 1998 due to the addition of sales and administrative personnel, commissions on higher sales and additional marketing and facility-related expenses. Amortization of Deferred Stock Compensation. In 1998, we recorded amortization of deferred stock compensation of $880,000 in connection with stock and stock options granted during 1998 at prices subsequently deemed to be below fair market value on the date of grant. Other Income (Expense). Our other income, net of expenses, for the period from inception to December 31, 1996 was not material. Our other income, net of expenses, decreased from $136,000 in 1997 to $3,000 in 1998 due primarily to higher interest expense charges resulting from increases in the amount of capital equipment we leased, partially offset by interest earned on our cash and cash equivalents. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations through private sales of securities and, to a lesser extent, bank borrowings and equipment lease financing. During 1998, we used $6.6 million in cash for operating activities, compared to $3.8 million in 1997. This increase resulted from the significant expansion of our operations during this period, including increases in inventory and accounts receivable. We expect that accounts receivable and inventory will continue to increase if our revenues continue to rise and that we will continue to increase our investment in capital assets to expand our operations. Our principal source of liquidity as of December 31, 1998 consisted of $8.2 million in cash and cash equivalents. As of December 31, 1998, we had a credit facility that includes a term loan and a revolving line of credit that provides for borrowings up to the lesser of $2.0 million or 80% of eligible accounts receivable, as defined in the credit facility. Our line of credit bears interest at the bank's prime lending rate plus .5% and expires on July 31, 1999. As of December 31, 1998, we had $1.9 million in outstanding bank indebtedness, consisting of $391,000 under the term loan and $1.5 million under the line of credit. In January 1999, we repaid the amount outstanding under the line of credit. As of December 31, 1998, we were not in compliance with the profitability covenant under the line of credit. We obtained a waiver of this covenant as of December 31, 1998. In January 1999, we increased the limit on the line of credit from $2.0 million to $5.0 million. Purchases of property and equipment, including equipment purchased under capital leases, increased from $1.5 million in 1997 to $2.7 million in 1998, and consisted primarily of purchases of computer equipment, including workstations and servers to support our increased research and develop- 25 28 ment activities. We expect our capital expenditures to increase as we further expand our research and development efforts and as our employee base grows. The timing and amount of future capital expenditures will depend primarily on our future growth. We expect to spend approximately $4.1 million for capital expenditures in fiscal 1999 for computer equipment, including workstations and servers to support our increased research and development activities. We believe that the net proceeds from this offering, together with our existing cash balances, anticipated cash flows from operations and credit line and capital lease financing, will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, we could be required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us. Any additional issuance of equity or equity-related securities will be dilutive to our stockholders. 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 that entities 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, results of operations or cash flows. We will be required to implement SOP No. 98-1 for the year ending December 31, 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, results of operations or cash flows. We will be required to implement SOP No. 98-5 for the year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative instruments and do not engage in hedging activities, we expect that the adoption of SFAS No. 133 will not have a material impact on our financial position, results of operations or cash flows. We will be required to implement SFAS No. 133 for the year ending December 31, 2000. YEAR 2000 COMPLIANCE Historically, computer programs used two digits -- rather than four -- to designate specific years. Computer programs that use two digits to designate a specific year may recognize a date using "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 normal business activities. This is known as the Year 2000 problem. We have relationships with, and are to varying degrees dependent upon, a large number of third parties that provide information, goods and services to us or who manufacture and ship our products. Our business, results of operations and financial condition could be materially adversely affected if any of the third parties with whom we have relationships were to experience significant Year 2000 related problems. In addition, our business, results of operations and financial condition could be materially adversely affected if any of our key customers encounter significant Year 2000 related problems that cause them to delay or cancel substantial purchase orders or product deliveries. 26 29 We have been informed by Electromax, our contract manufacturer, that its manufacturing systems are Year 2000 compliant. However, Electromax may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in their internal IT and non-IT systems. These unanticipated problems and costs could have a material adverse effect on their business, results of operations and financial condition. Additionally, Electromax is unable to ascertain whether any of its suppliers is Year 2000 compliant. The failure of a supplier of Electromax to be Year 2000 compliant could adversely affect Electromax's operations, which could materially adversely affect our business, results of operations and financial condition. Our products are ultimately used with a number of different hardware and software products, and to the extent any third-party products are not Year 2000 compliant, the interoperability of our products could be adversely affected. Given the large number of third-party components used in conjunction with our products and our limited resources, we do not expect to review third-party products for Year 2000 compliance. We have conducted an initial audit of our critical internal financial, informational and operational systems to identify and evaluate those areas that may be affected as a result of the Year 2000 problem. To date, we have not incurred material expense associated with our efforts to become Year 2000 compliant and do not anticipate that any future costs associated with our Year 2000 remediation efforts will be material. Although we plan to complete modifications or upgrades of our systems prior to the Year 2000, we may not be able to develop and implement a plan that adequately addresses the Year 2000 problem in a timely manner. If we are not able to address the Year 2000 problem adequately, we may be unable to conduct our business. This would have a material adverse effect on our results of operations and financial condition. 27 30 BUSINESS OVERVIEW Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable multiple system operators, or MSOs, and service providers to rapidly deploy high-speed broadband access to the Internet and corporate networks. Our Subscriber Management System, or SMS, connects and manages large numbers of subscribers using any of the major high-speed access technologies, including digital subscriber line, or DSL, cable and wireless. We sell our SMS product family through our direct sales force, VARs and distribution partners, such as Nokia and Nortel Networks. Bridging the gap between high-speed access concentrators and backbone routers, our SMS is currently being used by many of the largest carriers and service providers, including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE, Ameritech, Bell South, Concentric, Earthlink, Flashcom, Korea Telecom, Verio and @Work, a division of @Home. INDUSTRY BACKGROUND INCREASING DEMAND FOR BROADBAND ACCESS SERVICES In recent years, there has been a significant increase in demand by businesses and consumers for broadband, or high-speed, access to the Internet and to corporate networks. Increasing numbers of users are relying on Internet Protocol, or IP, based networks to access corporate intranets and the World Wide Web and to participate in network-dependent activities such as email, electronic commerce, telecommuting and on-line entertainment. Consumers are seeking low-cost, high-speed access to bandwidth-intensive Internet content and services such as highly graphical Web sites, audio, video and high-speed data. International Data Corporation, or IDC, predicts that by the end of 1999, one in three U.S. households will be online. Businesses have even greater requirements for high-speed access in order to implement electronic commerce strategies or Web-based business models, and to provide employees and others with robust telecommuting capabilities. These applications often require the transmission of large, multimedia-intensive files, which is practical only with high-speed data access services. EMERGING BROADBAND INTERNET ACCESS OPTIONS Carriers, cable MSOs and service providers are responding to this demand for high-speed access by providing inexpensive and comprehensive broadband services. These services deliver "always on" availability that eliminates the tedious dial-up process associated with analog modem technologies. Changes in telecommunications regulations have facilitated the development of broadband strategies by local access providers, using the following technologies: DSL. The market for digital subscriber line, or DSL, services is expanding rapidly. DSL operates over standard copper telephone wires, leveraging an extensive network infrastructure that can be upgraded for broadband services. Various implementations of DSL are being developed and deployed, including full-rate ADSL, or Asymmetrical DSL, and G.lite for consumer applications and SDSL, or Symmetrical DSL, for business applications. Certain applications of DSL can also serve as an affordable replacement for dedicated lines used to deliver high-speed data services. Incumbent local exchange carriers, or ILECs, including Ameritech, Bell Atlantic, Bell South, GTE, Pacific Bell, SBC and US West, have deployed DSL services. Telecommunications regulatory reform has enabled the new competitive local exchange carriers, or CLECs, and leading Internet exchange carriers including Covad Communications, MCI Worldcom, NorthPoint Communications, Rhythms NetConnections, and Sprint, to provide DSL service over the same telephone infrastructure used by the ILECs. 28 31 Interactive Cable. High-speed interactive communication across the cable infrastructure is made possible by the combination of two-way cable, cable modems installed in the home and cable modem termination systems, or CMTSs, installed at major cable concentration points, known as headends. Several companies are currently deploying broadband access services across two-way cable, including @Home and TimeWarner, through its Roadrunner service. IDC estimates that, as of the end of 1998, there were 95 million homes passed by cable. With upgrades to two-way cable, cable MSOs are well positioned to deploy broadband access services. Wireless. As an alternative to wireline access, certain carriers and service providers are using wireless technologies to provide cost-effective broadband access. Many of these providers are in the early stages of using their licenses to deploy broadband wireless access services. Fiber-to-the-Curb. Fiber optic cable supports an alternative broadband access technology based on light and photonics that offers nearly unlimited bandwidth capacity. Where deployment costs are justified by service opportunity, fiber optic cable is being deployed in the "last mile" from the telephone central office to the subscriber. Recent fiber-to-the-curb initiatives have been pursued by several ILECs. OBSTACLES TO DEPLOYING BROADBAND ACCESS Regardless of the type of broadband access delivered, deployments of broadband services pose several major challenges associated with scaling and configuring existing architectures to accommodate large numbers of new high-speed subscribers. The traditional dial network model, relying on analog modems and standard telephone lines, is structured so that service providers can aggregate subscribers using remote access servers, or RASs, located at the service providers' data centers. Although constrained by speed, this network model allows service providers not only to aggregate subscriber connections and pass the traffic to routers, but also to manage subscriber provisioning, authentication and accounting in the RAS. With broadband access technologies, however, subscriber connections are first concentrated by the carriers and cable MSOs using technology-specific access concentrators such as DSL access multiplexers, or DSLAMs, and CMTSs. From there, high-speed data circuits are aggregated at a central facility by carriers, cable MSOs or other service providers who terminate subscriber connections and provide backbone connectivity to the Internet. These service providers therefore need to manage thousands of subscribers' connections and to route subscribers' data to and from the Internet. While service providers have been using traditional routers to provide both the circuit termination and Internet connectivity functions, routers were only designed to address the Internet connection task and are limited to managing several hundred subscribers, significantly less than the thousands of potential subscribers associated with a widely deployed service. In addition, unlike existing RASs used in the traditional analog modem dial network model, routers were not designed to provide broadband subscriber management functions such as provisioning, authentication and accounting. 29 32 Broadband technologies pose additional challenges for service providers interested in offering more than one type of broadband service. Each broadband access technology uses different equipment at the service provider's facility. As a result, service providers offering multiple broadband services significantly increase their costs, as they must purchase different routers and deploy different operational models for each broadband service they choose to offer to their subscribers. The traditional broadband network model is depicted below: SEPARATE NETWORKS FOR EACH ACCESS TECHNOLOGY [DIAGRAM] Another obstacle to deploying broadband services is the point-to-point, or dedicated, nature of broadband access technologies. Whether the access method is DSL, cable or wireless, each of these technologies provides a dedicated link from one starting point, such as a home or small office, to a single destination network, such as a service provider or a corporation. Thus, a telecommuter who purchases a DSL service for connecting to a corporate network is unable to use the same line to access directly a consumer service provider for personal Web surfing. There is a growing demand from carriers, cable MSOs and service providers to address these issues so that they are able to provide their customers with reliable, scalable, easy-to-use high-speed access on a cost-effective basis. Carriers, cable MSOs and service providers require highly scalable networks and the ability to manage and groom individual subscriber data streams into simplified IP flows for backbone routers. Service providers must be able to rapidly and cost-effectively aggregate data streams from diverse broadband access technologies from different carriers and cable MSOs. 30 33 THE REDBACK NETWORKS SOLUTION Redback Networks provides solutions that make it possible for carriers, cable MSOs and service providers to connect and manage large numbers of subscribers using high-speed access technologies such as DSL, cable and wireless. Our Subscriber Management System, or SMS, lets carriers, cable MSOs and service providers connect thousands of subscribers quickly and cost-effectively, as well as manage subscriber accounts and service profiles. Carriers, cable MSOs and service providers are able to deliver different kinds of high-speed broadband access and a variety of service offerings with a single operational structure. Our SMS network model is described below: REDBACK SUPPORTS ALL MAJOR BROADBAND TECHNOLOGIES [DIAGRAM] Key benefits of our solution include the following: Enhances Broadband Operations. The SMS bridges the operational gap between "last mile" access networks that serve businesses and homes and the backbone routers used by service providers. The SMS accepts a large concentration of high-speed data traffic from multiple access concentrators and translates it to an IP data stream, relieving backbone routers of traffic translation and management responsibilities. In this process, the SMS manages individual subscriber connections and reduces the number of routers required for widespread deployment of broadband services. Supports All Major Access Technologies. The SMS provides and supports a consistent operational model across major access technologies including DSL, cable, wireless and dial, and can be deployed by all types of access providers, including ILECs and CLECs, cable MSOs and service providers. For example, a service provider, using the SMS, can offer DSL services today and later add or resell a cable or wireless service offering through the same SMS. With the SMS, providers are able to utilize one product and one familiar operational model to deliver multiple broadband access technologies to serve thousands of subscribers. 31 34 Facilitates Rapid and Scalable Deployment. The SMS supports service providers' existing access, accounting and management control systems, including RADIUS, enabling them to quickly deploy high-speed access and achieve rapid time-to-market for significant revenue-generating services. RADIUS is the industry standard database used by traditional remote access servers, or RASs. We designed our solution to be interoperable with equipment from multiple vendors, for easy integration into existing network environments. For example, the SMS has built-in support for the major DSL protocols and implementations. Additionally, the SMS is compatible with existing backbone routers and leverages the high-performance levels of these routers. Once in place, the SMS architecture is inherently more scalable than a router-based architecture. The SMS 1000 today supports up to 4,000 simultaneous subscriber sessions, over fifteen times the number of subscribers supported by conventional routers. Provides Platform for the Delivery of Value-Added Services. Our solution enables providers to create and market new service offerings that leverage basic broadband connectivity and capabilities. The multiple context functionality of the SMS lets service providers configure subscribers to access multiple services across a single physical link. For example, a telecommuter can access a corporate network from home while his or her family simultaneously accesses consumer Internet services through the same connection. Thus, a service provider previously generating a flat monthly access fee can offer value-added services and generate multiple revenue streams through "re-profiling". In addition, a wholesale provider of network services can partition high-speed transport services among multiple service providers or corporate customers through a single SMS with "re-selling". A large provider can use this capability to provide wholesale access to up to 20 smaller providers per SMS chassis -- a significant improvement for wholesale transactions. Simplifies End-User Administration and Support. Our approach allows easy configuration and administration of end-user broadband modems, reducing service providers' costs and enhancing their ability to rapidly deploy services to thousands of subscribers. For example, we utilize point-to-point over Ethernet, or PPPoE, technology to provide individualized services for multiple users sharing a single connection, such as multiple PCs in a home or office. The SMS also supports a variety of means to manage users, resulting in reduced training and lower operational expenses. STRATEGY Our objective is to be the leading provider of advanced solutions that enable carriers, cable MSOs and service providers to rapidly deploy high-speed broadband access to the Internet and corporate networks. Key elements of our strategy include the following: Extend Leadership in the Carrier and Service Provider Market. We are focused on delivering subscriber management solutions to carriers and service providers and have established early market leadership in the DSL market through account wins in several major networks. We currently have orders or installations at four of the five RBOCs, including SBC, Bell Atlantic, Bell South and Ameritech, as well as installations at other national and international carriers, including GTE and Korea Telecom. Additionally, we have several leading service providers as customers, including UUNET, a subsidiary of MCI Worldcom, Earthlink, Concentric, Southwestern Bell Information Services and Pacific Bell Internet, subsidiaries of SBC, and @Work, a division of @Home. We plan to extend our market leadership position by continuing to invest in sales and marketing efforts that let us further penetrate existing accounts, develop early customer relationships and win new service provider accounts for all types of broadband access. Penetrate Cable and Wireless Broadband Markets. We intend to leverage our leadership position in DSL subscriber management to penetrate other critical broadband access markets, such as cable, wireless and fiber-to-the-curb. We plan to continue to enhance our solutions that support multiple broadband access technologies and to expand our sales and marketing efforts accordingly. By offering 32 35 service providers the ability to support multiple broadband access technologies, we believe our solution will gain acceptance across multiple broadband access markets. Expand Global Distribution and Strengthen Strategic Relationships. We currently pursue a direct and indirect sales strategy to penetrate carrier, cable MSO and service provider organizations in North America, focusing primarily on large Internet service providers, or ISPs, ILECs and CLECs. We also target smaller service providers through VARs that participate in our authorized PowerPartners program. We are expanding our presence globally by increasing the scope and size of our sales force, including adding dedicated sales resources in both Europe and Asia. To further support our global sales objectives, we have established strategic relationships with leading communications and networking companies that have significant customer relationships in place. These partners, including Nortel Networks and Nokia, have enabled us to rapidly expand our global sales presence and to leverage their established relationships with major carriers and service providers. Leverage Leading Software Capabilities. We believe our Access Operating System, or AOS, software differentiates our solution and gives us a competitive advantage in the marketplace. Leveraging our highly experienced team of software engineers, we intend to continue to enhance our wholesale, security, bandwidth management, subscriber accounting and billing, and network management capabilities. We expect our current and future products will share a common software foundation and offer a consistent operational model. Enable New Consumer and Business Services. We believe our solution provides a highly flexible platform for the creation and delivery of new value-added services. We will continue to work directly with our customers to develop features and functionality that further enhance the ability of service providers to deliver profitable new broadband-based services. We believe this approach will increase the value we offer in both new and existing installations, as well as contribute to the continued business success of our customers. Examples of these new services include tiered "gold" or "platinum" high-availability services, virtual private networks, or VPNs, and bundled teleworker services. Deliver Broad Product Family. Our flagship SMS 1000 is targeted at carriers, cable MSOs and large service providers. We have expanded our product offering with the SMS 500, which is targeted at service provider facilities with fewer subscribers than those using the SMS 1000. Our strategy is to continue to leverage our AOS software across multiple access technologies and products. In so doing, we intend to address a range of functionality, density and application requirements of carriers, cable MSOs and small and large service providers. CUSTOMERS The following is a representative list of companies that have purchased our products and services: SERVICE PROVIDERS: CARRIERS: RESELLERS: Concentric Ameritech ECI Telecom Earthlink AT&T Wireless Fujitsu Flashcom Bell Atlantic GTI Pacific Bell Internet, Bell South Lucent a subsidiary of SBC GTE Nokia Southwestern Bell Information Systems, Korea Telecom Nortel Networks a subsidiary of SBC SBC Sumitomo Electronics UUNET, a subsidiary of MCI Worldcom Sprint Verio Williams Communications @Work, a division of @Home
The following examples illustrate how organizations are using our products to deploy broadband service offerings. 33 36 NETWORK SERVICE PROVIDER One of the world's largest network service providers, or NSPs, announced that it intended to roll out its DSL service by early 1999. The rollout, which has the potential to be the largest DSL deployment offered by any service provider to date, includes two different categories of DSL services: (1) Symmetrical DSL, or SDSL, services designed to support business applications such as Web hosting, e-commerce and bulk file transfer; and (2) Asymmetrical DSL, or ADSL, services targeted at consumer applications such as Internet surfing, home shopping and interactive games. In order to offer a broad deployment on a rapid time schedule, the service provider required a solution that would enable it to quickly and easily scale to large proportions. The NSP chose us to anchor its DSL service offering, and plans to deploy the SMS 1000 as an edge device that performs all of the aggregation, management and conversion functions necessary to deliver router-ready IP data streams to the backbone. The NSP will aggregate as many as 4,000 subscribers per SMS 1000 over high-speed links issuing from various central office sources. The NSP will be able to handle the extra volume of traffic resulting from high-speed DSL without adding any more router power to its backbone. Using the SMS 1000's powerful multiple context functionality, the NSP will deliver wholesale DSL services. INTERNET SERVICE PROVIDER One of the largest consumer ISPs, was interested in adding broadband access to its portfolio of access services. The ISP was already a leader in traditional dial-up access with hundreds of thousands of subscribers, and was looking to add cable access and ADSL access over various transfer modes. Specifically, the ISP received DSL capacity from strategic wholesale partners, and cable capacity through an affiliated cable MSO. The ISP was facing the issue of how to cost-effectively aggregate subscriber traffic from these different access technologies while maintaining its existing, and highly successful, operational model. By using our SMS 1000 in its large points-of-presence, or POPs, the ISP was able to aggregate its different DSL and cable feeds using a single vendor's device. Additionally, because the SMS 1000 was fully integrated with the ISP's existing RADIUS billing and authentication systems, the ISP was able to leverage and retain its many years of operating expertise and continue using its existing operational model with new broadband service offerings. INCUMBENT LOCAL EXCHANGE CARRIER AFFILIATE An unregulated affiliate of an ILEC, had been operating trials of its DSL Internet access service in a limited number of communities and households for over a year and planned to announce a much broader service deployment and breakthrough pricing levels. The ILEC affiliate needed a highly scalable and production-proven solution to handle the massive demand it expected to receive for its services. It was looking for a solution that would improve upon the router-based architecture already in use in the service trials. The ILEC affiliate selected our SMS 1000 as the subscriber management platform to aggregate subscriber traffic in its service. Today, SMS 1000s are being deployed in the ILEC affiliate's DSL-enabled POPs to manage live traffic from thousands of subscribers, and the service deployment has been scaling rapidly. SALES AND MARKETING We sell our products through a direct sales force, VARs, and strategic distribution partners. Direct Sales. Our direct sales force is located in North America and is focused on the largest service provider, cable MSO and carrier opportunities. As of February 28, 1999, our direct sales force 34 37 consisted of 35 persons located in various cities throughout North America. In addition, we are currently building sales organizations in Europe and Asia, both of which will be focused on large international accounts. VARs. We sell our SMS solutions through VARs and network integrators that participate in our authorized PowerPartners reseller program. PowerPartners are responsible for system installation, preliminary technical support and follow-on services to customers in their respective locations. Our authorized PowerPartners program provides a wide range of sales and marketing support materials, sales and technical training courses, a partners-only web site, and various cooperative marketing opportunities. Strategic Distribution Partners. In order to further support our global sales objectives, we have established strategic relationships with leading communications and networking companies that have significant customer relationships already in place. These partners, including Nortel Networks and Nokia, have enabled us to rapidly expand our global sales presence and to leverage their established relationships with major carriers and service providers. Marketing. We have a variety of marketing programs and initiatives to support the sale and distribution of our products. The audience for these activities includes our sales organization, strategic partners and authorized resellers, existing and prospective customers, and the trade press, analysts and others who are influential in the industry. Marketing activities include participation in technical conferences, preparation of sales tools, business cases, competitive analyses and other marketing collateral, sales training, publication of customer deployments, new product information and educational articles in industry journals, maintenance of our World Wide Web site and direct marketing to prospective customers. We also participate in leading industry tradeshows, such as Networld + InterOp at Las Vegas, where we received an award for Best of Show in May 1998 in the Wide Area Network, or WAN, and remote access devices category. PRODUCTS AND TECHNOLOGY Our SMS solutions enable broadband service providers to deliver high-speed Internet access and services by bridging the operational gap between high-speed access equipment in the telco central office or cable/wireless headend and network service provider backbone routers. Whether deployed by telecommunications carriers at their regional access points, by cable MSOs at a headend or by service providers at a point-of-presence, or POP, the SMS accepts a large concentration of high-speed data traffic from such devices as DSL access multiplexers, or DSLAMs, Cable Modem Termination Systems, or CMTSs, and wireless termination systems. The SMS applies scalable user configuration and management to the data streams, and then performs all of the translations necessary to convert the traffic to IP, relieving the service provider backbone routers of frame translations that can cause congestion on high-volume networks. DESCRIPTION OF THE SMS PRODUCT FAMILY We currently offer two SMS solutions, (1) the SMS 1000 and (2) the SMS 500. SMS 1000. We began shipping the flagship SMS 1000 in December 1997. To date, our customers for the SMS 1000 have included UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE, Ameritech, Bell South, Concentric, Earthlink, Flashcom, Korea Telecom, Verio and @Work, a division of @Home. Each SMS 1000 today can support up to 4,000 simultaneous subscribers and is targeted at major ISPs, ILECs, CLECs and cable MSOs. The chassis consists of six modular interface slots, which can be populated with modules supporting DS-3 and OC-3 ATM, DS-3 Frame Relay, 10/100 megabit Ethernet and other transmission protocols. 35 38 SMS 500. Targeted initially for service provider facilities with fewer subscribers than those using the SMS 1000, we released the SMS 500 for general availability in March 1999. The SMS 500 is a smaller chassis with two modular interface slots and supports up to 1,000 simultaneous subscribers. The SMS 500 supports ATM, Frame Relay and 10/100 megabit Ethernet, as well as T-1 connections. ACCESS OPERATING SYSTEM SOFTWARE Our Access Operating System software, or AOS, is an advanced operating system developed to optimize the subscriber management and routing functions in our SMS products. AOS operates on both the SMS 500 and SMS 1000, and was developed specifically to support the aggregation of large numbers of subscriber circuits. It supports a large variety of encapsulations in use in the networking industry today, and provides sophisticated traffic management features such as traffic shaping and rate policing. In addition, our AOS supports the routing and bridging of IP packets and is capable of running dynamic routing protocols. It supports authentication mechanisms such as Challenge Handshake Authentication Protocol, or CHAP, and Password Authentication Protocol, or PAP, and provides tools necessary to manage a large network of subscribers. AOS supports the unique capability to dynamically bind subscriber sessions to services. This capability enables dynamic service selection to be deployed by carriers and service providers alike. The AOS also supports the Layer 2 Tunneling Protocol, or L2TP, which is critical to the deployment of virtual private networks by service providers. We are a co-author of the PPP-over-Ethernet specification, or PPPoE, a protocol that greatly simplifies broadband access and service provider selection, and the PPPoE functionality in our AOS is a leading implementation. Another distinguishing feature of our AOS is its support for multiple contexts, which allows a service provider to partition a single SMS unit into as many as twenty multiple virtual logical devices. Some of the key functions that our AOS supports include: Policing and Rate Limiting. Policing and rate limiting supports the creation of different service classes and provides service providers with predictable traffic behavior for better management of their networks. Routing Protocol Support. AOS includes support for certain popular routing protocols. In addition, we will continue to leverage and expand the routing protocol support that our SMS product line offers. Layer 2 Tunneling Protocol (L2TP). We support Layer 2 Tunneling Protocol, or L2TP, the standard method of building a virtual private network, or VPN, allowing fixed and mobile users, including telecommuters, to simulate a private network using a shared infrastructure, such as the Internet. VPNs also allow mobile users to make secure connections to their corporate intranets or extranets over the public Internet. Web-based Management. The Web-based management capabilities in our AOS allow service providers to streamline operations and simplify troubleshooting through a common, easy-to-use browser interface. Bulk Statistics. The bulk statistics capabilities in our AOS allow service providers access to information that enables them to provide efficient storage and transfer of high volume accounting data. RESEARCH AND DEVELOPMENT We have assembled a team of highly experienced networking engineers with experience at leading communications companies. Our engineering expertise includes routers and routing protocols, access products, ATM/Frame Relay switching, WAN interfaces and network management. As of February 28, 1999, we employed 51 engineers, with plans to continue expanding all functional areas of the engineering organization. During 1998 we spent $5.7 million on research and development. 36 39 Our research and development process is driven by market demand. Product development begins with a comprehensive functional product specification based on input from the product management and sales organizations. In addition, we value feedback from customers and have incorporated a significant amount of customer-requested functionality to date. We are also active in industry bodies and standards committees and utilize information from these organizations in the product development process. We are focusing development efforts on, among other things, supporting carrier services and additional industry standards, expanding the capacity of existing products and extending network management capabilities. In addition, we are committed to extending the functionality of our AOS software to enable additional competitive advantage for our customers. CUSTOMER SERVICE AND SUPPORT Our customer service and support organization installs and maintains products sold in North America by our direct sales force, as well as certain products sold by our authorized resellers and partners. Generally, our strategic distribution partners and authorized resellers provide installation and first-level, or preliminary, support to their customers, while we provide backup support. Our Technical Assistance Center, or TAC, employs systems engineers who work closely with our direct sales personnel, partners and resellers to assist end users with post-sales support issues. We have retained field systems engineers to provide pre-sales support and installation services for direct sales customers. MANUFACTURING Our manufacturing operations consist primarily of prototype development, materials planning and procurement, final assembly, testing and quality control. We use several independent suppliers to provide certain printed circuit boards, chassis and subassemblies. We subcontract substantially all of our manufacturing to Electromax, located in San Jose, California. In addition, we use a combination of standard parts and components obtained through Wyle Electronics, located in Santa Clara, California. Several key components are purchased from sole or limited sources of supply. See "Risk Factors -- We are dependent on a single contract manufacturer and some of the key components in our products come from single or limited sources of supply." COMPETITION The broadband access markets we are targeting, including DSL, cable and wireless, are new and rapidly evolving and we expect these markets to become highly competitive in the future. In addition, we expect that new competitors will emerge as the market for broadband access itself evolves due to technological innovation and regulatory changes. We encounter current or potential competition from public and private companies providing backbone routers, access concentrators and subscriber aggregation systems. Cisco, the leading provider of backbone routers, offers products that compete directly with our SMS products, and also provides a comprehensive range of broadband access systems. We expect companies that offer access concentrators and routers, such as Nortel Networks and Ascend, which recently announced its pending acquisition by Lucent, to incorporate some subscriber management functionality into their products. In addition, there are private companies that provide subscriber management features in access concentrators or routing platforms. Some of our current and potential competitors, including Cisco, Alcatel and Lucent/Ascend are large public companies that have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, competitors with large market capitalizations or cash reserves are much better positioned than we are to acquire other companies, including our competitors, and thereby acquire new technologies or products that may displace our product lines. Any 37 40 of these acquisitions could give the acquiring competitor a strategic advantage that would materially adversely affect our business, results of operations and financial condition. Many of our competitors have significantly more established customer support and professional services organizations than we do. In addition, many of our competitors have more extensive customer bases and broader customer relationships than us, including relationships with many of our current and potential customers. Moreover, these competitors often have broader product offerings than we do. These companies can leverage their customer relationships and broader product offerings and adopt aggressive pricing policies to gain market share. As a result, we may not be able to maintain a competitive position against current or future competitors. Our failure to maintain and enhance our competitive position within the market could seriously harm our business, results of operations and financial condition. PATENTS AND PROPRIETARY RIGHTS Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patent, trademark, copyright and trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. These legal protections afford only limited protection for our technology. We have one patent application pending in the United States and we have no foreign patents or patent applications. Our pending patent application may not result in the issuance of any patents. If any patent is issued, it might be invalidated or circumvented or otherwise fail to provide us any meaningful protection. In addition, we cannot be certain that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose our intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our failure to protect our intellectual property effectively could have a material adverse effect on our business, financial condition or results of operations. We have licensed technology from third parties for incorporation into our units, and we expect to continue to enter into such agreements for future products. Our licenses may result in royalty payments to third parties, the cross-license of technology by us or payment of other consideration. If our arrangements are not concluded on commercially reasonable terms, our business, financial condition or results of operations could be materially adversely affected. EMPLOYEES At February 28, 1999, we had a total of 117 employees, all of whom were based in the United States. Of the total, 51 were in research and development, 41 were engaged in sales, marketing and business development, 7 were engaged in customer support services operations, and 18 were in administration, finance and operations. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good. FACILITIES Our principal administrative, sales, marketing and research and development facility occupies approximately 32,000 square feet in Sunnyvale, California pursuant to a lease that expires in September 1999. We believe that our existing facilities are adequate until this lease expires and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. We have sales offices throughout the United States, including regional sales offices in California, Colorado, Virginia and Washington. LEGAL PROCEEDINGS We are not aware of any pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, results of operations or financial condition. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third-party trademarks and other intellectual property rights. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 38 41 MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth certain information regarding our directors and officers as of December 31, 1998:
NAME AGE POSITION ---- --- -------- Dennis L. Barsema(1)................. 44 President, Chief Executive Officer and Director Geoffrey C. Darby(1)................. 52 Vice President of Finance, Chief Financial Officer and Secretary Randall J. Kruep(1).................. 38 Vice President of Worldwide Sales William E. Miskovetz(1).............. 40 Vice President of Engineering Larry D. Blair....................... 46 Vice President of Marketing David D. Childers.................... 51 Director of Customer Support Gilles G. Concordel.................. 37 Vice President of Business Development Gaurav Garg.......................... 33 Vice President of Business Development and Strategic Planning Edward S. Harriman................... 44 Chief Technology Officer Sean K. Laskey....................... 37 Vice President of Operations Carrie J. Perzow..................... 42 Vice President of Human Resources William M. Salkewicz................. 38 Director of Software Development Daniel A. Simone..................... 39 Vice President of Product Management James R. Flach(2).................... 51 Director Pierre R. Lamond(3).................. 68 Director, Chairman of the Board Daniel J. Warmenhoven(2)(3).......... 48 Director
- ------------------------- (1) Executive officer (2) Member of compensation committee (3) Member of audit committee Dennis L. Barsema has served as our President and Chief Executive Officer and has been a director since joining us in November 1997. Prior to that time, Mr. Barsema was the Senior Vice President and General Manager at Centigram, a telecommunications company, from January 1996 to November 1997. From October 1993 to December 1995, he served as Vice President at SoftSwitch, a telecommunications company. Prior to that time, he served as Vice President at Primary Access and AT&T Paradyne. Mr. Barsema holds a BS in Business Management from Northern Illinois University. Geoffrey C. Darby has served as our Vice President of Finance, Chief Financial Officer and Secretary since August 1998. From August 1994 to July 1998, he served as Vice President of Finance and Chief Financial Officer of Visioneer, a digital imaging company. From February 1989 to August 1994, he served as Vice President of Finance and Chief Financial Officer of Megatest, a provider of testing equipment for the semiconductor industry. Prior to that time, Mr. Darby was Assistant Treasurer of Compaq from February 1987 to December 1988. Mr. Darby holds a BS (Hons) from Southampton University in England and is a Chartered Accountant in the United Kingdom. Randall J. Kruep has served as our Vice President of Worldwide Sales since January 1999. From September 1997 to January 1999, Mr. Kruep served as our Vice President of Sales. Previously, Mr. Kruep was Senior Director of Telecom Sales for Fore Systems, an ATM/switching company, from May 1996 to July 1997. Prior to that time, he was a Regional Sales Manager at Cisco, a networking company, from May 1992 to May 1996. From May 1982 to May 1992 he was Director of Sales at Motorola in the Information Systems Group. Mr. Kruep holds a BA in Finance and Communications from Southern Illinois University and an MBA from Fontbonne College. 39 42 William E. Miskovetz has served as our Vice President of Engineering since May 1998. Previously, he was Vice President of Engineering at FreeGate, a networking company, from January 1997 to May 1998. From May 1991 to January 1997, he held various engineering and management positions at Cisco, a networking company. Mr. Miskovetz holds a BS in Computer Science from the University of Illinois. Larry D. Blair has served as our Vice President of Marketing since January 1998. Previously, Mr. Blair was Vice President of Marketing at Ipsilon Networks, a high-performance IP switch company. Prior to that time, Mr. Blair was a co-founder and the Vice President of Marketing at Kalpana, an ethernet switch company, from January 1990 to June 1995. Mr. Blair holds a BSEE from Rochester Institute of Technology. David D. Childers has served as our Director of Customer Support since July 1998. Previously, Mr. Childers was Senior Manager of Customer Support at Ascend, a networking company, from April 1995 to July 1998. From May 1975 to April 1995, Mr. Childers held various management positions at US West, a telecommunications company. Mr. Childers holds an AA from Community College Denver. Gilles G. Concordel is one of our co-founders and has served as Vice President of Business Development since December 1996. From November 1994 to December 1996, Mr. Concordel worked for Pacific Telesis, a telecommunications company, as Director of Multimedia Technology. From March 1991 to October 1994, he headed the multimedia business unit at Teknekron Communications Systems, a communications systems company. Mr. Concordel holds a Masters degree in Physics/Math from Ecole Polytechnique, a Masters degree in Telecommunications from Ecole Nationale Superieure des Telecommunications and an MBA from HEC, France/University of California at Los Angeles. Gaurav Garg is one of our co-founders and has served as our Vice President of Business Development and Strategic Planning since August 1996. Previously, Mr. Garg was a principal engineer at Bay Networks, a networking company, from July 1990 to July 1996. Mr. Garg holds BAEE, BACS and MSEE degrees from Washington University at St. Louis. Edward S. Harriman has served as our Chief Technology Officer since March 1999 and has been with Redback Networks since November 1996. Prior to joining Redback Networks, Mr. Harriman was a Consulting Engineer at Bay Networks, a networking company, from February 1989 to November 1996. Previously, Mr. Harriman was Principal Engineer at Bolt Beranek Newman, an Internet company, from February 1980 to February 1989. Mr. Harriman received his BA in Electrical Engineering and Computer Science from the Massachusetts Institute of Technology. Sean K. Laskey has served as our Vice President of Operations since October 1997. Previously, Mr. Laskey was Director of Operations at Tut Systems, a provider of advanced communications products from July 1996 to July 1997. From September 1990 to June 1996, Mr. Laskey held various management positions at Network Peripherals, a maker of networking equipment. Prior to that time, he was a Manufacturing and Materials Manager at Sun Microsystems, a software and computer systems company, from April 1987 to September 1990. Carrie J. Perzow has served as our Vice President of Human Resources since October 1998. From February 1995 to September 1998, she was the Vice President of Human Resources for Centigram, a telecommunications company. Prior to that time, she held various management positions at Sun Microsystems, a software and computer systems company, from June 1992 to January 1995. Ms. Perzow previously worked in various HR management positions at 3Com Corporation and Scientific Micro Systems. Ms. Perzow holds a BA in Sociology from the University of California at Santa Barbara. William M. Salkewicz is one of our co-founders and has served as our Director of Software Development since December 1996. Previously, Mr. Salkewicz was a Principal Engineer at Bay Networks, a networking company, from February 1992 to November 1996. From June 1988 to February 40 43 1992, Mr. Salkewicz was a Principal Engineer at Digital Equipment Corporation, a maker of computer peripherals. Mr. Salkewicz holds a BSEE and a BSCS from Western New England College. Daniel A. Simone has served as our Vice President of Product Management since January 1997. Previously, Mr. Simone worked at Bay Networks, a networking company, from June 1992 to January 1997 as Director of Product Management. Prior to Bay Networks, Mr. Simone held various positions at Motorola, a maker of communications equipment. Mr. Simone holds a BSEE from Marquette University, an MSEE from Marquette University and an MBA from the University of Chicago. James R. Flach has served as one of our directors since January 1997. From January 1997 to November 1997, Mr. Flach served as our President and Chief Executive Officer. Mr. Flach has been a partner of Accel Partners, a venture capital firm, since September 1992. He currently serves as Chairman of Sentient Networks, a multi-service access switch company, and is also a director of Hybrid Networks, a broadband access equipment company. Additionally, Mr. Flach serves on the board of a number of private companies. Mr. Flach holds a BS in Physics from Rensselaer Polytechnic Institute and an MS in Applied Mathematics from the Rochester Institute of Technology. Pierre R. Lamond has served as our Chairman of the Board since November 1996. Mr. Lamond has been a partner with Sequoia Capital, a venture capital firm, since 1981. He is currently the Chairman of CombiChem, a computational drug discovery company, and Vitesse Semiconductor, a semiconductor company. Additionally, Mr. Lamond serves on the board of a number of private companies. Prior to joining Sequoia, Mr. Lamond was a founder and technical director of National Semiconductor and the general manager of its Integrated Circuit Division. Mr. Lamond holds an MS in Electrical Engineering from Northeastern University and an MS in Physics from Toulouse University. Daniel J. Warmenhoven has served as one of our directors since January 1998. Mr. Warmenhoven has been President, Chief Executive Officer and a Director of Network Appliance, a network data storage devices company, since October 1994. Prior to that time, Mr. Warmenhoven served as Chairman, President and Chief Executive Officer of Network Equipment Technologies. Prior to joining Network Equipment Technologies, he spent five years with Hewlett-Packard serving in a number of senior management positions. Before that time, he served thirteen years with IBM. Mr. Warmenhoven holds a BSEE from Princeton University. Our executive officers are appointed by our board of directors and serve until their successors are elected or appointed. There are no family relationships among any of our directors or executive officers. BOARD COMMITTEES The board of directors has a compensation committee and an audit committee. Compensation Committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding all forms of compensation provided to our executive officers and directors, including stock compensation and loans. In addition, the compensation committee reviews and makes recommendations on bonus and stock compensation arrangements for all of our employees. As part of the foregoing, the compensation committee also administers our 1999 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and 1999 Directors' Option Plan. The current members of the compensation committee are Messrs. Flach and Warmenhoven. Audit Committee. The audit committee of the board of directors reviews and monitors our corporate financial reporting and our internal and external audits, including, among other things, our internal audit and control functions, the results and scope of the annual audit and other services provided by our independent auditors and our compliance with legal matters that have a significant impact on our financial reports. The audit committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider 41 44 and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Messrs. Lamond and Warmenhoven. DIRECTOR COMPENSATION Directors do not receive any cash fees for their service on the board or any board committee, but they are entitled to reimbursement for all reasonable out-of-pocket expenses incurred in connection with their attendance at board and board committee meetings. Mr. Warmenhoven received options to purchase 75,000 shares of common stock when he joined the board of directors. Following this offering, Messrs. Lamond and Flach will each receive an initial grant of options to purchase 25,000 shares of common stock and all directors will receive automatic annual option grants under our 1999 Directors' Option Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of the board of directors currently consists of Messrs. Flach and Warmenhoven. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. INDEMNIFICATION In March 1999, the board of directors authorized Redback Networks to enter into indemnification agreements with each of our directors and executive officers. The form of indemnification agreement provides that we will indemnify our directors and executive officers to the fullest extent permitted by Delaware law, our certificate of incorporation and our bylaws, against any and all of their expenses incurred by reason of their status as a director or executive officer. Our certificate of incorporation and bylaws each contain certain provisions relating to the limitation of liability and indemnification of our directors and officers. Our certificate of incorporation provides that our directors will not be personally liable to Redback Networks or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability - for any breach of the director's duty of loyalty to Redback Networks or our stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - in respect of certain unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derives any improper personal benefit. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware General Corporation law. Our certificate of incorporation also provides that if the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. The foregoing provisions of our certificate of incorporation are not intended to limit the liability of our directors or officers for any violation of applicable federal securities laws. 42 45 In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law; - we may, in our discretion, indemnify other current and former employees of Redback Networks as provided by the Delaware General Corporation Law; - to the fullest extent permitted by the Delaware General Corporation Law, we are required to advance all expenses incurred bY our directors and officers in connection with a legal proceeding (subject to certain exceptions); - the rights conferred in the bylaws are not exclusive; and - any retroactive amendment of our bylaw provisions relating to indemnification shall not affect any indemnification rights or obligations relating to any pre-existing state of facts. EXECUTIVE COMPENSATION The following table sets forth information with respect to compensation for the fiscal year ended December 31, 1998 paid by us for services rendered by our Chief Executive Officer and our other executive officers whose total salary and bonus for such fiscal year exceeded $100,000, collectively referred to below as the Named Executive Officers: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING OTHER ANNUAL NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($) --------------------------- --------- -------- ------------ --------------- Dennis L. Barsema.......................... $180,000 $ 90,000 $ -- -- President, Chief Executive Officer and Director Geoffrey C. Darby(1)....................... 72,000 7,000 225,000 -- Vice President of Finance, Chief Financial Officer and Secretary Randall J. Kruep........................... 90,000 135,422(2) 75,000 53,000(3) Vice President of Worldwide Sales William E. Miskovetz(4).................... 93,750 15,000 317,500 -- Vice President of Engineering
- ------------------------- (1) Represents the total amount of compensation Mr. Darby received in 1998 for the portion of the year during which he was one of our executive officers. Mr. Darby joined us in August 1998. See "Management -- Directors and Officers." (2) Represents commission income. (3) Represents reimbursement for relocation expenses. (4) Represents the total amount of compensation Mr. Miskovetz received in 1998 for the portion of the year during which he was one of our executive officers. Mr. Miskovetz joined us in May 1998. 43 46 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the year ended December 31, 1998 to each of the Named Executive Officers. No stock appreciation rights were granted to these individuals during that year.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED -------------------------------------------------------- ANNUAL RATES OF NUMBER OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(4) OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------- NAME GRANTED(#)(1) 1998(2) ($/SH)(3) DATE 5%($) 10%($) ---- ------------- --------------- --------- ---------- -------- --------- Dennis L. Barsema(5)........ -- --% $ -- -- -- -- Geoffrey C. Darby........... 125,000 4.6 .80 8/3/08 $62,889 $159,374 100,000 3.7 .80 8/3/08 50,312 127,499 Randall J. Kruep(6)......... 30,000 1.1 .60 5/27/08 11,320 28,687 27,333 1.0 3.00 12/15/08 51,569 130,685 17,667 .7 3.00 12/15/08 33,332 84,470 William E. Miskovetz........ 247,500 9.1 .30 4/13/08 46,695 118,335 30,000 1.1 1.00 9/1/08 18,867 47,812 20,000 .7 3.00 12/15/08 37,734 95,625 20,000 .7 3.00 12/15/08 37,734 95,625
- ------------------------- (1) Each of the options listed in the table is immediately exercisable. The shares purchasable under the options may be repurchased by Redback Networks at the original exercise price paid per share if the optionee ceases service before vesting in such shares. The repurchase right lapses and the optionee vests as to 25% of the option shares upon completion of 12 months of service from the vesting start date and the balance in a series of equal monthly installments over the next three years of service thereafter. The option shares will vest upon an acquisition of Redback Networks by merger or asset sale, unless our repurchase right with respect to the unvested option shares is transferred to the acquiring entity. In addition, the repurchase right as to Mr. Barsema's shares will lapse in full, and the vesting as to Mr. Darby's shares will be accelerated in full if, upon a merger or asset sale, they are not offered a position equal to or better than their existing position. In the event of a merger or asset sale, the vesting on Mr. Kruep's shares will be redetermined as if the shares vested over a three, rather than four, year period. (2) Based on a total of 2,709,100 options granted to our employees during the 12 months ended December 31, 1998. (3) The exercise price was equal to the fair market value of our common stock as valued by our board of directors on the date of grant. In determining this fair market value, the board of directors took into account the purchase price paid by investors for shares of our preferred stock (taking into account the liquidation preferences and other rights, privileges and preferences associated with such preferred stock) and an evaluation by the board of directors of our revenues, operating history and prospects. The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. We may also finance the option exercise by lending the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise. (4) The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the estimated fair market value on the date of grant appreciates at the indicated rate for the 44 47 entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. See footnote 3 for information on how the fair market value of our common stock was estimated. The initial public offering price is higher than the estimated fair market value on the date of grant, and the potential realizable value of the option grants would be significantly higher than the numbers shown in the table if future stock prices were projected to the end of the option term by applying the same annual rates of stock price appreciation to the initial public offering price. (5) Does not include 1,053,480 shares of restricted stock granted to Mr. Barsema in December 1997. See "Management -- Certain Transactions." (6) Does not include 300,000 shares of restricted stock granted to Mr. Kruep in August 1997. See "Management -- Certain Transactions." AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers the number of options exercised during the fiscal year ended December 31, 1998 and the number and value of securities underlying unexercised options that are held by the Named Executive Officers as of December 31, 1998. No stock appreciation rights were exercised by the Named Executive Officers in fiscal year 1998, and no stock appreciation rights were outstanding at the end of that year.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, DECEMBER 31, SHARES 1998(#)(2) 1998($)(3) ACQUIRED ON VALUE ----------------- ----------------- NAME EXERCISE(#) REALIZED($)(1) VESTED UNVESTED VESTED UNVESTED ---- ----------- -------------- ------ -------- ------ -------- Dennis L. Barsema.............. -- $ -- -- -- -- $ -- Geoffrey C. Darby.............. -- -- -- 225,000 -- 495,000 Randall J. Kruep............... 30,000 0 -- 45,000 -- -- William E. Miskovetz........... 97,500 0 -- 220,000 -- 465,000
- ------------------------- (1) Equal to the fair market value of the purchased shares on the option exercise date, less the exercise price paid for such shares. (2) The options are immediately exercisable for all of the option shares, but any shares purchased under those options will be subject to repurchase by Redback Networks, at the original exercise price paid per share, if the optionee ceases service with Redback Networks before vesting in such shares. The heading "Vested" refers to shares that are no longer subject to repurchase; the heading "Unvested" refers to shares subject to repurchase as of December 31, 1998. (3) Based on the fair market value of our common stock as determined by our board of directors at the end of 1998 of $3.00 per share, less the exercise price payable or paid for such shares. The fair market value of our common stock at the end of 1998 was estimated by the board of directors on the basis of the purchase price paid by investors for shares of our preferred stock (taking into account the liquidation preferences and other rights, privileges and preferences associated with the preferred stock) and an evaluation by the board of our revenues, operating history and prospects. The initial public offering price is higher than the estimated fair market value at fiscal year-end, and the value of unexercised options would be higher than the numbers shown in the table if the value were calculated by subtracting the exercise price from the initial public offering price. 45 48 STOCK PLANS 1999 STOCK INCENTIVE PLAN Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan on March 3, 1999, subject to stockholder approval. We have reserved 2,500,000 shares of our common stock for issuance under the 1999 Stock Incentive Plan. Any shares not yet issued under our 1997 Stock Plan on the date of this offering will also be available under the 1999 Stock Incentive Plan. On January 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically increase by 5% of the total number of shares of common stock that are outstanding at that time or by 1,500,000 shares, whichever is less. In general, if options or shares awarded under the 1999 Stock Incentive Plan or the 1997 Stock Plan are forfeited, then those options or shares will again become available for awards under the 1999 Stock Incentive Plan. We have not yet granted any options under the 1999 Stock Incentive Plan. Administration. The compensation committee of our board of directors administers the 1999 Stock Incentive Plan. The committee has the complete discretion to make all decisions relating to the interpretation and operation of our 1999 Stock Incentive Plan. The committee has the discretion to determine who will receive an award, what type of award it will be, how many shares will be covered by the award, what the vesting requirements will be (if any), and what the other features and conditions of each award will be. The compensation committee may also reprice outstanding options and modify outstanding awards in other ways. Eligibility. The following groups of individuals are eligible to participate in the 1999 Stock Incentive Plan: - Employees; - Members of our board of directors who are not employees; and - Consultants. Types of Award. The 1999 Stock Incentive Plan provides for the following types of award: - Incentive stock options to purchase shares of our common stock; - Nonstatutory stock options to purchase shares of our common stock; and - Restricted shares of our common stock. Options. An optionee who exercises an incentive stock option may qualify for favorable tax treatment under Section 422 of the Internal Revenue Code of 1986. Nonstatutory stock options, however, do not qualify for such favorable tax treatment. The exercise price for incentive stock options granted under the 1999 Stock Incentive Plan may not be less than 100% of the fair market value of our common stock on the option grant date. In the case of nonstatutory stock options, the minimum exercise price is 30% of the fair market value of our common stock on the option grant date. Optionees may pay the exercise price by using: - Cash; - Shares of common stock that the optionee already owns; - A full-recourse promissory note, except that the par value of newly issued shares must be paid in cash; - An immediate sale of the option shares through a broker designated by us; or - A loan from a broker designated by us, secured by the option shares. 46 49 Options vest at the time or times determined by the compensation committee. In most cases, our options vest over the four-year period following the date of grant. Options generally expire 10 years after they are granted, except that they generally expire earlier if the optionee's service terminates earlier. The 1999 Stock Incentive Plan provides that no participant may receive options covering more than 1,000,000 shares in the same year, except that a newly hired employee may receive options covering up to 2,000,000 shares in the first year of employment. Salary Reduction Option Program. The compensation committee may offer our employees, non-employee directors and consultants the opportunity to convert a portion of their salaries or fees into nonstatutory stock options. Individuals who have been selected for this program, if they wish to participate, must file an irrevocable election before the end of a calendar year. In the election, they must specify how much they would like to contribute during the next year, within the limits established by the committee. On the first business day in January of the next year, we will grant them an option under the 1999 Stock Incentive Plan. The exercise price of this option will be equal to one-third of the market price of our stock on the date of grant. The number of shares covered by the option will be equal to the amount of the salary or fee reduction that the participant elected, divided by an amount equal to two-thirds of the market price of our stock on the date of grant. As a result, the total discount under the option (the market price of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the dollar amount of the reduction in the optionee's compensation for the calendar year in which the grant is made. The option will generally become exercisable in 12 equal monthly installments, as the optionee completes each calendar month of service in the year of the grant. The option generally remains exercisable for 10 years from the date of grant, even if the optionee's service terminates earlier. The other terms applicable to grants under this program are substantially the same as the terms described above for regular nonstatutory option grants. Restricted Shares. Restricted shares may be awarded under the 1999 Stock Incentive Plan in return for: - Cash; - A full-recourse promissory note, except that the par value of newly issued shares must be paid in cash; - Services already provided to us; and - In the case of treasury shares only, services to be provided to us in the future. Restricted shares vest at the time or times determined by the compensation committee. Change in Control. If a change in control of Redback Networks occurs, an option or restricted stock award under the 1999 Stock Incentive Plan will generally become fully vested. However, if the surviving corporation assumes the option or award or replaces it with a comparable award, then vesting accelerates only to the extent determined by the compensation committee. A change in control includes: - A merger of Redback Networks after which our own stockholders own 50% or less of the surviving corporation (or its parent company); - A sale of all or substantially all of our assets; - A proxy contest that results in the replacement of more than one-half of our directors over a 24-month period; or - An acquisition of 50% or more of our outstanding stock by any person or group, other than a person related to Redback Networks (such as a holding company owned by our stockholders). Amendments or Termination. Our board may amend or terminate the 1999 Stock Incentive Plan at any time. If our board amends the plan, it does not need to ask for stockholder approval of the 47 50 amendment unless applicable law requires it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless the board decides to terminate the plan earlier. 1999 EMPLOYEE STOCK PURCHASE PLAN Share Reserve and Administration. Our board of directors adopted our 1999 Employee Stock Purchase Plan on March 3, 1999, subject to stockholder approval. Our 1999 Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. We have reserved 1,000,000 shares of our common stock for issuance under the plan. On May 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically be restored to 1,000,000. In other words, the reserve will be increased by the number of shares that have been issued under the 1999 Employee Stock Purchase Plan during the prior 12-month period. The plan will be administered by the compensation committee of our board of directors. Eligibility. All of our employees are eligible to participate if they are employed by us for more than 20 hours per week and for more than five months per year. Eligible employees may begin participating in the 1999 Employee Stock Purchase Plan at the start of any offering period. Each offering period lasts 24 months. Overlapping offering periods start on May 1 and November 1 of each year. However, the first offering period will start on the effective date of this offering and end on April 30, 2001. Amount of Contributions. Our 1999 Employee Stock Purchase Plan permits each eligible employee to purchase common stock through payroll deductions. Each employee's payroll deductions may not exceed 15% of the employee's cash compensation. Purchases of our common stock will occur on April 30 and October 31 of each year. Each participant may purchase up to 1,000 shares on any purchase date (2,000 shares per year). But the value of the shares purchased in any calendar year (measured as of the beginning of the applicable offering period) may not exceed $25,000. Purchase Price. The price of each share of common stock purchased under our 1999 Employee Stock Purchase Plan will be 85% of the lower of: - The fair market value per share of common stock on the date immediately before the first day of the applicable offering period; or - The fair market value per share of common stock on the purchase date. In the case of the first offering period, the price per share under the plan will be 85% of the lower of: - The price per share to the public in this offering; or - The fair market value per share of common stock on the purchase date. Other Provisions. Employees may end their participation in the 1999 Employee Stock Purchase Plan at any time. Participation ends automatically upon termination of employment with Redback Networks. If a change in control of Redback Networks occurs, our 1999 Employee Stock Purchase Plan will end and shares will be purchased with the payroll deductions accumulated to date by participating employees, unless the plan is assumed by the surviving corporation or its parent. Our board of directors may amend or terminate the 1999 Employee Stock Purchase Plan at any time. Our Chief Executive Officer may also amend the plan in certain respects. If our board increases the number of shares of common stock reserved for issuance under the plan (except for the automatic increases described above), it must seek the approval of our stockholders. 1999 DIRECTORS' OPTION PLAN Share Reserve. Our board of directors adopted our 1999 Directors' Option Plan on March 3, 1999, subject to stockholder approval. We have reserved 200,000 shares of our common stock for issuance under the plan. On January 1 of each year, starting with the year 2000, the number of shares in the 48 51 reserve will automatically be restored to 200,000. In other words, the reserve will be increased by the number of shares that have been optioned under the 1999 Directors' Option Plan during the prior 12-month period. In general, if options granted under the 1999 Directors' Option Plan are forfeited, then those options will again become available for grants under the plan. The Directors' Option Plan will be administered by the compensation committee of our board of directors, although all grants under the plan are automatic and non-discretionary. Initial Grants. Only the non-employee members of our board of directors will be eligible for option grants under the 1999 Directors' Option Plan. Each non-employee director who did not previously receive options to buy our common stock will receive an initial option to buy 25,000 shares on the date of this offering. Each non-employee director who first joins our board after the effective date of this offering will receive an initial option for 25,000 shares. That grant will occur when the director takes office. The initial options vest in equal monthly installments over the four-year period following the date of grant, except that all vesting for the first year occurs at the close of that year. Annual Grants. At the time of each of our annual stockholders' meetings, beginning in 2000, each non-employee director who will continue to be a director after that meeting will automatically be granted an annual option for 10,000 shares of our common stock. However, a new non-employee director who is receiving the 25,000-share initial option will not receive the 10,000-share annual option in the same calendar year. The annual options vest in equal monthly installments over the one-year period following the date of grant. Other Option Terms. The exercise price of each non-employee director's option will be equal to the fair market value of our common stock on the option grant date. A director may pay the exercise price by using cash, shares of common stock that the director already owns, or an immediate sale of the option shares through a broker designated by us. The non-employee directors' options have a 10-year term, except that they expire one year after a director leaves the board (if earlier). If a change in control of Redback Networks occurs, a non-employee director's option granted under the 1999 Directors' Option Plan will become fully vested (unless the accounting rules applicable to a pooling of interests preclude acceleration). Vesting also accelerates in the event of the optionee's death or disability. Amendments or Termination. Our board may amend or terminate the 1999 Directors' Option Plan at any time. If our board amends the plan, it does not need to ask for stockholder approval of the amendment unless applicable law requires it. The 1999 Directors' Option Plan will continue in effect indefinitely, unless the board decides to terminate the plan. 49 52 CERTAIN TRANSACTIONS SALES OF STOCK TO INSIDERS Since August 30, 1996, we have issued and sold securities to the following persons who are executive officers, directors or principal stockholders of Redback Networks. These figures reflect activity through December 31, 1998.
SERIES A SERIES B SERIES C SERIES D TOTAL SHARES PREFERRED PREFERRED PREFERRED PREFERRED COMMON AS INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK(5) STOCK CONVERTED(6) ----------- --------- --------- --------- --------- --------- ------------ Dennis L. Barsema............... -- -- -- -- 1,053,480 1,053,480 Geoffrey C. Darby............... -- -- -- -- -- -- Randall J. Kruep................ -- -- -- -- 330,000 330,000 William E. Miskovetz............ -- -- -- -- 97,500 97,500 James R. Flach(7)............... -- 2,500,001 392,171 409,508 150,000 3,451,680 Pierre R. Lamond(8)............. 1,500,000 2,555,004 622,453 419,130 -- 5,096,587 Daniel J. Warmenhoven........... -- -- -- -- 75,000 75,000 Funds affiliated with Sequoia Capital(9).................... 1,500,000 2,455,002 612,703 419,130 -- 4,986,835 Funds Affiliated with Accel Partners(10).................. -- 2,500,001 387,296 409,508 -- 3,296,805 Funds affiliated with Mayfield Fund(11)...................... -- -- 1,500,000 212,746 -- 1,712,746
- ------------------------- (1) See "Principal Stockholders" for more detail on shares held by these purchasers. (2) The per share purchase price for our series A preferred stock was $.13. (3) The per share purchase price for our series B preferred stock was $1.00. (4) The per share purchase price for our series C preferred stock was $2.00. (5) The per share purchase price for our series D preferred stock was $7.87. (6) Reflects the conversion to common stock of each share of series A, series B, series C and series D preferred stock that will be effective upon the closing of our initial public offering. (7) These figures include 4,875 shares of our series C preferred stock and 150,000 shares of our common stock held individually by Mr. Flach. These figures also include holdings by entities related to Accel Partners which include: Accel Internet/Strategic Technology Fund L.P., Accel Investors '96 L.P., Accel Keiretsu V L.P., Accel V L.P. and Ellmore C. Patterson Partners. Mr. Flach, a director of Redback Networks, is a partner of Accel Partners. (8) These figures include 50,001 shares of our series B preferred stock and 4,875 shares of our series C preferred stock held by the Pierre R. and Christine E. Lamond Trust dated November 22, 1985 and 50,001 shares of our series B preferred stock and 4,875 shares of our series C preferred stock held by the David A. Lamond Trust dated November 16, 1992. These figures also include holdings by entities related to Sequoia Capital which include: Sequoia 1995 LLC, Sequoia 1997, Sequoia Capital VIII, Sequoia Technology Partners VII and SQP 1997. Mr. Lamond, a director and chairman of the board of Redback Networks, is a partner of Sequoia Capital. (9) Sequoia Capital includes the following entities managed by Sequoia Capital: Sequoia 1995 LLC, Sequoia 1997, Sequoia Capital VIII, Sequoia Technology Partners VII and SQP 1997. Pierre R. Lamond, a director and chairman of the board of Redback Networks, is a partner of Sequoia Capital. (10) Accel Partners includes the following entities managed by Accel Partners: Accel Internet/ Strategic Technology Fund L.P., Accel Investors '96 L.P., Accel Keiretsu V L.P., Accel V L.P. 50 53 and Ellmore C. Patterson Partners. James R. Flach, a director of Redback Networks, is a partner of Accel Partners. (11) Mayfield Fund includes the following entities managed by Mayfield Fund: Mayfield Associates Fund III and Mayfield VIII. In addition, we have granted options to certain of our executive officers. See "Management -- Option Grants." SERIES A FINANCING On September 24, 1996, we issued an aggregate of 1,687,500 shares of series A preferred stock at a per share purchase price of $.13 to four investors, including entities affiliated with Sequoia Capital. SERIES B FINANCING On January 14, 1997, we issued an aggregate of 5,134,498 shares of series B preferred stock at a per share purchase price of $1.00 to 14 investors, including entities affiliated with Sequoia Capital, Accel Partners and Pierre Lamond. SERIES C FINANCING On October 23, 1997, we issued an aggregate of 2,557,999 shares of series C preferred stock at a per share purchase price of $2.00 to 16 investors, including James Flach and entities affiliated with Sequoia Capital, Accel Partners, Mayfield Fund and Pierre Lamond. SERIES D FINANCING On July 2, 1998, we issued an aggregate of 1,076,624 shares of series D preferred stock at a per share purchase price of $7.87 to 14 investors, including entities affiliated with Sequoia Capital, Accel Partners and Mayfield Fund. On January 21, 1999, we issued an aggregate of 63,532 shares of series D preferred stock at a per share purchase price of $7.87 to TDF Management Pte Ltd. LOANS TO CERTAIN EXECUTIVE OFFICERS In April 1997, we loaned $105,000 to Live Wire Communications Inc. under a promissory note. Darrell Scherbarth, who was then one of our officers, was president and chief executive officer of Live Wire Communications Inc. The note accrued interest at a rate of 5.9%. We forgave the principal of $105,000 and recorded this amount as a compensation expense in 1997. In December 1997, we loaned $104,696 to Dennis Barsema, our president, chief executive officer and a director, under a promissory note. The note accrues interest at a rate of 5.81% compounded annually and expires on December 3, 2000, on which date all unpaid interest and principal is due on demand. The full amount of this note is currently outstanding, plus accrued interest. In January 1998, we advanced $210,626 to Mr. Barsema for the purchase of Redback Networks common stock pursuant to a subscription agreement dated December 1997. The principal balance of this note, together with interest accrued and unpaid to date, is due and payable in January 2002. Interest will accrue under the note on any unpaid principal balance at the rate of 5.93% per annum, compounded annually. The full amount of this note is currently outstanding, plus accrued interest. This note is secured by a pledge of the purchased common stock. 51 54 OPTION GRANTS In the past, we have granted options to our executive officers and directors. We intend to grant additional options to our directors and officers in the future. See "Management -- Option Grants in Last Fiscal Year" and "Management -- Director Compensation." INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY We have entered into an Indemnification Agreement with each of our executive officers and directors. See "Management -- Indemnification." ------------------------- We believe that the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. 52 55 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of Redback Networks common stock as of December 31, 1998 and as adjusted to reflect the sale of the common stock offered hereby for: (1) each person who is known by us to beneficially own more than 5% of our common stock; (2) the chief executive officer and each of our executive officers, (3) each of our directors; (4) Gaurav Garg, one of our founders; and (5) all of our directors and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole voting and investment power with respect to such shares. The percentage of beneficial ownership for the following table is based on 18,281,923 shares of common stock outstanding as of December 31, 1998 assuming conversion of all outstanding shares of preferred stock into common stock, and shares of common stock outstanding after the completion of this offering assuming no exercise of the underwriters' over-allotment option.
PERCENTAGE OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES ------------------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED(1) OFFERING(1) OFFERING(1)(2) ------------------------ ---------------- -------------- -------------- EXECUTIVE OFFICERS, DIRECTORS AND FOUNDER Dennis J. Barsema............................. 953,480 5.2% Geoffrey C. Darby(3).......................... 225,000 1.2 Randall J. Kruep(4)........................... 375,000 2.0 William E. Miskovetz(5)....................... 317,500 1.7 Gaurav Garg................................... 872,550 4.8 James R. Flach(6)............................. 3,451,680 18.9 Pierre R. Lamond(7)........................... 5,096,587 27.9 Daniel J. Warmenhoven......................... 75,000 * OTHER 5% STOCKHOLDERS Entities affiliated with Sequoia Capital(8)... 4,986,835 27.3 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Entities affiliated with Accel Partners(9).... 3,296,805 18.0 428 University Avenue Palo Alto, CA 94301 Entities affiliated with Mayfield Fund(10).... 1,712,746 9.4 2800 Sand Hill Road Menlo Park, CA 94025 All executive officers and directors as a group (7 persons)(11)....................... 10,494,247 55.9
- ------------------------- * Represents beneficial ownership of less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Common stock subject to options currently exercisable within 60 days of December 31, 1998 are deemed outstanding for purposes of computing the percentage ownership of the person holding such option but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except where indicated, and subject to community property laws where applicable, the persons in the table above have sole voting and investment power with respect to all common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each of the 53 56 individuals listed in the table is c/o Redback Networks Inc., 1389 Moffett Park Drive, Sunnyvale, CA 94089. (2) Assumes no exercise of the underwriters' over-allotment option. (3) Includes options immediately exercisable for 225,000 shares. (4) Includes options immediately exercisable for 45,000 shares. (5) Includes options immediately exercisable for 220,000 shares. (6) Includes 154,875 shares owned individually by Mr. Flach, 356,053 shares held by Accel Internet/ Strategic Technology Fund L.P., 158,247 shares held by Accel Investors '96 L.P., 52,746 shares held by Accel Keiretsu V L.P., 2,657,230 shares held by Accel V L.P. and 72,529 shares held by Ellmore C. Patterson Partners. (7) Includes 54,876 shares owned by the Pierre R. and Christine E. Lamond Trust dated November 22, 1985, 54,876 shares held in the David A. Lamond Trust dated November 16, 1992, 137,031 shares held by Sequoia 1995 LLC, 4,441 shares held by Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII and 223,218 shares held by Sequoia Technology Partners VII. (8) Includes 137,031 shares held by Sequoia 1995 LLC, 4,441 shares held by Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII, 223,218 shares held by Sequoia Technology Partners VII and 7,879 shares held by SQP 1997. (9) Includes 356,053 shares held by Accel Internet/Strategic Technology Fund L.P., 158,247 shares held by Accel Investors '96 L.P., 52,746 shares held by Accel Keiretsu V L.P., 2,657,230 shares held by Accel V L.P. and 72,529 shares held by Ellmore C. Patterson Partners. (10) Includes 85,638 shares held by Mayfield Associates Fund III and 1,627,108 shares held by Mayfield VIII. (11) Includes options immediately exercisable for 490,000 shares. 54 57 DESCRIPTION OF CAPITAL STOCK GENERAL On the closing of this offering, our authorized capital stock will consist of 80,000,000 shares of common stock, $.0001 par value, and 10,000,000 shares of preferred stock, $.0001 par value. The following summary of certain provisions of the common stock and the preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws and by the provisions of applicable law. COMMON STOCK As of December 31, 1998, there were 7,825,302 shares of common stock outstanding that were held of record by approximately 120 stockholders. There will be shares of Common Stock outstanding (assuming no exercise of the underwriters' over-allotment option and assuming no exercise after December 31, 1998, of outstanding options) after giving effect to the sale of the shares of common stock to the public offered hereby and the conversion of our preferred stock into common stock at a one-to-one ratio. 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 therefor. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of Redback 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 completion of this offering will be fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Redback Networks without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any of the preferred stock. WARRANTS Immediately following the closing of this offering, there will be four warrants to purchase preferred stock convertible into common stock. There are two warrants outstanding to purchase an aggregate of 99,375 shares of series B preferred stock at $1.00 per share, one warrant outstanding to purchase 24,000 shares of series C preferred stock at $2.00 per share and one warrant outstanding to purchase 6,096 shares of series D preferred stock at $7.87 per share. Each of the outstanding warrants for the series B preferred stock expire on February 14, 2002 and July 31, 2003 respectively. The outstanding warrant to 55 58 purchase series C preferred stock expires on February 28, 2004. The outstanding warrant to purchase series D preferred stock expires on August 21, 2004. ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CERTIFICATE OF INCORPORATION AND BYLAWS The certificate of incorporation provides that, effective upon the closing of this offering, all stockholder actions must be effected at a duly called meeting and not by a consent in writing. The bylaws provide that our stockholders may call a special meeting of stockholders only upon a request of stockholders owning at least 50% of our capital stock. These provisions of the certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of Redback Networks. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of Redback Networks. These provisions are designed to reduce the vulnerability of Redback Networks to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. See "Risk Factors -- Antitakeover provisions in our charter documents and Delaware law could prevent or delay a change in control of our company." DELAWARE TAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the interested stockholder became an interested stockholder, unless: - prior to becoming an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to becoming an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; 56 59 - subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. REGISTRATION RIGHTS After this offering, the holders of 11,634,435 shares of common stock will be entitled to certain rights with respect to the registration of these shares under the Securities Act. Under the terms of our agreement with the holders of these registrable securities, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of that registration and are entitled to include shares of their registrable common stock therein. Additionally, holders of 10,520,153 shares of common stock are also entitled to certain demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect that registration. Further, the holders of these demand rights may require us to file additional registration statements on Form S-3. All of these registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in that registration and our right not to effect a requested registration within six months following an offering of our securities, including the offering made hereby. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is U.S. Stock Transfer Corporation. 57 60 SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this offering, we will have shares of common stock outstanding, assuming the issuance of shares of common stock offered hereby and no exercise of options after December 31, 1998. Of these shares, the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 18,281,923 shares of common stock are deemed restricted shares under Rule 144. The number of shares of common stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements under which the holders of these shares have agreed, subject to limited exceptions, not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. On the date of this prospectus, no shares other than the shares offered hereby will be eligible for sale. Beginning 180 days after the date of this prospectus, or earlier with the consent of Morgan Stanley & Co. Incorporated 18,281,923 restricted shares will become available for sale in the public market subject to certain limitations of Rule 144 of the Securities Act. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after this offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of 1% of the then-outstanding shares of our common stock (approximately shares after giving effect to this offering) and the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding that sale. Sales under Rule 144 of the Securities Act are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about us. A person who is not our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell their shares immediately following this offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 of the Securities Act prior to effecting a transfer of the subject shares. Prior to this offering, there has been no public market for our common stock and we do not know the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the market price of our common stock. Nevertheless, sales of substantial amounts of these shares in the public market, or the perception that these sales could occur, could adversely affect the market price of the common stock and could impair our future ability to raise capital through an offering of our equity securities. OPTIONS As of December 31, 1998, there were a total of 2,064,725 shares of common stock subject to outstanding options under our 1997 Stock Option Plan, of which 124,156 were vested, and 40,000 shares of common stock subject to outstanding options issued outside our 1997 Stock Option Plan, none of which were vested. However, all of these shares are subject to lock-up agreements. Immediately after the completion of the offering, Redback Networks intends 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 the 1997 Stock Option Plan and issued outside the 1997 Stock Option Plan. On the date 180 days after the effective date of the offering, a total of shares of common stock subject to 58 61 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 1997 Stock Plan and shares granted outside the 1997 Stock Plan generally would be available for resale in the public market. Rule 701 under the Securities Act provides that shares of common stock acquired on the exercise of outstanding options may be resold by persons other than our affiliates, beginning 90 days after the date of this prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. We intend to file one or more registration statements on form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and common stock issued or issuable pursuant to our 1997 Stock Plan. We expect to file the registration statement covering shares offered pursuant to the 1997 Stock Plan and the 1999 Stock Incentive Plan approximately 30 days after the closing of this offering. Such registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public markets, subject to the lock-up agreements, if applicable. LOCK-UP AGREEMENTS The officers, directors and stockholders of Redback Networks have agreed, subject to limited exceptions, not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of the offering. Morgan Stanley & Co. Incorporated, however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. See "Underwriters." 59 62 UNDERWRITERS Under the terms and subject to conditions contained in the underwriting agreement dated the date hereof, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc., and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are serving as representatives, have severally agreed to purchase, and we have agreed to sell to them, an aggregate of shares of common stock. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below:
NUMBER NAME OF SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... BancBoston Robertson Stephens Inc. ......................... Dain Rauscher Wessels....................................... ------- Total............................................. =======
The underwriters are offering the shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered hereby, other than those covered by the over-allotment option described below, if any of the shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain other dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. At our request, the underwriters have reserved up to 10% of the shares of common stock to be sold in the offering and offered hereby for sale, at the initial public offering price, to certain persons designated by us. The number of shares of common stock available for sale to the general public will be reduced to the extent these persons purchase the 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 hereby. 60 63 We, our directors, officers and certain other of our stockholders have each agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, or otherwise during the period ending 180 days after the date of this prospectus, we will not directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or similar agreement that transfers to another, in whole or in part, the economic risk of ownership of the common stock; whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in the previous paragraph do not apply to: - the sale of any shares to the underwriters; - the issuance by Redback Networks of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; - transactions by any person other than Redback Networks relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; - the granting of stock options pursuant to our existing employee benefit plans, provided that such options do not become exercisable and such options do not vest during such 180-day period; or - certain gifts or transfers to trusts, provided that the transferees enter into lock-up agreements similar to those described in the previous paragraph. The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. We have submitted an application to have our common stock approved for quotation on the Nasdaq National Market under the symbol "RBAK." In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. 61 64 PRICING OF THE OFFERING Prior to this offering, there has been no public market for the shares of common stock. Consequently, the public offering price for the shares of common stock will be determined by negotiations between Redback Networks and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be: - our record of operations, current financial position and future prospects; - the experience of our management; - our sales, earnings and certain other financial operating information in recent periods; and - the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. Our estimated public offering price range is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of this prospectus, certain members and employees of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially owned an aggregate of 29,871 shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS Our financial statements as of December 31, 1997 and 1998 and for the period from August 30, 1996 (inception) to December 31, 1996 and for each of the two years in the period ended December 31, 1998, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 62 65 ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission, or SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules filed therewith. For further information with respect to Redback Networks and the common stock offered hereby, reference is made to the registration statement and to the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. 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 SEC referred to above. 63 66 REDBACK NETWORKS INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet............................................... F-3 Statement of Operations..................................... F-4 Statement of Stockholders' Equity........................... F-5 Statement of Cash Flows..................................... F-6 Notes to Financial Statements............................... F-7
F-1 67 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Redback Networks Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Redback Networks Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from August 30, 1996 (inception) through December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California March 5, 1999 F-2 68 REDBACK NETWORKS INC. BALANCE SHEET
DECEMBER 31, --------------------------- 1997 1998 ----------- ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 3,084,000 $ 8,189,000 Short-term investments.................................... 3,139,000 -- Accounts receivable, less allowances of $0 and $340,000... 48,000 2,342,000 Inventory................................................. 89,000 821,000 Other current assets...................................... 211,000 262,000 ----------- ------------ Total current assets.............................. 6,571,000 11,614,000 Property and equipment, net................................. 1,066,000 2,822,000 Notes receivable from related party......................... 105,000 111,000 Other assets................................................ 107,000 135,000 ----------- ------------ $ 7,849,000 $ 14,682,000 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings, current....................................... $ 247,000 $ 1,747,000 Capital lease obligations, current........................ 149,000 560,000 Accounts payable.......................................... 451,000 2,060,000 Accrued liabilities....................................... 94,000 2,005,000 Deferred revenue.......................................... -- 781,000 ----------- ------------ Total current liabilities......................... 941,000 7,153,000 Borrowings, less current portion............................ 391,000 144,000 Capital lease obligations, less current portion............. 436,000 1,131,000 ----------- ------------ 1,768,000 8,428,000 ----------- ------------ Commitments (Note 6) Stockholders' equity: Convertible Preferred Stock: Series A, B, C and D; $0.0001 par value; 13,500,000 shares authorized; 9,379,997 and 10,456,621 issued and outstanding at December 31, 1997 and 1998............................................... 10,419,000 18,884,000 Common Stock: $0.0001 par value; 22,500,000 shares authorized; 6,734,132 and 7,825,302 shares issued and outstanding at December 31, 1997 and 1998.............. 426,000 6,741,000 Deferred stock compensation............................... -- (4,731,000) Stock subscription receivable............................. (211,000) -- Notes receivable from stockholder......................... -- (211,000) Accumulated deficit....................................... (4,553,000) (14,429,000) ----------- ------------ Total stockholders' equity........................ 6,081,000 6,254,000 ----------- ------------ $ 7,849,000 $ 14,682,000 =========== ============
The accompanying notes are an integral part of these statements. F-3 69 REDBACK NETWORKS INC. STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 30, 1996 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------ ----------- ----------- Net revenues....................................... $ -- $ 48,000 $ 9,206,000 Cost of revenues................................... -- 29,000 3,603,000 --------- ----------- ----------- Gross profit....................................... -- 19,000 5,603,000 --------- ----------- ----------- Operating expenses: Research and development......................... 124,000 3,249,000 5,727,000 Selling, general and administrative.............. 19,000 1,317,000 8,875,000 Amortization of deferred stock compensation...... -- -- 880,000 --------- ----------- ----------- Total operating expenses................. 143,000 4,566,000 15,482,000 --------- ----------- ----------- Loss from operations............................... (143,000) (4,547,000) (9,879,000) Interest and other income.......................... 1,000 221,000 254,000 Interest expense................................... -- (85,000) (251,000) --------- ----------- ----------- Net loss........................................... $(142,000) $(4,411,000) $(9,876,000) ========= =========== =========== Basic and diluted net loss per share............... $ (.22) $ (4.10) $ (3.57) ========= =========== =========== Shares used in computing net loss per share........ 658,000 1,076,000 2,769,000 ========= =========== =========== Pro-forma net loss per share (unaudited): Basic and diluted net loss per share............. $ (.78) =========== Shares used in computing net loss per share...... 12,684,000 ===========
The accompanying notes are an integral part of these statements. F-4 70 REDBACK NETWORKS INC. STATEMENT OF STOCKHOLDERS' EQUITY
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK DEFERRED STOCK RECEIVABLE ------------------------ ---------------------- STOCK SUBSCRIPTION FROM SHARES AMOUNT SHARES AMOUNT COMPENSATION RECEIVABLE STOCKHOLDER ---------- ----------- --------- ---------- ------------ ------------ ------------ Issuance of Series A Convertible Preferred Stock, net............. 1,687,500 $ 217,000 -- $ -- $ -- $ -- $ -- Issuance of Common Stock.......... -- -- 2,829,996 8,000 -- -- -- Net loss.......................... -- -- -- -- -- -- -- ---------- ----------- --------- ---------- ----------- --------- --------- Balance at December 31, 1996...... 1,687,500 217,000 2,829,996 8,000 -- -- -- Issuance of Series B Convertible Preferred Stock, net............. 5,134,498 5,119,000 -- -- -- -- -- Issuance of Series C Convertible Preferred Stock, net............. 2,557,999 5,083,000 -- -- -- -- -- Exercise of stock options......... -- -- 106,875 6,000 -- -- -- Issuance of Common Stock.......... -- -- 4,199,730 385,000 -- (211,000) -- Issuance of Common Stock and warrants for services............ -- -- 90,746 31,000 -- -- -- Repurchase of Common Stock........ -- -- (493,215) (4,000) -- -- -- Net loss.......................... -- -- -- -- -- -- -- ---------- ----------- --------- ---------- ----------- --------- --------- Balance at December 31, 1997...... 9,379,997 10,419,000 6,734,132 426,000 -- (211,000) -- Issuance of Series D Convertible Preferred Stock, net............. 1,076,624 8,465,000 -- -- -- -- -- Exercise of stock options......... -- -- 836,875 345,000 -- -- -- Issuance of Common Stock.......... -- -- 631,502 142,000 -- -- -- Issuance of Common Stock and warrants for services............ -- -- 102,900 255,000 -- -- -- Repurchase of Common Stock........ -- -- (480,107) (38,000) -- -- -- Deferred stock compensation....... -- -- -- 5,611,000 (5,611,000) -- -- Amortization of deferred stock compensation..................... -- -- -- -- 880,000 -- -- Issuance of notes receivable...... -- -- -- -- -- 211,000 (211,000) Net loss.......................... -- -- -- -- -- -- -- ---------- ----------- --------- ---------- ----------- --------- --------- Balance at December 31, 1998...... 10,456,621 $18,884,000 7,825,302 $6,741,000 $(4,731,000) $ -- $(211,000) ========== =========== ========= ========== =========== ========= ========= TOTAL ACCUMULATED STOCKHOLDERS' DEFICIT EQUITY ------------ ------------- Issuance of Series A Convertible Preferred Stock, net............. $ -- $ 217,000 Issuance of Common Stock.......... -- 8,000 Net loss.......................... (142,000) (142,000) ------------ ----------- Balance at December 31, 1996...... (142,000) 83,000 Issuance of Series B Convertible Preferred Stock, net............. -- 5,119,000 Issuance of Series C Convertible Preferred Stock, net............. -- 5,083,000 Exercise of stock options......... -- 6,000 Issuance of Common Stock.......... -- 174,000 Issuance of Common Stock and warrants for services............ -- 31,000 Repurchase of Common Stock........ -- (4,000) Net loss.......................... (4,411,000) (4,411,000) ------------ ----------- Balance at December 31, 1997...... (4,553,000) 6,081,000 Issuance of Series D Convertible Preferred Stock, net............. -- 8,465,000 Exercise of stock options......... -- 345,000 Issuance of Common Stock.......... -- 142,000 Issuance of Common Stock and warrants for services............ -- 255,000 Repurchase of Common Stock........ -- (38,000) Deferred stock compensation....... -- -- Amortization of deferred stock compensation..................... -- 880,000 Issuance of notes receivable...... -- -- Net loss.......................... (9,876,000) (9,876,000) ------------ ----------- Balance at December 31, 1998...... $(14,429,000) $ 6,254,000 ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 71 REDBACK NETWORKS INC. STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 30, 1996 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 --------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $(142,000) $(4,411,000) $(9,876,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 2,000 281,000 922,000 Amortization of deferred stock compensation... -- -- 880,000 Write-off of fixed assets..................... -- 200,000 -- Other noncash charges......................... -- 136,000 255,000 Changes in assets and liabilities: Accounts receivable........................ -- (48,000) (2,294,000) Inventory.................................. -- (89,000) (732,000) Other current assets....................... (26,000) (185,000) (51,000) Other assets............................... (34,000) (73,000) (34,000) Accounts payable........................... 31,000 420,000 1,609,000 Accrued liabilities........................ 102,000 (8,000) 1,911,000 Deferred revenue........................... -- -- 781,000 --------- ----------- ----------- Net cash used by operating activities...... (67,000) (3,777,000) (6,629,000) --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment................. (39,000) (899,000) (1,234,000) Purchase of short-term investments................. -- (3,139,000) -- Sale of short-term investments..................... -- -- 3,139,000 Advances to related parties........................ -- (210,000) -- --------- ----------- ----------- Net cash (used) provided by investing activities............................... (39,000) (4,248,000) 1,905,000 --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Convertible Preferred Stock, net...................................... 217,000 10,202,000 8,465,000 Proceeds from issuance of Common Stock, net........ 8,000 176,000 449,000 Principal payments on capital lease obligations.... -- (26,000) (338,000) Proceeds from bank borrowings...................... -- 700,000 1,500,000 Repayments of bank borrowings...................... -- (62,000) (247,000) --------- ----------- ----------- Net cash provided by financing activities............................... 225,000 10,990,000 9,829,000 --------- ----------- ----------- Net increase in cash and cash equivalents............ 119,000 2,965,000 5,105,000 Cash and cash equivalents at beginning of period..... -- 119,000 3,084,000 --------- ----------- ----------- Cash and cash equivalents at end of period........... $ 119,000 $ 3,084,000 $ 8,189,000 ========= =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest............................. $ -- $ 60,000 $ 222,000 ========= =========== =========== SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY: Property and equipment acquired under capital leases.......................................... $ -- $ 611,000 $ 1,444,000 ========= =========== ===========
The accompanying notes are an integral part of these statements. F-6 72 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY Redback Networks Inc., (the "Company" or "Redback"), was incorporated in Delaware on August 30, 1996. Redback is a leading provider of advanced networking solutions that enable carriers, cable multiple system operators and service providers to rapidly deploy high-speed broadband access to the Internet and corporate networks. Redback's Subscriber Management System connects and manages large numbers of subscribers using any of the major high-speed access technologies including digital subscriber line, cable and wireless. The Company operates in one business segment. Through December 31, 1997, the Company was considered to be in the development stage and was principally engaged in research and development, raising capital and building its management team. During 1998, the Company ceased to be in the development stage. STOCK SPLITS Share information for all periods has been retroactively adjusted to reflect a 4-for-1 Common Stock split effected in January 1997 and a 3-for-2 Common Stock split effected in September 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Product sales are recognized upon shipment provided that no significant vendor obligations remain and collection is considered probable. Services revenue consists primarily of post-contract customer support, training, consulting and installation services. Post-contract customer support revenues are recognized ratably over the support period, which is generally one year. Revenues from training, consulting services and installation are recognized as the services are performed. Service revenues to date have not been significant. WARRANTY AND SALES RETURNS ALLOWANCES The Company provides a limited warranty for its products. A provision for the estimated warranty cost and a provision for sales returns are recorded at the time revenue is recognized based on the Company's historical experience. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents, and investments with original maturity dates greater than three months but less than 12 months to be short-term investments. Cash equivalents at December 31, 1997 and 1998 consist of money-market funds and commercial paper totaling $2,930,000 and $7,735,000, respectively, the carrying amounts of which approximates fair value. At December 31, 1997, the F-7 73 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Company had short-term investments which consisted of $3,139,000 of commercial paper which was held to maturity. The cost of this investment approximated fair value at December 31, 1997. CONCENTRATION OF CREDIT RISK, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company places its temporary cash investments in money market funds and commercial paper with high credit quality financial institutions. The Company's accounts receivable are derived from revenue earned from customers located in the U.S. and certain foreign countries, including Canada, Korea, Finland and China. Sales to foreign customers in 1998, which were denominated in U.S. dollars, accounted for 15% of total revenues. Sales to any one foreign country did not exceed 10% of total revenues in 1998. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The Company has generated all of its revenues to date from the sale of one product, the SMS 1000. During the year ended December 31, 1998, two customers accounted for 18% and 19% of the Company's revenue and at December 31, 1998, these two customers each accounted for 9% of total gross receivables. The Company is dependent on a single contract manufacturer and some of the key components in the Company's product come from single or limited sources of supply. INVENTORY Inventory, which consists principally of raw materials and finished goods, is stated at the lower of cost or market, cost being determined under the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to five years, or the lease term of the respective assets. LONG-LIVED ASSETS The Company periodically evaluates the recoverability of its long-lived assets based on expected undiscounted cash flows and recognizes impairment from the carrying value of long-lived assets, if any, based on the fair value of such assets. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS No. 123"). The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18. F-8 74 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES The Company accounts for income taxes under the liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. FAIR VALUE The carrying value of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities. The Company does not hold or issue financial instruments for trading purposes. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Software development costs not qualifying for capitalization are included in research and development and are expensed as incurred. After technological feasibility is established, material software development costs are capitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life or on the ratio of current revenues to total projected product revenues, if greater. The Company defines technological feasibility as the establishment of a working model, which typically occurs upon completion of the first beta version. To date, the period between achieving technological feasibility, and the general availability of the related products has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive income. NET LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Weighted average shares exclude shares subject to repurchase ("restricted shares"). Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Common equivalent shares, composed of unvested restricted F-9 75 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) shares and incremental common shares issuable upon the exercise of stock options and warrants and upon conversion of Series A, B, C, and D Convertible Preferred Stock. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
FOR THE PERIOD FROM AUGUST 30, 1996 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------- 1996 1997 1998 ------------ ----------- ----------- Numerator: Net loss..................................... $ (142,000) $(4,411,000) $(9,876,000) =========== =========== =========== Denominator: Weighted average common shares outstanding... 1,911,000 4,534,000 7,420,000 Weighted average unvested common shares subject to repurchase..................... (1,253,000) (3,458,000) (4,651,000) ----------- ----------- ----------- Denominator for basic and diluted calculation............................... 658,000 1,076,000 2,769,000 =========== =========== =========== Basic and diluted net loss per share........... $ (.22) $ (4.10) $ (3.57) =========== =========== ===========
Options to purchase 232,500, and 2,104,725 shares of Common Stock at an average exercise price of $.16 and $1.49, per share and warrants to purchase 99,375 and 129,421 shares of Preferred Stock at an average exercise price of $1.00 and $1.51 per share, have not been included in the computation of diluted net loss per share for 1997 and 1998, respectively, as their effect would have been anti-dilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share for the year ended December 31, 1998 is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's Series A, B, C and D Convertible Preferred Stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on January 1, 1998, or at date of original issuance, if later. The resulting pro forma adjustment includes an increase in the weighted average shares used to compute basic net loss per share of 9,915,000 for the year ended December 31, 1998. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company expects that the adoption of SOP No. 98-1 will not have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-1 for the year ending December 31, 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 F-10 76 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. The Company expects that the adoption of SOP No. 98-5 will not have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-5 for the year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because the Company currently holds no derivative instruments and does not engage in hedging activities, the Company expects that the adoption of SFAS No. 133 will not have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SFAS No. 133 for the year ending December 31, 2000. NOTE 2 -- BALANCE SHEET COMPONENTS:
DECEMBER 31, ------------------------- 1997 1998 ---------- ----------- INVENTORY Raw materials....................................... $ 89,000 $ 563,000 Finished goods...................................... -- 258,000 ---------- ----------- $ 89,000 $ 821,000 ========== =========== PROPERTY AND EQUIPMENT, NET Computer equipment.................................. $1,180,000 $ 3,554,000 Furniture and fixtures.............................. 148,000 358,000 Leasehold improvements.............................. 21,000 115,000 ---------- ----------- 1,349,000 4,027,000 Less: Accumulated depreciation and amortization..... (283,000) (1,205,000) ---------- ----------- $1,066,000 $ 2,822,000 ========== =========== ACCRUED LIABILITIES Accrued compensation................................ $ 94,000 $ 494,000 Accrued professional fees........................... -- 458,000 Accrued warranty.................................... -- 338,000 Other............................................... -- 715,000 ---------- ----------- $ 94,000 $ 2,005,000 ========== ===========
Property and equipment includes $611,000 and $2,055,000 of computer equipment, internal-use software and furniture and fixtures under capital leases at December 31, 1997 and 1998, respectively. Accumulated amortization of assets under capital leases totaled $80,000 and $552,000 at December 31, 1997 and 1998, respectively. NOTE 3 -- RELATED PARTY TRANSACTIONS: In April 1997, the Company loaned $105,000 to an affiliate of an officer under a promissory note. The note accrued interest at a rate of 5.9%. The principal of $105,000 was forgiven by the Company and recorded as compensation expense in 1997. F-11 77 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In December 1997, the Company loaned $105,000 to an officer under a promissory note. The note accrues interest at a rate of 5.81% compounded annually and expires on December 3, 2000, on which date all unpaid interest and principal is due on demand. The balance of the note and accrued interest was $111,000 at December 31, 1998. In January 1998, the Company advanced $211,000 under a full recourse promissory note to one of its officers for the purchase of Common Stock of the Company pursuant to a December 1997 stock subscription. The principal balance of this note, together with interest accrued and unpaid to date, is due and payable in January 2002. Interest accrues under the note on any unpaid principal balance at the rate of 5.93% per annum, compounded annually. NOTE 4 -- INCOME TAXES: No provisions for income taxes have been recorded as the Company has incurred net losses since inception. At December 31, 1998, the Company had approximately $11.6 million of federal and state net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2011 and 2004, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Such a change may have occurred as a result of the preferred stock issuances during 1997 and 1998. As of December 31, 1998, the Company had gross deferred tax assets of approximately $5.4 million, related primarily to net operating loss carryforwards and certain reserves that are not currently deductible for tax purposes. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. NOTE 5 -- BORROWINGS: The Company had $638,000 and $391,000 outstanding under a loan and security agreement with a bank at December 31, 1997 and 1998, respectively. The loan agreement provides for borrowings of up to $750,000 which are secured by the Company's property and equipment. Under the terms of the loan agreement, certain transactions, including payment of dividends, are prohibited without the bank's consent. The loan bears interest at the prime rate (7.75% at December 31, 1998) plus .5% per annum. The Company is required to make monthly repayments on this loan through July 2000. Principal payments under the loan are due as follows:
YEAR ENDED DECEMBER 31, ------------ 1999........................................................ $247,000 2000........................................................ 144,000 -------- $391,000 ========
In August 1998, the Company's loan and security agreement with its bank was amended to include a revolving line that provides for additional borrowings of up to, the lessor of $2 million, or 80% of eligible F-12 78 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) accounts receivable. The line bears interest at the prime rate plus .5% per annum. At December 31, 1998, the Company had $1,500,000 outstanding and due under this line. No additional amounts were available under the line as of December 31, 1998. Borrowings under the agreement are secured by certain of the Company's assets. The revolving line matures in July 1999 and contains certain financial covenants, mainly relating to liquidity and profitability. See Note 12. The Company was not in compliance with a covenant under this line at December 31, 1998. The Company has obtained a waiver of this covenant as of December 31, 1998. NOTE 6 -- COMMITMENTS: The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2001. The terms of the facility lease provide for rental payments on a graduated scale. The facility lease expires in September 1999. The Company recognizes rent expense on a straight-line basis over the lease period. Rental expense for 1996, 1997 and 1998 was $0, $144,000 and $441,000, respectively. At December 31, 1998, the Company had an equipment lease line that provides for a total purchases under the facility of $2,750,000. Future minimum lease payments under noncancelable operating and capital leases, including operating lease commitments entered into subsequent to December 31, 1998, are as follows:
YEAR ENDED CAPITAL OPERATING DECEMBER 31, LEASES LEASES ------------ ---------- --------- 1999..................................................... $ 767,000 $479,000 2000..................................................... 813,000 -- 2001..................................................... 443,000 -- ---------- -------- Total minimum lease payments................... 2,023,000 $479,000 ======== Less: Amount representing interest....................... 332,000 ---------- Present value of capital lease obligations............... 1,691,000 Less: Current portion.................................... 560,000 ---------- Non-current portion of capital lease obligations....... $1,131,000 ==========
NOTE 7 -- CONVERTIBLE PREFERRED STOCK: Convertible Preferred Stock at December 31, 1998 consists of the following:
PROCEEDS SHARES NET OF ------------------------ LIQUIDATION ISSUANCE SERIES DESIGNATED OUTSTANDING AMOUNT COSTS ------ ---------- ----------- ----------- ----------- A...................................... 1,687,500 1,687,500 $ 225,000 $ 217,000 B...................................... 5,233,875 5,134,498 5,135,000 5,119,000 C...................................... 2,582,001 2,557,999 5,116,000 5,083,000 D...................................... 1,350,000 1,076,624 8,477,000 8,465,000 ---------- ---------- ----------- ----------- 10,853,376 10,456,621 $18,953,000 $18,884,000 ========== ========== =========== ===========
F-13 79 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The holders of the Convertible Preferred Stock have various rights and preferences as follows: VOTING Each share of Series A, B, C and D has voting rights equal to an equivalent number of shares of Common Stock into which it is convertible and votes together as one class with the Common Stock. As long as at least 375,000 shares of Convertible Preferred Stock remain outstanding, the Company must obtain approval from a majority of the holders of Convertible Preferred Stock in order to alter the articles of incorporation as related to the rights, preferences or privileges of the Convertible Preferred Stock. As long as any shares of Convertible Preferred Stock remain outstanding, the Company must obtain approval from a majority of the holders of Convertible Preferred Stock in order to change the authorized number of shares of Convertible Preferred Stock, change the authorized number of Directors, authorize a dividend for any class or series other than Convertible Preferred Stock, create a new class of stock or effect a merger, consolidation or sale of assets where the existing stockholders retain less than 50% of the voting stock of the surviving entity. The holders of the existing Convertible Preferred Stock and Common Stock, respectively, voting separately as a class, shall be entitled to elect two directors at each annual meeting of the stockholders. DIVIDENDS Holders of Series A, B, C and D Convertible Preferred Stock are entitled to receive noncumulative dividends at the per annum rate of $.013, $.10, $.20 and $.787 per share, respectively, when and if declared by the Board of Directors. No dividends on Convertible Preferred Stock or Common Stock have been declared from inception through December 31, 1998. LIQUIDATION In the event of any liquidation, dissolution or winding up of the Company, including a merger, acquisition or sale of assets where the beneficial owners of the Company's Common Stock and Convertible Preferred Stock own less than 50% of the resulting voting power of the surviving entity, the holders of Series A, B, C and D Convertible Preferred Stock are entitled to receive an amount of $.13, $1.00, $2.00 and $7.87 per share, respectively, plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of Common Stock. The remaining assets, if any, shall be distributed among the holders of Series C Preferred Stock, Series D Preferred Stock and Common Stock pro rata in proportion to the number of shares of Common Stock held by each (assuming conversion of all such Series C and Series D Preferred Stock) until, with respect to the holders of Series C Preferred Stock, such holders shall have received an aggregate of $4.00 per share, and with respect to the holders of Series D Preferred Stock, such holders shall have received an aggregate of $11.81 per share; thereafter, the holders of Common Stock shall receive all of the remaining assets of the Company pro rata based on the number of shares of Common Stock held by each. Should the Company's legally available assets be insufficient to satisfy the liquidation preferences, the funds will be distributed ratably to the Series A, B, C and D Convertible Preferred Stock holders. CONVERSION Each share of Series A, B, C and D Convertible Preferred Stock is convertible, at the option of the holder, according to a conversion ratio which is subject to adjustment for dilution. Each share of Series A, B, C and D Convertible Preferred Stock automatically converts into the number of shares of F-14 80 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Common Stock into which such shares are convertible, at the then effective conversion ratio, upon: (1) the closing of a public offering of Common Stock at a per share price of at least $.66, $2.50, $5.00 and $10.00 per share, respectively, with gross proceeds of at least $7,500,000, (2) a merger, sale of substantially all of the assets or other transactions which result in a change in control or (3) the consent of the holders of the majority of Convertible Preferred Stock. At December 31, 1998, the Company has reserved 1,687,500, 5,233,875, 2,582,001 and 1,350,000 shares of Common Stock for the conversion of Series A, B, C and D Convertible Preferred Stock, respectively. WARRANTS FOR CONVERTIBLE PREFERRED STOCK In connection with certain borrowings, the Company issued warrants to purchase 99,375, 24,000 and 6,096 shares of Series B, C and D Convertible Preferred Stock for $1.00, $2.00 and $7.87 per share, respectively, in 1997 and 1998. Such warrants expire through 2004. Using the Black-Scholes pricing model, the Company estimated that the fair value of the warrants was $98,000 at the dates of grant. The Company recognized $25,000 and $28,000 of interest expense associated with these warrants during 1997 and 1998, respectively. NOTE 8 -- COMMON STOCK: A portion of the Common Stock outstanding is subject to a right of repurchase by the Company which generally lapses over a four year period. All grants to non-employee service providers and other non-employees were fully vested at the date of issuance. At December 31, 1997 and 1998, there were 4,985,588 and 4,241,400 shares subject to repurchase. The Company issued 90,746 and 102,900 shares of Common Stock to consultants and other service providers of the Company in 1997 and 1998, respectively. The fair value of the Common Stock issued was determined to be $6,000 and $227,000 in 1997 and 1998, respectively, based on the fair value of the services received or Common Stock issued, whichever was more reliably measurable, and has been recognized in general and administrative expenses. The Company issued 2,829,996, 2,072,230 and 29,252 restricted shares of Common Stock outside the 1997 Stock Option Plan in 1996, 1997 and 1998, respectively. The weighted average fair value of the restricted shares issued was $0, $.05 and $.50, in 1996, 1997 and 1998, respectively. NOTE 9 -- STOCK OPTIONS In April 1997, the Company adopted the 1997 Stock Plan (the "Plan"). The Plan provides for the granting of stock options and common stock to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options ("NSO") may be granted to Company employees and consultants. The Company has reserved 7,071,096 shares of Common Stock for issuance under the Plan. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the F-15 81 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) shares on the date of grant, respectively. Options are generally exercisable immediately, subject to repurchase options held by the Company. The repurchase options lapse over a maximum period of five years at such times and under such conditions as determined by the Board of Directors. To date, options and restricted stock granted generally vest over four years.
OPTIONS OUTSTANDING ---------------------- WEIGHTED SHARES AVERAGE AVAILABLE NUMBER EXERCISE FOR GRANT OUTSTANDING PRICE ---------- ----------- -------- Authorized............................................. 3,900,000 -- $ -- Options granted........................................ (331,500) 331,500 .13 Common Stock granted................................... (2,218,246) -- -- Options exercised...................................... -- (99,000) .06 Common Stock repurchased............................... 7,500 -- -- ---------- --------- Balance at December 31, 1997............................. 1,357,754 232,500 .16 Authorized............................................. 3,171,096 -- -- Options granted........................................ (2,669,100) 2,669,100 1.25 Common Stock granted................................... (705,150) -- -- Options exercised...................................... -- (836,875) .41 Common Stock repurchased............................... 118,500 -- -- ---------- --------- Balance at December 31, 1998............................. 1,273,100 2,064,725 1.47 ========== =========
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998 ----------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE - ---------- ------------ ------------ --------- ----------- -------- $.05 - 1.00 1,111,725 9.36 years $ .56 1,011,725 $ .54 2.00 449,000 9.79 years 2.00 409,000 2.00 3.00 504,000 9.94 years 3.00 469,416 3.00 --------- --------- 2,064,725 9.60 years 1.47 1,890,141 1.46 ========= =========
A total of 124,156 options with an average exercise price of $.18 per share are vested at December 31, 1998. In 1997, the Company issued, to an employee, options to purchase 7,875 shares of Common Stock at an exercise price of $0.20 per share outside the Plan. These options were exercised in 1997. In 1998, the Company issued, to two employees, options to purchase 40,000 shares of Common Stock at an exercise price of $3.00 per share outside the Plan. These options were outstanding at December 31, 1998. FAIR VALUE DISCLOSURES Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would not have been materially different. F-16 82 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes pricing model with the following assumptions:
YEARS ENDED DECEMBER 31, ---------------- 1997 1998 ----- ----- Expected life (years)....................................... 5 5 Risk free interest rate..................................... 6.03% 5.12% Expected volatility......................................... -- -- Dividend yield.............................................. -- --
The weighted average fair values of options granted during 1997 and 1998 were as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE YEAR ENDED DECEMBER 31, 1997 EXERCISE PRICE FAIR VALUE ---------------------------- ----------------- ----------------- Exercise price equal to market value.................... $ .13 $ .03
YEAR ENDED DECEMBER 31, 1998 ---------------------------- Exercise price equal to market value.................... .60 .13 Exercise price less than market value................... 1.31 2.46
The weighted average fair value of restricted shares of Common Stock granted under the Plan in 1997 and 1998 was $.13 and $.77, respectively. NOTE 10 -- DEFERRED STOCK COMPENSATION: In the year ended December 31, 1998, the Company recorded deferred stock compensation expense of approximately $5,611,000 related to the issuance of stock options and restricted shares at prices subsequently determined to be below fair market value. These charges are being amortized over a period of four years from the date of option or restricted shares issuance. Amortization of $880,000 has been recognized as stock compensation expense in the year ended December 31, 1998. NOTE 11 -- EMPLOYEE BENEFIT PLANS: The Company sponsors a 401(k) defined contribution plan covering all employees. Contributions made by the Company are determined annually by the Board of Directors. There have been no Company contributions to the plan since inception. NOTE 12 -- SUBSEQUENT EVENTS: LOAN AGREEMENT In January 1999, the Company repaid the $1.5 million in borrowings under the loan and security agreement with a bank which was outstanding as of December 31, 1998. In January 1999, the Company's loan and security agreement with the bank was amended to increase the revolving line from $2.0 million to $5.0 million. PREFERRED STOCK In January 1999, the Company sold 63,532 shares of Series D Preferred Stock for $500,000. F-17 83 REDBACK NETWORKS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) AMENDMENT TO CERTIFICATE OF INCORPORATION In March 1999, the Board of Directors approved, subject to stockholder approval, an amendment to the Company's certificate of incorporation to provide for an increase in the authorized capital stock to 24,500,000 shares of common stock. In March 1999, the Company also approved an amendment to the Company's certificate of incorporation to provide for an increase in the authorized capital stock to 80,000,000 shares of Common Stock and 10,000,000 shares of undesignated Preferred Stock upon the completion of the Company's proposed initial public offering. Upon completion of the initial public offering, all previously issued and outstanding Preferred Stock will be converted into shares of Common Stock and warrants to purchase shares of Preferred Stock will be converted into warrants to purchase shares of Common Stock. STOCK PLANS During the period from January 1, 1999 to February 28, 1999, the Company granted options to purchase 838,100 shares of Common Stock at exercise prices of $4.75 to $8.75 per share. The Company recorded deferred stock compensation expense of approximately $3.0 million related to the issuance of these options. In March 1999, the Board of Directors approved, subject to stockholder approval, an increase in the common shares available for issuance under the 1997 Stock Plan of 600,000 shares. In March 1999, the Board of Directors approved, subject to stockholder approval, the adoption of the 1999 Stock Incentive Plan ("1999 Plan") and reserved 2,500,000 shares of common shares for issuance under this Plan. Shares not yet issued under the 1997 Stock Plan will also be available under the 1999 Plan. The 1999 Plan allows the grant of ISO, NSO and restricted stock to employees, non-employee board members and consultants. In March 1999, the Board of Directors approved, subject to stockholder approval, the adoption of the 1999 Employee Stock Purchase Plan and reserved 1,000,000 shares of Common Stock for issuance under this Plan. In March 1999, the Board of Directors approved, subject to stockholder approval, the adoption of the 1999 Directors' Option Plan and reserved 200,000 shares of Common Stock for issuance under this Plan. F-18 84 [GRAPHIC -- INSIDE BACK COVER] Across the top of the page reads "Redback Networks. Enabling high-speed access for the masses." The page has two graphics on the right side and one graphic on the bottom left side. The first graphic on the right is a picture of the SMS 1000. Below that is a picture of the SMS 500. The following caption is above these graphics: - "Redback Networks' Subscriber Management Systems are used by leading carriers and service providers to deploy high-speed services and manage subscribers." Next to these graphics is the following text: - "Deployed in production networks worldwide by leading carriers and service providers. Supports all major broadband technologies. Scalable to thousands of subscribers. Ease of delivering connectivity cuts time to market. Multiple service creation opportunities." Text runs down the left side of the page and down to the bottom right which reads: - "Redback Networks delivers solutions that allow carriers, cable MSOs and service providers to quickly and cost-effectively bring high-speed Internet access services to market." "Powerful solutions for managing high-speed subscribers Redback Networks' Subscriber Management Systems, or SMSs are powerful, advanced networking solutions that bridge the operational gap between high-speed access networks that serve businesses and homes and backbone routers. The SMS accepts the high-speed data traffic of thousands of individual subscribers and translates it to simple Internet protocol data streams, relieving backbone routers of processing and management tasks. By relieving routers of subscriber management functions, the SMS enhances router performance and helps reduce the need for additional router investment. Rapid, scalable deployment of Internet access The SMS allows providers to offer high-speed Internet access using DSL, cable and wireless technologies alone or in combination. Because the SMS leverages existing access, accounting and management control systems, it speeds the deployment of these technologies and gives providers a competitive advantage. For example, the SMS supports the same industry-standard RADIUS database technology used with traditional dial network subscribers, thus reducing staff training and operational costs. Service creation enables new revenues for service providers In addition to streamlining basic high-speed access, the SMS allows providers to create and market new service offerings that leverage high-speed connectivity. With the SMS's service selection capabilities, service providers can add value to their high-speed access offerings by "re-profiling" and "re-selling" lines to subscribers multiple times. Possible services include "business by day/family by night" billing as well as different qualities of service. In addition, wholesale providers of network transport can use the SMS to cost-effectively provide access bandwidth to service provider customers." The graphic on the bottom-left side of the page depicts three distinct Internet access modes, DSL, cable and wireless, each connected to the SMS 1000 product, which is connected to both the Internet and a corporate network. The caption for this graphic reads: - "The SMS bridges the operational gap between high-speed subscribers and the Internet, supports all major high-speed access technologies, and accelerates the deployment of new services." In the bottom right corner is our logo. 85 [REDBACK NETWORKS LOGO] 86 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 the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees. SEC Registration fee........................................ $ 10,391 NASD fee.................................................... 4,238 Nasdaq National Market listing fee.......................... 27,795 Printing and engraving expenses............................. 150,000 Legal fees and expenses..................................... 400,000 Accounting fees and expenses................................ 250,000 Blue sky fees and expenses.................................. 10,000 Transfer agent fees......................................... 10,000 Miscellaneous fees and expenses............................. 87,576 -------- Total............................................. $950,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers, including reimbursement for expenses incurred, in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's Bylaws provides for mandatory indemnification of its directors and permissible indemnification of officers and employees to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with its officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification Agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. II-1 87 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since the Company's inception on August 30, 1996, the Company has issued and sold the following securities (which numbers reflect the four for one stock split effected January 13, 1997 and the three for two stock split effected September 11, 1998): 1. From inception through December 31, 1998, the Company granted options to purchase 3,000,600 shares of common stock and granted 2,923,396 shares of restricted common stock at exercise prices ranging from $.053 to $3.00 per share to employees, consultants, directors and other service providers pursuant to its 1997 Stock Plan. Additionally, the Company granted options to purchase 47,875 shares of common stock and granted 4,931,478 shares of restricted common stock at exercise prices ranging from $.001667 to $3.00 per share to employees, consultants, directors and other service providers outside of the 1997 Stock Plan. 2. From inception through December 31, 1998, the Company issued and sold an aggregate of 8,798,624 shares of its common stock to employees, consultants, directors and other service providers for aggregate consideration of approximately $1,172,000 pursuant to direct issuances or exercises of options granted both under its 1997 Stock Plan and outside of that 1997 Stock Plan. 3. In September 1996, the Company issued and sold an aggregate of 1,687,500 shares of its Series A Preferred Stock for an aggregate purchase price of approximately $225,000, or $.13 per share. 4. In January 1997, the Company issued and sold 5,134,498 shares of its Series B Preferred Stock for an aggregate purchase price of approximately $5,135,000, or $1.00 per share. 5. In February and July 1997, the Company issued warrants to purchase 52,500 and 46,875 shares respectively, of its Series B Preferred Stock at an exercise price of $1.00 per share. 6. In October 1997, the Company issued and sold 2,557,999 shares of its Series C Preferred Stock for an aggregate purchase price of approximately $5,116,000, or $2.00 per share. 7. In March 1998, the Company issued a warrant to purchase 24,000 shares of its Series C Preferred Stock at an exercise price of $2.00 per share. 8. In July 1998, the Company issued and sold 1,076,624 shares of its Series D Preferred Stock for an aggregate purchase price of approximately $8,477,000, or $7.87. 9. In October 1998, the Company issued a warrant to purchase 6,096 shares of its Series D Preferred Stock at an exercise price of $7.87 per share. 10. In January 1999, the Company issued and sold 63,532 shares of its Series D Preferred Stock for an aggregate purchase price of approximately $499,997, or $7.87 per share. The sale of the above securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or transactions pursuant to compensation benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each such transaction represented their intentions 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 issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. II-2 88 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1* Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Registrant, as amended to date 3.2* Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the closing of the offering made pursuant to this Registration Statement 3.3 Bylaws of the Registrant 3.4* Form of Amended and Restated Bylaws of the Registrant, to be effective upon the closing of the offering made pursuant to this Registration Statement 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4 4.2* Form of Registrant's Common Stock Certificate 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 10.1 Form of Indemnification Agreement 10.2 1999 Stock Incentive Plan 10.3 1999 Employee Stock Purchase Plan 10.4 1999 Directors' Option Plan 10.5 Sublease between Registrant and Infoseek Corporation, dated January 12, 1998 (without exhibits) 10.6 First Amendment to Sublease between Registrant and Infoseek Corporation, dated January 15, 1999 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2* Consent of Counsel. Reference is made to Exhibit 5.1........ 24.1 Power of Attorney. Reference is made to page II-5........... 27.1 Financial Data Schedule.....................................
- ------------------------ * to be filed by amendment. (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 The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 89 The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 90 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, 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 Sunnyvale, State of California, on this 16th day of March, 1999. REDBACK NETWORKS INC. By: /s/ DENNIS L. BARSEMA ------------------------------------ Dennis L. Barsema President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Dennis L. Barsema and Geoffrey C. Darby, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DENNIS L. BARSEMA President, Chief Executive March 16, 1999 - ------------------------------------------------ Officer (Principal Executive Dennis L. Barsema Officer) and Director /s/ GEOFFREY C. DARBY Chief Financial Officer March 16, 1999 - ------------------------------------------------ (Principal Financial and Geoffrey C. Darby Accounting Officer) and Secretary /s/ JAMES R. FLACH Director March 16, 1999 - ------------------------------------------------ James R. Flach /s/ PIERRE R. LAMOND Director March 16, 1999 - ------------------------------------------------ Pierre R. Lamond /s/ DANIEL J. WARMENHOVEN Director March 16, 1999 - ------------------------------------------------ Daniel J. Warmenhoven
II-5 91 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement.............................. 3.1 Certificate of Incorporation of the Registrant, as amended to date..................................................... 3.2* Form of Restated Certificate of Incorporation of the Registrant, to be filed upon the closing of the offering made pursuant to this Registration Statement................ 3.3 Bylaws of the Registrant.................................... 3.4* Form of Amended and Restated Bylaws of the Registrant, to be ... effective upon the closing of the offering made pursuant to this Registration Statement................................. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4......... 4.2* Form of Registrant's Common Stock Certificate............... 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.............................................. 10.1 Form of Indemnification Agreement........................... 10.2 1999 Stock Incentive Plan................................... 10.3 1999 Employee Stock Purchase Plan........................... 10.4 1999 Directors' Option Plan................................. 10.5 Sublease between Registrant and Infoseek Corporation, dated January 12, 1998 (without exhibits)......................... 10.6 First Amendment to Sublease between Registrant and Infoseek Corporation, dated January 15, 1999......................... 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants................................................. 23.2* Consent of Counsel. Reference is made to Exhibit 5.1........ 24.1 Power of Attorney. Reference is made to page II-5........... 27.1 Financial Data Schedule.....................................
- ------------------------ * to be filed by amendment. EX-3.1 2 CERTIFICATE OF INCORPORATION OF THE REGISTRANT 1 EXHIBIT 3.1 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "REDBACK NETWORKS INC.", FILED IN THIS OFFICE ON THE ELEVENTH DAY OF SEPTEMBER, A.D. 1998, AT 1 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL OF THE STATE OF DELAWARE] /s/ EDWARD J. FREEL ----------------------------------- Edward J. Freel, Secretary of State [SECRETARY'S OFFICE SEAL] 2658224 8100 AUTHENTICATION: 9298751 981354296 DATE: 09-14-98 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF REDBACK NETWORKS INC., A DELAWARE CORPORATION The undersigned, Dennis L. Barsema and Robert V. Gunderson, Jr., hereby certify that: ONE: They are the duly elected and acting President and Assistant Secretary, respectively, of said corporation. TWO: The name of the corporation is RedBack Networks Inc. and that the corporation was originally incorporated on August 30, 1996 pursuant to the General Corporation Law. THREE: Pursuant to Section 242 and Section 245 of the General Corporation Law of the State of Delaware, RedBack Networks Inc. has adopted this Amended and Restated Certificate of Incorporation, restating, integrating and further amending its Amended and Restated Certificate of Incorporation dated on or about July 1, 1998, which Amended and Restated Certificate of Incorporation has been duly proposed by the directors and adopted by the stockholders of this corporation (by written consent pursuant to Section 228 of said General Corporate Law) in accordance with the provisions of said Section 242 and Section 245. FOUR: The Amended and Restated Certificate of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is RedBack Networks Inc. ARTICLE II The address of the registered office of this corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV Upon the filing of this Amended and Restated Certificate of Incorporation, each two (2) shares of this corporation's outstanding Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be automatically 3 split into three (3) shares of this corporation's Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively, without any action by the holder thereof. No fractional shares shall be issued upon the split of such shares. Any shares of Common Stock surrendered in connection with the split provided for herein that would otherwise result in a fractional share shall be redeemed for $1.50 per share, the current fair market value of this corporation's Common Stock. Any shares of Preferred Stock surrendered in connection with the split provided for herein that would otherwise result in a fractional share shall be redeemed for the applicable Original Issue Price (as defined in Article 5, Section B(2)(a)) per share. Whether or not fractional shares are issuable upon such split shall be determined on the basis of the total number of shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock held by each holder and the number of shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issuable upon such aggregate split. ARTICLE V A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that this corporation is authorized to issue is thirty-six million (36,000,000) shares. Twenty-two million, five hundred thousand (22,500,000) shares shall be Common Stock, par value $.0001 per share, and thirteen million, five hundred thousand (13,500,000) shares shall be Preferred Stock, par value $.0001 per share. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Amended and Restated Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock, which series shall consist of 1,687,500 shares, the Series B Preferred Stock, which series shall consist of 5,233,875 shares, the Series C Preferred Stock, which series shall consist of 2,582,001 shares, and the Series D Preferred Stock, which series shall consist of 1,350,000 shares, are as set forth below in this Article V(B). The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights that have been or may be granted to the Preferred Stock or series thereof in Certificates of Determination or this corporation's Amended and Restated Certificate of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A, Series B, Series C and Series D Preferred Stock), prior or subsequent to the issue of that series, but not below the number of 2 4 shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. (a) Subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of shares of Series A, Series B, Series C and Series D Preferred Stock (together, the "Existing Preferred Stock") shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the rate of $0.013 per share per annum with respect to the Series A Preferred Stock, $0.10 per share per annum with respect to the Series B Preferred Stock, $0.20 per share per annum with respect to the Series C Preferred Stock and $0.787 per share per annum with respect to the Series D Preferred Stock, or, if greater (as determined on a per annum basis and an as converted basis for the Existing Preferred Stock), an amount equal to that paid on any other outstanding shares of this corporation, payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. The provisions of Section (B)(1)(a) of this Article V shall apply to any distribution payable in securities of this corporation or other persons, evidences of indebtedness issued by this corporation or other persons, assets or options or rights to purchase any such securities or evidences of indebtedness (other than in connection with a transaction referred to in Section (B)(2)(c), (B)(4)(d) or (B)(4)(e) of this Article V). 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Existing Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof, (A) for the Series A Preferred Stock, an amount per share equal to the sum of (i) $0.13 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price") and (ii) an amount equal to declared but unpaid dividends on such shares, (B) for the Series B Preferred Stock, an amount per share equal to the sum of (i) $1.00 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and (ii) an amount equal to declared but unpaid dividends on such shares, (C) for the Series C Preferred Stock, an amount per share equal to the sum of (i) $2.00 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price") and (ii) an amount equal to declared but unpaid dividends on such shares and (D) for the Series D Preferred Stock, an amount per share equal to the sum of (i) $7.87 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price") and (ii) an amount equal to declared but unpaid dividends on such shares (the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price and the Original Series D Issue Price being the applicable "Original Issue Price" for such series). If upon the occurrence of such event, 3 5 the assets and funds thus distributed among the holders of the Existing Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of this corporation legally available for distribution shall be distributed ratably among the holders of the Existing Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of this corporation available for distribution to stockholders shall be distributed among the holders of Series C Preferred Stock, Series D Preferred Stock and Common Stock pro rata in proportion to the number of shares of Common Stock held by each (assuming conversion of all such Series C Preferred Stock and Series D Preferred Stock) until, with respect to the holders of Series C Preferred Stock, such holders shall have received an aggregate of $4.00 per share (including amounts paid pursuant to subsection (a) of this Section 2) and, with respect to the holders of Series D Preferred Stock, such holders shall have received an aggregate of $11.81 per share (including amounts paid pursuant to subsection (a) of this Section 2); thereafter, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of the Common Stock of this corporation shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of this corporation (a "Liquidation Event") shall be deemed to be occasioned by, or to include, (A) the acquisition of this corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of this corporation; or (B) a sale of all or substantially all of the assets of this corporation . (ii) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: (1) If traded on a securities exchange or through NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30) day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and 4 6 (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by this corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iii) In the event the requirements of this subsection 2(c) are not complied with, this corporation shall forthwith either: (A) cause such Liquidation Event to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such Liquidation Event, in which event the rights, preferences and privileges of the holders of the Existing Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(c)(iv) hereof. (iv) This corporation shall give each holder of record of Existing Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice provided for herein or sooner than ten (10) days after this corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 3. Redemption. The Existing Preferred Stock is not redeemable. 4. Conversion. The holders of the Existing Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Existing Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price applicable to such share, determined as hereafter provided, in 5 7 effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, the initial Conversion Price per share for shares of Series B Preferred Stock shall be the Original Series B Issue Price, the initial Conversion Price per share for shares of Series C Preferred Stock shall be the Original Series C Issue Price and the initial Conversion Price per share for shares of Series D Preferred Stock shall be the Original Series D Issue Price; provided, however, that the Conversion Price for the Existing Preferred Stock shall be subject to adjustment as set forth in section (B)(4)(d) of this Article V. (b) Automatic Conversion. (i) Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock immediately upon the consummation of this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $0.66 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and aggregate proceeds in excess of $7,500,000. (ii) Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series B Preferred Stock immediately upon the consummation of this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $2.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and aggregate proceeds in excess of $7,500,000. (iii) Each share of Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series C Preferred Stock immediately upon the consummation of this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and aggregate proceeds in excess of $7,500,000. (iv) Each share of Series D Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series D Preferred Stock immediately upon the consummation of this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $10.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and aggregate proceeds in excess of $7,500,000. (v) Each share of Existing Preferred Stock shall automatically be converted into shares of Common Stock at the applicable Conversion Ratio then in effect for such shares at the election of the holders of more than two-thirds of the outstanding Existing 6 8 Preferred Stock voting together as a single class in accordance with Section (B)(5) of this Article V. (c) Mechanics of Conversion. Before any holder of Existing Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Existing Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Existing Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Existing Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Existing Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Existing Preferred Stock shall not be deemed to have converted such Existing Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock for Splits and Combinations. The Conversion Price of the Existing Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event this corporation should at any time or from time to time after the date ""of filing of this Amended and Restated Certificate of Incorporation fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of each series of Existing Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. 7 9 (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Existing Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not otherwise referred to herein or in Article IV of this Amended and Restated Certificate of Incorporation, then, in each such case for the purpose of this Section, the holders of the Existing Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A, Series B, Series C or Series D Preferred Stock, each as the case may be, are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section (B)(4) or in Section (B)(2) of this Article V or the stock split provided for in Article IV of this Amended and Restated Certificate of Incorporation) provision shall be made so that the holders of the Existing Preferred Stock shall thereafter be entitled to receive upon conversion of the Existing Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Existing Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Existing Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This corporation will not, by amendment of its Restated Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Existing Preferred Stock against impairment. 8 10 (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Existing Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Existing Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Existing Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Existing Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Existing Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Existing Preferred Stock. (i) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Existing Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Existing Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Existing Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Existing Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this certificate. (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Existing Preferred Stock shall be deemed given if deposited in 9 11 the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 5. Voting Rights. (a) The holder of each share of Existing Preferred Stock shall have the right to one vote for each share of Common Stock into which such Existing Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Existing Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Election of Directors. (i) The holders of the Existing Preferred Stock, voting separately as a class, shall be entitled to elect two directors at each annual meeting of stockholders of this corporation at which any director is elected or at the time of any written consent to action in lieu of any such meeting. No director so elected by the holders of the Existing Preferred Stock may be removed without the prior consent, given in person or by proxy, either in writing or at a special meeting called for that purpose, of the holders of the Existing Preferred Stock voting separately as a class. In case of the death, resignation or other removal of any director elected by the holders of the Existing Preferred Stock pursuant to this Subsection (B)(5)(b)(i), such holders may elect, voting separately as a class, by written notification delivered to the Board of Directors of the Corporation, a successor to hold office for the unexpired term of such removed director. (ii) The holders of the Common Stock, voting separately as a class, shall be entitled to elect two directors at each annual meeting of stockholders of this corporation at which any director is elected or at the time of any written consent to action in lieu of any such meeting. No director so elected by the holders of the Common Stock may be removed without the prior consent, given in person or by proxy, either in writing or at a special meeting called for that purpose, of the holders of the Common Stock voting separately as a class. In case of the death, resignation or other removal of any director elected by the holders of the Common Stock pursuant to this Subsection (B)(5)(b)(ii), such holders may elect, voting separately as a class, by written notification delivered to the Board of Directors of the corporation, a successor to hold office for the unexpired term of such removed director. (iii) The holders of the Common and Existing Preferred Stock, voting together, shall be entitled to elect one director at each annual meeting of stockholders of the corporation at which any director is elected or at the time of any written consent to action in lieu of any such meeting. No director so elected by the holders of the Common and Existing Preferred Stock may be removed without the prior consent given in person or by proxy, either in 10 12 writing or at a special meeting called for that purpose, of the holders of the Common and Existing Preferred Stock voting together. In case of the death, resignation or other removal of the director elected by the holders of the Common and Existing Preferred Stock pursuant to this Subsection (B)(5)(b)(iii), such holders may elect, voting together, by written notification delivered to the Board of Directors of the corporation, a successor to hold office for the unexpired term of such removed director. 6. Protective Provisions. (a) Subject to the rights of series of Preferred Stock that may from time to time come into existence, so long as any shares of Existing Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Existing Preferred Stock voting as a class: (i) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of; (ii) alter or change the rights, preferences or privileges of the shares of Existing Preferred Stock so as to affect adversely the shares; (iii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of any series of Existing Preferred Stock; (iv) authorize, create or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security having a preference over, or being on a parity with, the Existing Preferred Stock with respect to voting, dividends or upon liquidation; (v) pay any dividends on the Common Stock; (vi) change the number of directors of this corporation; or (vii) amend this Amended and Restated Certificate of Incorporation or the Bylaws of this corporation. (b) So long as at least three hundred seventy-five thousand (375,000) shares of a series of Existing Preferred Stock are outstanding after taking into account for the two-for-three split of the outstanding Existing Preferred Stock (effected upon the filing of this Amended and Restated Certificate of Incorporation), the corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the shares of such series then outstanding, amend this corporation's Amended and Restated 11 13 Certificate of Incorporation to alter or change the rights, preferences or privileges of the shares of such series, if such series would be adversely affected by such amendment in a manner different from other then outstanding series of Existing Preferred Stock (it being understood that, without limiting the foregoing, different series of Existing Preferred Stock shall not be affected differently because of differences in the amounts of their respective issue prices, liquidation preferences and redemption prices). 7. Status of Converted or Redeemed Stock. In the event any shares of Existing Preferred Stock shall be converted pursuant to Section (B) 4 hereof, the shares so converted shall be canceled and shall not be issuable by this corporation. The Restated Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in this corporation's authorized capital stock. C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section 2 of Division (B) of this Article V hereof. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have (i) the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law and (ii) the right to vote for the election of directors as provided in Section 5(b) of Division (B) of this Article V hereof. ARTICLE VI Except as otherwise provided in this Amended and Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of this corporation. ARTICLE VII The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. 12 14 ARTICLE VIII Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide. ARTICLE IX Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation. ARTICLE X A director of this corporation shall, to the full extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, not be liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article X, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article X, shall eliminate or reduce the effect of this Article X in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article X, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE XI This corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. * * * FIVE: That thereafter said amendment and restatement was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law by obtaining the vote of the holders of the majority of the outstanding stock of the corporation in favor of said amendment and restatement in the manner set forth in Section 222 of the General Corporation Law. 13 15 IN WITNESS WHEREOF, the undersigned have executed this certificate on September 11, 1998. /s/ DENNIS L. BARSEMA --------------------------------------------- Dennis L. Barsema, President /s/ ROBERT V. GUNDERSON, JR. --------------------------------------------- Robert V. Gunderson, Jr., Assistant Secretary EX-3.3 3 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.3 BYLAWS OF REDBACK NETWORKS INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Santa Clara, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1996, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a 1 2 board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least ten percent (10%) in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. 2 3 Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of fifty percent (50%) of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express 3 4 provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole board shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director 4 5 elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and new created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. 5 6 Section 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the president on two (2) days' notice to each director by mail or forty-eight (48) hours notice to each director either personally or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. Section 8. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn 6 7 the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation of these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or 7 8 they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the 8 9 corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation or bylaw, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS 9 10 Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a president, treasurer and a secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a treasurer, and a secretary and may choose vice presidents. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 10 11 THE CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. Section 7. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. THE PRESIDENT AND VICE-PRESIDENTS Section 8. The president shall be the chief executive officer of the corporation; and in the absence of the Chairman and Vice Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors; he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 9. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 10. In the absence of the president or in the event of his inability or refusal to act, the vice-president, if any, (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, 11 12 then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 11. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. 12 13 THE TREASURER AND ASSISTANT TREASURERS Section 13. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 14. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 15. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 16. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall 13 14 perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice-chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, 14 15 optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 15 16 TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 16 17 REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 17 18 CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFICATION Section 6. The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director of the corporation or a predecessor corporation or, at the corporation's request, a director or officer of another corporation, provided, however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 6 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled 18 19 under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation's obligation to provide indemnification under this Section 6 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. Expenses incurred by a director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director of the corporation (or was serving at the corporation's request as a director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent's duty to the corporation or its stockholders. The foregoing provisions of this Section 6 shall be deemed to be a contract between the corporation and each director who serves in such capacity at any time while this 19 20 bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer or employee of the corporation. To assure indemnification under this Section 6 of all directors, officers and employees who are determined by the corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 6, be interpreted as follows: an "other enterprise" shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines." ARTICLE VIII AMENDMENTS 20 21 Section 1. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. 21 22 CERTIFICATE OF SECRETARY OF REDBACK NETWORKS INC. The undersigned, Robert V. Gunderson, Jr., hereby certifies that he is the duly elected and acting Secretary of Redback Networks Inc., a Delaware corporation (the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws of said Corporation as duly adopted by Action by Written Consent in Lieu of Organizational Meeting by the Directors on August 30, 1996. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 30th day of August, 1996. /s/ Robert V. Gunderson, Jr. ------------------------------------------------ Robert V. Gunderson, Jr. Secretary 22 EX-10.1 4 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of March __, 1999, between REDBACK NETWORKS INC., a Delaware corporation ("the Company"), and ________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company has adopted Bylaws (the "Bylaws") providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors; and WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of directors' and officers' liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's service as an officer or director after the date hereof, the parties hereto agree as follows: 1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article VII of the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith 2 and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company's obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law. 3. Contribution in the Event of Joint Liability. (a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding 2 3 in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive. (c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee. 4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten (10) days 3 4 after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement: (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (1) by a majority vote of the disinterested directors, even though less than a quorum, or (2) by independent legal counsel in a written opinion, or (3) by the stockholders. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by 4 5 Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 5 6 (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat. (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 6 7 7. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right to seek any such adjudication. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b). (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors' and officers' liability insurance policies maintained by the Company the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. 7 8 8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 9. Exception to Right of Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his rights under this Agreement. 10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the 8 9 Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or any other Enterprise at the Company's request. 11. Security. To the extent requested by the Indemnitee and approved by the Board of Directors of the Company, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 12. Enforcement. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 13. Definitions. For purposes of this Agreement: (a) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (b) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (c) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is 9 10 or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement. 14. Severability. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent 10 11 possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to the address set forth below Indemnitee signature hereto. (b) If to the Company, to: 1389 Moffett Park Drive Sunnyvale, California 94089-1134 Attention: Dennis Barsema or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 18. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 11 12 20. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof. 21. Gender. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. 12 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. REDBACK NETWORKS INC. By:______________________________________ Name:_____________________________ Title:____________________________ Address: 1389 Moffett Park Drive Sunnyvale, California 94089-1134 INDEMNITEE ________________________________________ Address: ________________________________________ ________________________________________ ________________________________________ ________________________________________ 13 EX-10.2 5 1999 STOCK INCENTIVE PLAN 1 EXHIBIT 10.2 REDBACK NETWORKS INC. 1999 STOCK INCENTIVE PLAN (AS ADOPTED EFFECTIVE _______ __, 1999) 2 TABLE OF CONTENTS
Page ARTICLE 1. INTRODUCTION..................................................................... 1 ARTICLE 2. ADMINISTRATION................................................................... 1 2.1 Committee Composition........................................................... 1 2.2 Committee Responsibilities...................................................... 1 2.3 Committee for Non-Officer Grants................................................ 1 ARTICLE 3. SHARES AVAILABLE FOR GRANTS...................................................... 2 3.1 Basic Limitation................................................................ 2 3.2 Annual Increase in Shares....................................................... 2 3.3 Additional Shares............................................................... 2 ARTICLE 4. ELIGIBILITY...................................................................... 2 4.1 Nonstatutory Stock Options and Restricted Shares................................ 2 4.2 Incentive Stock Options......................................................... 2 ARTICLE 5. OPTIONS.......................................................................... 3 5.1 Stock Option Agreement.......................................................... 3 5.2 Number of Shares................................................................ 3 5.3 Exercise Price.................................................................. 3 5.4 Exercisability and Term......................................................... 3 5.5 Effect of Change in Control..................................................... 3 5.6 Modification or Assumption of Options........................................... 4 5.7 Buyout Provisions............................................................... 4 5.8 Salary Reduction Option Grants.................................................. 4 ARTICLE 6. PAYMENT FOR OPTION SHARES........................................................ 4 6.1 General Rule.................................................................... 4 6.2 Surrender of Stock.............................................................. 5 6.3 Exercise/Sale................................................................... 5 6.4 Exercise/Pledge................................................................. 5 6.5 Promissory Note................................................................. 5 6.6 Other Forms of Payment.......................................................... 5 ARTICLE 7. RESTRICTED SHARES................................................................ 5 7.1 Restricted Stock Agreement...................................................... 5 7.2 Payment for Awards.............................................................. 5 7.3 Vesting Conditions.............................................................. 6 7.4 Voting and Dividend Rights...................................................... 6 ARTICLE 8. PROTECTION AGAINST DILUTION...................................................... 6 8.1 Adjustments..................................................................... 6
i 3
Page 8.2 Dissolution or Liquidation...................................................... 6 8.3 Reorganizations................................................................. 7 ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES................................................... 7 ARTICLE 10. AWARDS UNDER OTHER PLANS........................................................ 7 ARTICLE 11. LIMITATION ON RIGHTS............................................................ 7 11.1 Retention Rights............................................................... 7 11.2 Stockholders' Rights........................................................... 7 11.3 Regulatory Requirements........................................................ 8 ARTICLE 12. WITHHOLDING TAXES............................................................... 8 12.1 General........................................................................ 8 12.2 Share Withholding.............................................................. 8 ARTICLE 13. LIMITATION ON PAYMENTS.......................................................... 8 13.1 Scope of Limitation............................................................ 8 13.2 Basic Rule..................................................................... 9 13.3 Reduction of Payments.......................................................... 9 13.4 Overpayments and Underpayments................................................. 9 13.5 Related Corporations........................................................... 10 ARTICLE 14. FUTURE OF THE PLAN.............................................................. 10 14.1 Term of the Plan............................................................... 10 14.2 Amendment or Termination....................................................... 10 ARTICLE 15. DEFINITIONS..................................................................... 10 ARTICLE 16. EXECUTION....................................................................... 13
ii 4 REDBACK NETWORKS INC. 1999 STOCK INCENTIVE PLAN ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board effective as of the date of the Company's initial public offering. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares or Options (which may constitute incentive stock options or nonstatutory stock options). The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy: (a) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code. 2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. 2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also appoint a secondary committee of the Board, which shall be composed of one or more directors of the Company who need not satisfy the requirements of Section 2.1. Such secondary committee may administer the Plan with respect to Employees and Consultants who are not considered officers or directors of 5 the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and Consultants and may determine all features and conditions of such Awards. Within the limitations of this Section 2.3, any reference in the Plan to the Committee shall include such secondary committee. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Options and Restricted Shares awarded under the Plan shall not exceed (a) 2,500,000 plus (b) the aggregate number of Common Shares remaining available for grants under the Predecessor Plan on the date of the Company's initial public offering plus (c) the additional Common Shares described in Sections 3.2 and 3.3. No additional grants shall be made under the Predecessor Plan after the date of the Company's initial public offering. The limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 8. 3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year, commencing with the year 2000, the aggregate number of Options and Restricted Shares that may be awarded under the Plan shall automatically increase by a number equal to the lesser of (a) five percent of the total number of Common Shares then outstanding or (b) 1,500,000. 3.3 ADDITIONAL SHARES. If Options granted under this Plan or the Predecessor Plan are forfeited or terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for the grant of Options or Restricted Shares under this Plan. If Common Shares issued upon the exercise of Options granted under this Plan or the Predecessor Plan are forfeited, then such Common Shares shall again become available for the grant of NSOs and Restricted Shares under this Plan. If Restricted Shares issued under this Plan or the Predecessor Plan are forfeited, then the corresponding Common Shares shall again become available for the grant of NSOs and Restricted Shares under this Plan. The aggregate number of Common Shares that may be issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares or other Common Shares are forfeited. ARTICLE 4. ELIGIBILITY. 4.1 NONSTATUTORY STOCK OPTIONS AND RESTRICTED SHARES. Only Employees, Outside Directors and Consultants shall be eligible for the grant of NSOs and Restricted Shares. 4.2 INCENTIVE STOCK OPTIONS. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied. 2 6 ARTICLE 5. OPTIONS. 5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2. 5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 8. Options granted to any Optionee in a single fiscal year of the Company shall not cover more than one million Common Shares, except that Options granted to a new Employee in the fiscal year of the Company in which his or her service as an Employee first commences shall not cover more than two million Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 8. 5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than 30% of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding. 5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. 5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company, subject to the following limitations: (a) In the case of an ISO, the acceleration of exercisability shall not occur without the Optionee's written consent. (b) If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that the Company's independent accountants and such other party's 3 7 independent accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. In addition, acceleration of exercisability may be required under Section 8.3. 5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. 5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. 5.8 SALARY REDUCTION OPTION GRANTS. The Committee, at its sole discretion, may offer one or more Employees, Outside Directors and Consultants an opportunity to receive NSOs in consideration of a voluntary reduction in their cash compensation from the Company, a Parent or a Subsidiary. The Committee shall determine the maximum and minimum amounts of the reduction that an Employee, Outside Director or Consultant may elect. If an Employee, Outside Director or Consultant designated by the Committee wishes to receive NSOs under this Section 5.8, then he or she shall file a written and irrevocable election with the Company prior to the close of a calendar year. Such election shall specify the dollar amount by which the compensation of the Employee, Outside Director or Consultant shall be reduced during the next following calendar year (within the limitations prescribed by the Committee). On the first trading day of the calendar year next following the receipt of an election by the Company, the Employee, Outside Director or Consultant who filed such election shall automatically receive an NSO. Such NSO shall cover a number of Common Shares equal to (a) the amount of the compensation reduction elected by the Optionee divided by (b) two-thirds of the Fair Market Value of one Common Share on the date of grant. The Exercise Price of such NSO shall be equal to one-third of the Fair Market Value of one Common Share on the date of grant. Such NSO shall become exercisable in 12 equal monthly installments over the calendar year in which the grant occurred, but no portion of such NSO shall become exercisable after the Optionee's service has terminated for any reason. The term of such NSO shall be 10 calendar years, commencing with the calendar year in which the grant occurred (regardless of whether the Optionee's service has terminated). Except as provided in this Section 5.8, the NSOs granted under this Section 5.8 shall be subject to the provisions applicable to other NSOs granted under the Plan. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased, except as follows: 4 8 (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6. (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is applicable, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Common Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. 6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company. 6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to pledge all or part of the Common Shares being purchased under the Plan to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company. 6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents. 6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. ARTICLE 7. RESTRICTED SHARES. 7.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. 7.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, 5 9 including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the consideration shall consist exclusively of cash, cash equivalents or past services rendered to the Company (or a Parent or Subsidiary) or, for the amount in excess of the par value of such newly issued Restricted Shares, full-recourse promissory notes, as the Committee may determine. 7.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company, except as provided in the next following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of vesting shall not occur to the extent that the Company's independent accountants and such other party's independent accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. 7.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. ARTICLE 8. PROTECTION AGAINST DILUTION. 8.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Options and Restricted Shares available for future Awards under Article 3, (b) the limitations set forth in Section 5.2, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. Except as provided in this Article 8, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 8.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised, Options shall terminate immediately prior to the dissolution or liquidation of the Company. 6 10 8.3 REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Options and Restricted Shares shall be subject to the agreement of merger or reorganization. Such agreement shall provide for (a) the continuation of the outstanding Awards by the Company, if the Company is a surviving corporation, (b) the assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards, (d) full exercisability or vesting and accelerated expiration of the outstanding Awards or (e) settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES. The Committee (in its sole discretion) may permit or require an Optionee to have Common Shares that otherwise would be delivered to such Optionee as a result of the exercise of an Option converted into amounts credited to a deferred compensation account established for such Optionee by the Committee as an entry on the Company's books. Such amounts shall be determined by reference to the Fair Market Value of such Common Shares as of the date when they otherwise would have been delivered to such Optionee. A deferred compensation account established under this Article 9 may be credited with interest or other forms of investment return, as determined by the Committee. An Optionee for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Optionee and the Company. If the conversion of Options is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such conversion, including (without limitation) the settlement of deferred compensation accounts established under this Article 9. ARTICLE 10. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Restricted Shares and shall, when issued, reduce the number of Common Shares available under Article 3. ARTICLE 11. LIMITATION ON RIGHTS. 11.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Outside Director or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the service of any Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment agreement (if any). 11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued or, in the case of an 7 11 Option, the time when he or she becomes entitled to receive such Common Shares by filing a notice of exercise and paying the Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 11.3 REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. ARTICLE 12. WITHHOLDING TAXES. 12.1 GENERAL. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 12.2 SHARE WITHHOLDING. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when they are withheld or surrendered. ARTICLE 13. LIMITATION ON PAYMENTS. 13.1 SCOPE OF LIMITATION. This Article 13 shall apply to an Award only if: (a) The independent auditors most recently selected by the Board (the "Auditors") determine that the after-tax value of such Award to the Participant, taking into account the effect of all federal, state and local income taxes, employment taxes and excise taxes applicable to the Participant (including the excise tax under section 4999 of the Code), will be greater after the application of this Article 13 than it was before the application of this Article 13; or (b) The Committee, at the time of making an Award under the Plan or at any time thereafter, specifies in writing that such Award shall be subject to this Article 13 (regardless of the after-tax value of such Award to the Participant). If this Article 13 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan. 8 12 13.2 BASIC RULE. In the event that the Auditors determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Article 13, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 13.3 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 13, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 13 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 13.4 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 9 13 13.5 RELATED CORPORATIONS. For purposes of this Article 13, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. ARTICLE 14. FUTURE OF THE PLAN. 14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become effective on the date of the Company's initial public offering. The Plan shall remain in effect until it is terminated under Section 14.2, except that no ISOs shall be granted on or after the 10th anniversary of the later of (a) the date when the Board adopted the Plan or (b) the date when the Board adopted the most recent increase in the number of Common Shares available under Article 3 which was approved by the Company's stockholders. 14.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE 15. DEFINITIONS. 15.1 "AFFILIATE" means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity. 15.2 "AWARD" means any award of an Option or a Restricted Share under the Plan. 15.3 "BOARD" means the Company's Board of Directors, as constituted from time to time. 15.4 "CHANGE IN CONTROL" shall mean: (a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Company's assets; (c) A change in the composition of the Board, as a result of which 50% or fewer of the incumbent directors are directors who either (i) had been directors of the Company on the date 24 months prior to the date of the event that may constitute a Change in Control (the "original directors") or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at 10 14 least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (d) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Subsection (d), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. 15.5 "CODE" means the Internal Revenue Code of 1986, as amended. 15.6 "COMMITTEE" means the compensation committee of the Board, as described in Article 2. 15.7 "COMMON SHARE" means one share of the common stock of the Company. 15.8 "COMPANY" means Redback Networks Inc., a Delaware corporation. 15.9 "CONSULTANT" means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan, except as provided in Section 4.2. 15.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate. 15.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 15.12 "EXERCISE PRICE" means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. 15.13 "FAIR MARKET VALUE" means the market price of Common Shares, determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 15.14 "ISO" means an incentive stock option described in section 422(b) of the Code. 11 15 15.15 "NSO" means a stock option not described in sections 422 or 423 of the Code. 15.16 "OPTION" means an ISO or NSO granted under the Plan and entitling the holder to purchase Common Shares. 15.17 "OPTIONEE" means an individual or estate who holds an Option. 15.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an Employee. Service as an Outside Director shall be considered employment for all purposes of the Plan, except as provided in Section 4.2. 15.19 "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 15.20 "PARTICIPANT" means an individual or estate who holds an Award. 15.21 "PREDECESSOR PLAN" means the Redback Networks Inc. 1997 Stock Plan. 15.22 "PLAN" means this Redback Networks Inc. 1999 Stock Incentive Plan, as amended from time to time. 15.23 "RESTRICTED SHARE" means a Common Share awarded under the Plan. 15.24 "RESTRICTED STOCK AGREEMENT" means the agreement between the Company and the recipient of a Restricted Share that contains the terms, conditions and restrictions pertaining to such Restricted Share. 15.25 "STOCK OPTION AGREEMENT" means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 15.26 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 12 16 ARTICLE 16. EXECUTION. To record the adoption of the Plan by the Board on March 3, 1999, the Company has caused its duly authorized officer to execute this document in the name of the Company. REDBACK NETWORKS INC. By: ---------------------------------- Title: ------------------------------- 13 EX-10.3 6 1999 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.3 REDBACK NETWORKS INC. 1999 EMPLOYEE STOCK PURCHASE PLAN (AS ADOPTED EFFECTIVE _______ __, 1999) 2 TABLE OF CONTENTS
Page SECTION 1. PURPOSE OF THE PLAN.......................................................... 1 SECTION 2. ADMINISTRATION OF THE PLAN................................................... 1 (a) Committee Composition........................................................ 1 (b) Committee Responsibilities................................................... 1 SECTION 3. ENROLLMENT AND PARTICIPATION................................................. 1 (a) Offering Periods............................................................. 1 (b) Accumulation Periods......................................................... 1 (c) Enrollment................................................................... 1 (d) Duration of Participation.................................................... 1 (e) Applicable Offering Period................................................... 2 SECTION 4. EMPLOYEE CONTRIBUTIONS....................................................... 2 (a) Frequency of Payroll Deductions.............................................. 2 (b) Amount of Payroll Deductions................................................. 2 (c) Changing Withholding Rate.................................................... 2 (d) Discontinuing Payroll Deductions............................................. 3 (e) Limit on Number of Elections................................................. 3 SECTION 5. WITHDRAWAL FROM THE PLAN..................................................... 3 (a) Withdrawal................................................................... 3 (b) Re-Enrollment After Withdrawal............................................... 3 SECTION 6. CHANGE IN EMPLOYMENT STATUS.................................................. 3 (a) Termination of Employment.................................................... 3 (b) Leave of Absence............................................................. 3 (c) Death........................................................................ 3 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES......................................... 4 (a) Plan Accounts................................................................ 4 (b) Purchase Price............................................................... 4 (c) Number of Shares Purchased................................................... 4 (d) Available Shares Insufficient................................................ 4 (e) Issuance of Stock............................................................ 4 (f) Unused Cash Balances......................................................... 5 (g) Stockholder Approval......................................................... 5 SECTION 8. LIMITATIONS ON STOCK OWNERSHIP............................................... 5 (a) Five Percent Limit........................................................... 5 (b) Dollar Limit................................................................. 5
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Page SECTION 9. RIGHTS NOT TRANSFERABLE...................................................... 6 SECTION 10. NO RIGHTS AS AN EMPLOYEE..................................................... 6 SECTION 11. NO RIGHTS AS A STOCKHOLDER................................................... 6 SECTION 12. SECURITIES LAW REQUIREMENTS.................................................. 6 SECTION 13. STOCK OFFERED UNDER THE PLAN................................................. 7 (a) Authorized Shares............................................................ 7 (b) Anti-Dilution Adjustments.................................................... 7 (c) Reorganizations.............................................................. 7 SECTION 14. AMENDMENT OR DISCONTINUANCE.................................................. 7 SECTION 15. DEFINITIONS.................................................................. 7 (a) Accumulation Period.......................................................... 7 (b) Board........................................................................ 7 (c) Code......................................................................... 7 (d) Committee.................................................................... 8 (e) Company...................................................................... 8 (f) Compensation................................................................. 8 (g) Corporate Reorganization..................................................... 8 (h) Eligible Employee............................................................ 8 (i) Exchange Act................................................................. 8 (j) Fair Market Value............................................................ 8 (k) IPO.......................................................................... 9 (l) Offering Period.............................................................. 9 (m) Participant.................................................................. 9 (n) Participating Company........................................................ 9 (o) Plan......................................................................... 9 (p) Plan Account................................................................. 9 (q) Purchase Price............................................................... 9 (r) Stock........................................................................ 9 (s) Subsidiary................................................................... 9 SECTION 15. EXECUTION.................................................................... 9
ii 4 REDBACK NETWORKS INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE OF THE PLAN. The Plan was adopted by the Board effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code. SECTION 2. ADMINISTRATION OF THE PLAN. (a) COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board. (b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. SECTION 3. ENROLLMENT AND PARTICIPATION. (a) OFFERING PERIODS. While the Plan is in effect, two overlapping Offering Periods shall commence in each calendar year. The Offering Periods shall consist of the 24-month periods commencing on each May 1 and November 1, except that the first Offering Period shall commence on the date of the IPO and end on April 30, 2001. (b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the six-month periods commencing on each May 1 and November 1, except that the first Accumulation Period shall commence on the date of the IPO and end on October 31, 1999. (c) ENROLLMENT. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than five days prior to the commencement of such Offering Period. (d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Accumulation Period in which his or her employee contributions were discontinued under Section 4(d) or 8(b). A Participant who 5 discontinued employee contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 8(b) shall automatically resume participation at the beginning of the earliest Accumulation Period ending in the next calendar year, if he or she then is an Eligible Employee. (e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period shall be determined as follows: (i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment for a subsequent Offering Period under Paragraph (ii) or (iii) below. (ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period for which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period. (iii) Any other provision of the Plan notwithstanding, the Company (at its sole discretion) may determine prior to the commencement of any new Offering Period that all Participants shall be re-enrolled for such new Offering Period. (iv) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period. SECTION 4. EMPLOYEE CONTRIBUTIONS. (a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 15%. (c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as 2 6 reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 15%. (d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company. (e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than two elections under Subsection (c) or (d) above during any Accumulation Period. SECTION 5. WITHDRAWAL FROM THE PLAN. (a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 3(c). Re-enrollment may be effective only at the commencement of an Offering Period. SECTION 6. CHANGE IN EMPLOYMENT STATUS. (a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work. (c) DEATH. In the event of the Participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant's death. 3 7 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES. (a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts. (b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of: (i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or (ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 3(e)) or, in the case of the first Offering Period under the Plan, 85% of the price at which one share of Stock is offered to the public in the IPO. (c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 1,000 shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 8(b) and 13(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be (i) rounded down to the next lower whole share or (ii) credited as a fractional share. (d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 13(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. (e) ISSUANCE OF STOCK. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. 4 8 (f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the Participant in cash, without interest. (g) STOCKHOLDER APPROVAL. Any other provision of the Plan notwithstanding, no shares of Stock shall be purchased under the Plan unless and until the Company's stockholders have approved the adoption of the Plan. SECTION 8 .LIMITATIONS ON STOCK OWNERSHIP. (a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply: (i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code; (ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and (iii) Each Participant shall be deemed to have the right to purchase 1,000 shares of Stock under this Plan with respect to each Accumulation Period. (b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of the following limit: (i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company). (ii) In the case of Stock purchased during an Offering Period that commenced in the immediately preceding calendar year, the limit shall be equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the immediately preceding calendar year. 5 9 (iii) In the case of Stock purchased during an Offering Period that commenced in the second preceding calendar year, the limit shall be equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the two preceding calendar years. For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). SECTION 9. RIGHTS NOT TRANSFERABLE. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a). SECTION 10. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause. SECTION 11. NO RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Accumulation Period. SECTION 12. SECURITIES LAW REQUIREMENTS. Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company's securities may then be traded. 6 10 SECTION 13. STOCK OFFERED UNDER THE PLAN. (a) AUTHORIZED SHARES. The number of shares of Stock available for purchase under the Plan shall be 1,000,000 (subject to adjustment pursuant to this Section 13). On May 1 of each year, commencing with May 1, 2000, the aggregate number of shares of Stock available for purchase during the life of the Plan shall automatically be increased by the number of shares necessary to cause the number of shares then available for purchase to be restored to 1,000,000 (subject to adjustment pursuant to this Section 13). (b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock offered under the Plan, the 1,000-share limitation described in Section 7(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event. (c) REORGANIZATIONS. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period and Accumulation Period then in progress shall terminate and shares shall be purchased pursuant to Section 7, unless the Plan is continued or assumed by the surviving corporation or its parent corporation. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. SECTION 14. AMENDMENT OR DISCONTINUANCE. The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. In addition, the Company's Chief Executive Officer may amend the Plan at any time, except to increase the number of shares of Stock that may be issued under the Plan in the aggregate or to any individual Participant. Except as provided in Section 13, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 15. DEFINITIONS. (a) "ACCUMULATION PERIOD" means a six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b). (b) "BOARD" means the Board of Directors of the Company, as constituted from time to time. (c) "CODE" means the Internal Revenue Code of 1986, as amended. 7 11 (d) "COMMITTEE" means the compensation committee of the Board, as described in Section 2. (e) "COMPANY" means Redback Networks Inc., a Delaware corporation. (f) "COMPENSATION" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. "Compensation" shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation. (g) "CORPORATE REORGANIZATION" means: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization; or (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. (h) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company whose customary employment is for more than five months per calendar year and for more than 20 hours per week. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means the market price of Stock, determined by the Committee as follows: (i) If the Stock was traded on The Nasdaq National Market on the date in question, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq National Market; (ii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; or (iii) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 8 12 Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal or as reported directly to the Company by Nasdaq or a stock exchange. Such determination shall be conclusive and binding on all persons. (k) "IPO" means the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission. (l) "OFFERING PERIOD" means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 3(a). (m) "PARTICIPANT" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c). (n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company. (o) "PLAN" means this Redback Networks Inc. 1999 Employee Stock Purchase Plan, as it may be amended from time to time. (p) "PLAN ACCOUNT" means the account established for each Participant pursuant to Section 7(a). (q) "PURCHASE PRICE" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b). (r) "STOCK" means the Common Stock of the Company. (r) "STOCK" means the Common Stock of the Company. (s) "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 16. EXECUTION. To record the adoption of the Plan by the Board on March 3, 1999, the Company has caused its duly authorized officer to execute this document in the name of the Company. REDBACK NETWORKS INC. By: ----------------------------------- Title: -------------------------------- 9 EX-10.4 7 1999 DIRECTORS' OPTION PLAN 1 EXHIBIT 10.4 REDBACK NETWORKS INC. 1999 DIRECTORS' OPTION PLAN (AS ADOPTED EFFECTIVE _______ __, 1999) 2 TABLE OF CONTENTS
Page ARTICLE 1. INTRODUCTION.....................................................................1 ARTICLE 2. ADMINISTRATION...................................................................1 2.1 Committee Composition...........................................................1 2.2 Committee Responsibilities......................................................1 ARTICLE 3. SHARES AVAILABLE FOR GRANTS......................................................1 3.1 Basic Limitation................................................................1 3.2 Annual Increase in Shares.......................................................1 3.3 Additional Shares...............................................................2 ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS................................2 4.1 Eligibility.....................................................................2 4.2 Initial Grants..................................................................2 4.3 Annual Grants...................................................................2 4.4 Accelerated Exercisability......................................................2 4.5 Exercise Price..................................................................3 4.6 Term............................................................................3 4.7 Affiliates of Non-Employee Directors............................................3 4.8 Stock Option Agreement..........................................................3 ARTICLE 5. PAYMENT FOR OPTION SHARES........................................................3 5.1 Cash............................................................................3 5.2 Surrender of Stock..............................................................3 5.3 Exercise/Sale...................................................................3 5.4 Other Forms of Payment..........................................................3 ARTICLE 6. PROTECTION AGAINST DILUTION......................................................4 6.1 Adjustments.....................................................................4 6.2 Dissolution or Liquidation......................................................4 6.3 Reorganizations.................................................................4 ARTICLE 7. LIMITATION ON RIGHTS.............................................................4 7.1 Stockholders' Rights............................................................4 7.2 Regulatory Requirements.........................................................4 7.3 Withholding Taxes...............................................................5 ARTICLE 8. FUTURE OF THE PLAN...............................................................5 8.1 Term of the Plan................................................................5 8.2 Amendment or Termination........................................................5
i 3 ARTICLE 9. DEFINITIONS......................................................................5 ARTICLE 10. EXECUTION.......................................................................7
ii 4 REDBACK NETWORKS INC. 1999 DIRECTORS' OPTION PLAN ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board effective as of the date of the Company's initial public offering. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Non-Employee Directors to focus on critical long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors with exceptional qualifications and (c) linking Non-Employee Directors directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for automatic and non-discretionary grants of Options to Non-Employee Directors. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act. 2.2 COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares subject to Options granted under the Plan shall not exceed (a) 200,000 plus (b) the additional Common Shares described in Sections 3.2 and 3.3. The limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 6. 3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year, commencing with the year 2000, the aggregate number of Common Shares available for the grant of Options under the Plan shall automatically be increased by the number necessary to cause the total number of Common Shares then available to be restored to 200,000. 5 3.3 ADDITIONAL SHARES. If Options are forfeited or terminate for any other reason before being exercised, then the Common Shares subject to such Options shall again become available for the grant of Options under the Plan. ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. 4.1 ELIGIBILITY. Only Non-Employee Directors shall be eligible for the grant of Options under the Plan. 4.2 INITIAL GRANTS. Each Non-Employee Director who first becomes a member of the Board after the date of the Company's initial public offering shall receive a one-time grant of an Option covering 25,000 Common Shares (subject to adjustment under Article 6) on the date when such Non-Employee Director first joins the Board. Each Non-Employee Director who is a member of the Board on the date of the Company's initial public offering, and who did not previously receive an option to purchase Common Shares, shall receive a one-time grant of an Option covering 25,000 Common Shares on the date of the Company's initial public offering. Options granted under this Section 4.2 shall become exercisable in equal monthly installments over the 48-month period commencing on the date of grant, except that all of the first 12 installments shall become exercisable on the first anniversary of the date of grant. A Non-Employee Director who previously was an Employee shall not receive a grant under this Section 4.2. 4.3 ANNUAL GRANTS. Upon the conclusion of each regular annual meeting of the Company's stockholders held in the year 2000 or thereafter, each Non-Employee Director who will continue serving as a member of the Board thereafter shall receive an Option covering 10,000 Common Shares (subject to adjustment under Article 6), except that such Option shall not be granted in the calendar year in which the same Non-Employee Director received the Option described in Section 4.2. Options granted under this Section 4.3 shall become exercisable in equal monthly installments over the 12-month period commencing on the date of grant. A Non-Employee Director who previously was an Employee shall be eligible to receive grants under this Section 4.3. 4.4 ACCELERATED EXERCISABILITY. All Options granted to a Non-Employee Director under this Article 4 shall also become exercisable in full in the event of: (a) The termination of such Non-Employee Director's service because of death or total and permanent disability; or (b) A Change in Control with respect to the Company, except as provided in the next following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that the Company's independent accountants and such other party's independent 2 6 accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. 4.5 EXERCISE PRICE. The Exercise Price under all Options granted to a Non-Employee Director under this Article 4 shall be equal to 100% of the Fair Market Value of a Common Share on the date of grant, payable in one of the forms described in Article 5. 4.6 TERM. All Options granted to a Non-Employee Director under this Article 4 shall terminate on the earlier of (a) the 10th anniversary of the date of grant or (b) the date 12 months after the termination of such Non-Employee Director's service for any reason. 4.7 AFFILIATES OF NON-EMPLOYEE DIRECTORS. The Committee may provide that the Options that otherwise would be granted to a Non-Employee Director under this Article 4 shall instead be granted to an affiliate of such Non-Employee Director. Such affiliate shall then be deemed to be a Non-Employee Director for purposes of the Plan, provided that the service-related vesting and termination provisions pertaining to the Options shall be applied with regard to the service of the Non-Employee Director. 4.8 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. ARTICLE 5. PAYMENT FOR OPTION SHARES. 5.1 CASH. All or any part of the Exercise Price may be paid in cash or cash equivalents. 5.2 SURRENDER OF STOCK. All or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Common Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. 5.3 EXERCISE/SALE. All or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company. 5.4 OTHER FORMS OF PAYMENT. At the sole discretion of the Committee, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. 3 7 ARTICLE 6. PROTECTION AGAINST DILUTION. 6.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Common Shares available for future grants under Article 3, (b) the number of Options to be granted to Non-Employee Directors under Article 4, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. Except as provided in this Article 6, an Optionee shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 6.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised, Options shall terminate immediately prior to the dissolution or liquidation of the Company. 6.3 REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. Such agreement shall provide for (a) the continuation of the outstanding Options by the Company, if the Company is a surviving corporation, (b) the assumption of the outstanding Options by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own options for the outstanding Options, (d) full exercisability and accelerated expiration of the outstanding Options or (e) settlement of the full value of the outstanding Options in cash or cash equivalents followed by cancellation of such Options. ARTICLE 7. LIMITATION ON RIGHTS. 7.1 STOCKHOLDERS' RIGHTS. A Optionee shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Option prior to the time when he or she becomes entitled to receive such Common Shares by filing a notice of exercise and paying the Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 7.2 REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Option prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. 4 8 7.3 WITHHOLDING TAXES. To the extent required by applicable federal, state, local or foreign law, an Optionee or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. ARTICLE 8. FUTURE OF THE PLAN. 8.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become effective on the date of the Company's initial public offering. The Plan shall remain in effect until it is terminated under Section 8.2. 8.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Options shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option previously granted under the Plan. ARTICLE 9. DEFINITIONS. 9.1 "BOARD" means the Company's Board of Directors, as constituted from time to time. 9.2 "CHANGE IN CONTROL" means: (a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Company's assets; (c) A change in the composition of the Board, as a result of which 50% or fewer of the incumbent directors are directors who either (i) had been directors of the Company on the date 24 months prior to the date of the event that may constitute a Change in Control (the "original directors") or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (d) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or 5 9 indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Subsection (d), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. 9.3 "CODE" means the Internal Revenue Code of 1986, as amended. 9.4 "COMMITTEE" means a committee of the Board, as described in Article 2. 9.5 "COMMON SHARE" means one share of the common stock of the Company. 9.6 "COMPANY" means Redback Networks Inc., a Delaware corporation. 9.7 "EMPLOYEE" means a common-law employee of the Company, a Parent or a Subsidiary. 9.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 9.9 "EXERCISE PRICE" means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. 9.10 "FAIR MARKET VALUE" means the market price of Common Shares, determined by the Committee in good faith on such basis as it deems appropriate. The Committee's determination of Fair Market Value by shall be based on the prices reported in The Wall Street Journal whenever possible, except that the Fair Market Value on the date of the Company's initial public offering shall be equal to the price of Common Shares to the public in such offering. Such determination shall be conclusive and binding on all persons. 9.11 "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an Employee. 9.12 "OPTION" means an option granted under the Plan and entitling the holder to purchase Common Shares. Options do not qualify as incentive stock options described in section 422(b) of the Code. 9.13 "OPTIONEE" means an individual or estate who holds an Option. 9.14 "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company 6 10 owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 9.15 "PLAN" means this Redback Networks Inc. 1999 Directors' Option Plan, as amended from time to time. 9.16 "STOCK OPTION AGREEMENT" means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 9.17 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 10. EXECUTION. To record the adoption of the Plan by the Board on March 3, 1999, the Company has caused its duly authorized officer to execute this document in the name of the Company. REDBACK NETWORKS INC. By:_________________________________________ Title:______________________________________ 7 EX-10.5 8 SUBLEASE BETWEEN REGISTRANT AND INFOSEEK CORP 1 EXHIBIT 10.5 SUBLEASE THIS SUBLEASE ("Sublease") is dated, for reference purposes only, as of January 12, 1998, and is made by and between INFOSEEK CORPORATION, a California corporation ("Sublessor"), and REDBACK NETWORKS, INC., a Delaware corporation ("Sublessee"). Sublessor and Sublessee hereby agree as follows: 1. Recitals: This Sublease is made with reference to the fact that Limar Realty Corp. #8, a California corporation ("Master Lessor"), as Landlord, and Sublessor, as Tenant, entered that certain Lease, dated March 4, 1997, as amended by that certain First Amendment to Lease dated June 9, 1997, and that certain Second Amendment to Lease dated July 15, 1997 (collectively, "Master Lease"), with respect to that certain real property commonly known as 1399 East Moffett Park Drive, Sunnyvale, CA (the "Premises"or "Property"), as more particularly described in the Master Lease. A copy of the Master Lease is attached hereto as Exhibit "A" and incorporated by reference herein. 2. Premises: Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, a portion of the Premises, deemed to be 20,462 square feet of space (the "Subleased Premises"), being a portion of that approximately 91,900 square foot building (the "Building") located on the Premises. The Subleased Premises are more particularly described on Exhibit "B" attached hereto and incorporated by reference herein. 3. Term: The term of this Sublease ("Term") shall commence (the "Commencement Date") on the date of completion of the demising wall depicted on Exhibit C attached hereto and incorporated by reference herein. The Term shall end on September 30, 1999 ("Termination Date"), unless this Sublease is sooner terminated pursuant to its terms or the Master Lease is sooner terminated pursuant to its terms. The parties acknowledge that Sublessee has no option to extend the Term of this Sublease. 4. Rent: A. Monthly Base Rent. Sublessee shall pay to Sublessor as monthly base rent ("Monthly Base Rent") for the Subleased Premises equal monthly installments as follows:
Months Rent/Month ------ ---------- 1- 12 $32,330 13-last month of the Term $33,353
As used herein, the word "month" shall mean a period beginning on the first (1st) day of a month and ending on the last day of that month. Rent (as defined in Paragraph 4.B) shall be paid on or before three (3) days prior to the first (1st) day of each calendar month during the Term. Rent for any period during the term hereof which is for less than one month of the Term shall be a pro rata portion of the monthly installment based on a thirty (30)-day month. Rent shall be payable without notice or -1- 2 demand and without any deduction, offset, or abatement, in lawful money of the United States of America. Rent shall be paid directly to Sublessor at the address of the Premises, Attn. Chief Financial Officer, or such other address as may be designated in writing by Sublessor. B. Additional Rent. All monies required to be paid by Sublessee under this Sublease (excluding Monthly Base Rent pursuant to Paragraph 4.A), including, without limitation, any amounts payable by Sublessor to Master Lessor under the Master Lease (including, without limitation, "Operating Expenses," as defined in Section 13 of the Master Lease), shall be deemed additional rent ("Additional Rent"). Monthly Base Rent and Additional Rent hereinafter collectively shall be referred to herein as "Rent." Sublessee and Sublessor agree, as a material part of the consideration given by Sublessee to Sublessor for this Sublease, that from and after the Commencement Date, Sublessee shall pay all costs, expenses, taxes, insurance, maintenance and other charges of every kind and nature arising in connection with the Subleased Premises under this Sublease and the Master Lease; in this regard, Sublessee shall pay 22.27% of Sublessor's share of "Operating Expenses" (as such terms is defined in the Master Lease). Notwithstanding anything to the contrary set forth in this Sublease, Sublessor's obligation to pay Additional Rent (attributable to the Term) shall survive the expiration or earlier termination of this Sublease, and if Sublessor is unable to determine the amount of Additional Rent due and payable by Sublessee at the expiration or earlier termination of this Sublease, then the parties shall make an adjusting payment between them when the correct amount can be determined. C. Payment of First Month's Rent. Upon execution hereof by Sublessee, Sublessee shall pay to Sublessor, in cash, the sum of Thirty-Two Thousand Three Hundred Thirty Dollars ($32,330), which shall constitute Rent for the first month of the Term. 5. Security Deposit: Upon execution hereof by Sublessee, Sublessee shall deposit with Sublessor, in cash, the sum of Sixty-Four Thousand Six Hundred Sixty Dollars ($64,660), as security for the performance by Sublessee of the terms and conditions of this Sublease. If Sublessee fails to pay Rent or other charges due hereunder or otherwise defaults with respect to any provision of this Sublease, then Sublessor may draw upon, use, apply or retain all or any portion of the security deposit for the payment of any Rent or other charge in default, for the payment of any other sum which Sublessor has become obligated to pay by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor has suffered thereby. If Sublessor so uses or applies all or any portion of the security deposit, then Sublessee shall, within five (5) days after demand therefor, deposit cash with Sublessor in the amount required to restore the deposit to the full amount stated above. Upon the expiration or earlier termination of this Sublease, Sublessor shall return to Sublessee (without interest) so much of the security deposit as has not been applied by Sublessor pursuant to this Paragraph, or which is not otherwise required to cure Sublessee's defaults. 6. Late Charge: In addition to any interest payable pursuant to the terms of the Master Lease, as incorporated herein pursuant to Paragraph 25.A below, if Sublessee fails to pay Sublessor any amount due hereunder on or before the date when such payment is due, Sublessee shall pay to Sublessor upon demand a late charge equal to ten percent (10%) of the delinquent amount. The parties agree that the foregoing late charge represents a reasonable estimate of the cost and expense -2- 3 which Sublessor will incur in processing each delinquent payment. Sublessor's acceptance of any interest or late charge shall not waive Sublessee's default in failing to pay the delinquent amount. 7. Repairs: Except as set forth in Paragraph 14 below with respect to the construction of the demising wall, or as otherwise provided herein, Sublessor shall have no obligation whatsoever to make or pay the cost of any alterations, improvements or repairs to the Subleased Premises. 8. Indemnity: Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold Sublessor harmless against any and all claims, liabilities, judgments, causes of action, damages, costs (including reasonable attorneys' and experts' fees), and expenses (collectively, "Claims"), caused by or arising in connection with: (i) the use, occupancy or condition of the Subleased Premises; (ii) the negligence or willful misconduct of Sublessee or its employees, contractors, agents or invitees; or (iii) a breach of Sublessee's obligations under this Sublease; provided, however, that Sublessee shall have no obligation to indemnify, protect, or hold harmless Sublessor against, nor shall Sublessor be deemed released from, any of such Claims to the extent it is caused by or arises in connection with: (i) the gross or active negligence or willful misconduct of Sublessor or its employees, contractors, agents, or invitees; or (ii) a breach of Sublessor's obligations under this Sublease. 9. Right to Cure Defaults: If Sublessee fails to pay any sum of money to Sublessor, or fails to perform any other act on its part to be performed hereunder, then Sublessor may, but shall not be obligated to, make such payment or perform such act. All such sums paid, and all costs and expenses of performing any such act, shall be deemed Additional Rent payable by Sublessee to Sublessor upon demand. In addition, Sublessee shall pay to Sublessor interest on all amounts due, at the rate of ten percent (10%) per annum or the maximum rate allowed by law, whichever is less (the "Interest Rate"), from the due date to and including the date of the payment, from the date of the expenditure until repaid. 10. Assignment and Subletting: Sublessee may not assign this Sublease, sublet the Subleased Premises, transfer any interest of Sublessee therein, or permit any use of the Subleased Premises by another party ("Transfer"). Any Transfer by Sublessee shall be void and shall, at the option of Sublessor, terminate this Sublease. Notwithstanding anything to the contrary contained in this Sublease or in the Master Lease, at Sublessor's sole option, Sublessor shall have the right to terminate this Sublease if Sublessee requests Sublessor's consent to an assignment of this Sublease or a sublet of all or any portion of the Subleased Premises. 11. Use: Sublessee may use the Subleased Premises only for the uses set forth in Paragraph 1.c and Sections 6 and 7 of the Master Lease and for no other purpose. With respect to Hazardous Materials (defined below), Sublessee shall not engage in or permit any activities in or about the Premises or Project which involve the use or presence of Hazardous Materials. Sublessee shall not do or permit anything to be done in or about the Subleased Premises which would (i) injure the Subleased Premises, or (ii) vibrate, shake, overload, or impair the efficient operation of the Subleased Premises or the sprinkler systems, heating, ventilating or air conditioning equipment, or utilities systems located therein. Sublessee shall not store any materials, supplies, finished or -3- 4 unfinished products, or articles of any nature outside of the Subleased Premises. Sublessee shall comply with all reasonable rules and regulations promulgated from time to time by Sublessor and Master Lessor with respect to the Subleased Premises and the Premises. As used herein, the term "Hazardous Materials" shall mean any material or substance that is now or hereafter prohibited or regulated by any statute, law, rule, regulation or ordinance or that is now or hereafter designated by any governmental authority to be radioactive, toxic, hazardous or otherwise a danger to health, reproduction or the environment. 12. Effect of Conveyance: As used in this Sublease, the term "Sublessor" means the holder of the tenant's interest under the Master Lease. In the event of any transfer of said tenant's interest, Sublessor shall be and hereby is entirely relieved of all covenants and obligations of Sublessor hereunder first arising after the effective date of such transfer, and it shall be deemed and construed, without further agreement between the parties, that the transferee has assumed and shall carry out all covenants and obligations from and after the effective date of such transfer to be performed by Sublessor hereunder. Sublessor may transfer and deliver any security of Sublessee to the transferee of said tenant's interest in the Master Lease, and thereupon Sublessor shall be discharged from any further liability with respect thereto. 13. Acceptance: By taking possession of the Subleased Premises, Sublessee shall conclusively be deemed to have accepted the Subleased Premises in their "as-is," then-existing condition; provided, however, that as of the Commencement Date, all Building systems serving the Subleased Premises, including, but not limited to, electrical, plumbing, HVAC, and fire sprinklers, will be in good working order. Sublessee shall have five (5) days after the Commencement Date to notify Sublessor in writing of any defects in the foregoing Building systems and if written notice of any such defects in such systems is not received by Sublessor within said five (5) day period, then correction of any such defects shall be the obligation of Sublessee, not Sublessor. 14. Improvements: No alterations or improvements shall be made to the Subleased Premises, except in accordance with this Sublease and the Master Lease, and with the prior written consent, when required, of both Master Lessor and Sublessor. Sublessor's consent to any proposed alteration or improvement shall not be unreasonably withheld or delayed; provided, however, that it shall be deemed reasonable for Sublessor to withhold its consent to any proposed alteration or improvement which is not approved by Master Lessor. As more fully described in Section 14 of the Master Lease, as incorporated herein, all alterations or improvements made by Sublessee to the Subleased Premises shall remain on and be surrendered with the Subleased Premises upon the expiration or earlier termination of this Sublease, except that Sublessor may, within thirty (30) days before or thirty (30) days after termination of the Sublease, elect to require Sublessee to remove some or all of the alterations or improvements which Sublessee may have made to the Subleased Premises, unless Sublessor has previously agreed in writing that any one or more of such alterations or improvements need not be removed at the end of the Term. If Sublessor so elects, Sublessee shall at its own cost restore the Subleased Premises to the condition designated by Sublessor in Sublessor's election, before the last day of the Term or within thirty (30) days after notice of Sublessor's election is given to Sublessee, whichever is later. Sublessor shall not be required to provide a tenant improvement allowance to Sublessee in connection with Sublessee's construction of any alterations or -4- 5 improvements to the Subleased Premises. Notwithstanding the foregoing, Sublessor shall use reasonable good faith efforts to cause the construction of the demising wall depicted on Exhibit C to be completed as soon reasonably practicable following the approval of this Sublease by Master Lessor. Sublessor shall cause the demising wall to be constructed in accordance with applicable laws and in a good and workmanlike manner. 15. Limitation of Liability: Except to the extent of the gross or active negligence or willful misconduct of Sublessor, its agents, employees, contractors or invitees, Sublessor shall not be liable to Sublessee for: (i) failure or interruption of any utility system or service, or (ii) failure of Master Lessor to maintain the Subleased Premises as may be required under the Master Lease. In the event that Sublessor is entitled to an abatement of rent (with respect to the Subleased Premises) under the terms of the Master Lease, Sublessee shall be entitled to a proportionate share of abatement of Rent under this Sublease. Sublessor and Sublessee are corporations, and the obligations of Sublessor and Sublessee hereunder shall not constitute the personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders or other principals or representatives of the corporations. 16. Default: Sublessee shall be in material default of its obligations under this Sublease if any of the following events occur: A. Sublessee fails to pay any Rent when due, when such failure continues for three (3) days after written notice from Sublessor to Sublessee that any such sum is due; or B. Sublessee fails to perform any term, covenant or condition of this Sublease (except those requiring payment of Rent) and fails to commence cure of such breach within seven (7) days after delivery of a written notice from Sublessor specifying the nature of the breach or to thereafter expeditiously complete such cure within a reasonable time; or C. Sublessee makes a general assignment of its assets for the benefit of its creditors, including attachment of, execution on, or the appointment of a custodian or receiver with respect to a substantial part of Sublessee's property or any property essential to the conduct of its business; or D. Sublessee abandons the Subleased Premises or ceases to conduct business in the Subleased Premises for more than seven (7) consecutive days in any thirty (30) day period; or E. A petition is filed by or against Sublessee under the bankruptcy laws of the United States or any other debtors' relief law or statute, unless such petition is dismissed within sixty (60) days after filing; or a court directs the winding up or liquidation of Sublessee; or a substantial part of Sublessee's property or any property essential to the conduct of its business is attached or executed upon and not released from the attachment or execution within sixty (60) days; or a custodian or receiver is appointed for a substantial part of Sublessee's property or any property essential to the conduct of its business and not discharged within sixty (60) days; or -5- 6 F. Sublessee commits any other act or omission which constitutes an event of default under the Master Lease, which has not been cured after delivery of written notice and passage of the applicable grace period provided in the Master Lease as modified, if at all, by the provisions of this Sublease. 17. Remedies. In the event of any default by Sublessee under this Sublease (including, without limitation, a default pursuant to Section 20 of the Master Lease, as incorporated herein), Sublessor shall have all remedies provided by applicable law, including, without limitation, all rights pursuant to Paragraph 21 of the Master Lease, as incorporated herein and under California Civil Code Sections 1951.2 and 1951.4. Sublessor may resort to its remedies cumulatively or in the alternative. 18. Surrender: Prior to expiration of this Sublease, Sublessee shall remove all of its trade fixtures and shall surrender the Subleased Premises to Sublessor in the condition received, free of Hazardous Materials brought onto the Property by Sublessee, its agents, employees, contractors or invitees, reasonable wear and tear excepted. If the Subleased Premises are not so surrendered, then Sublessee shall be liable to Sublessor for all costs incurred by Sublessor in returning the Subleased Premises to the required condition, plus interest thereon at the Interest Rate. Sublessee shall indemnify, defend with counsel reasonably acceptable to Sublessor, protect and hold harmless Sublessor against any and all claims, liabilities, judgments, causes of action, damages, costs, and expenses (including attorneys' and experts' fees) resulting from Sublessee's delay in surrendering the Subleased Premises in the condition required. 19. Estoppel Certificates: Within five (5) days after demand by Sublessor, Sublessee shall execute and deliver to Sublessor an estoppel certificate to Sublessor in connection with the Sublease in the form required pursuant to Section 24 of the Master Lease. 20. Broker: Sublessor and Sublessee each represent to the other that they have dealt with no real estate brokers, lenders, agents or salesmen other than Cooper/Brady Corporate Real Estate Services, representing Sublessor, and Wayne Macia Associates, representing Sublessee, in connection with this transaction. Each party agrees to hold the other party harmless from and against all claims for brokerage commissions, finder's fees, or other compensation made by any other agent, broker, salesman or finder as a consequence of said party's actions or dealings with such agent, broker, salesman, or finder. Sublessor shall pay a commission due in connection with this transaction pursuant to a separate written agreement between Sublessor and its broker, Cooper/Brady Corporate Real Estate Services. 21. Notices: Unless five (5) days' prior written notice is given in the manner set forth in this Paragraph, the address of each party for all purposes connected with this Sublease shall be that address set forth below their signatures at the end of this Sublease. The address for Master Lessor shall be as set forth in the Master Lease. All notices, demands, or communications in connection with this Sublease shall be considered received when (i) personally delivered; or (ii) if properly addressed and either sent by nationally recognized overnight courier or deposited in the mail (registered or certified, return receipt requested, and postage prepaid), on the date shown on the return receipt for acceptance or rejection. All notices given to the Master Lessor under the Master Lease shall be -6- 7 considered received only when delivered in accordance with the Master Lease to all parties hereto at the address set forth below their signatures at the end of this Sublease. 22. Severability: If any term of this Sublease is held to be invalid or unenforceable by any court of competent jurisdiction, then the remainder of this Sublease shall remain in full force and effect to the fullest extent possible under the law, and shall not be affected or impaired. 23. Amendment: This Sublease may not be amended except by the written agreement of all parties hereto. 24. Attorneys' Fees: If either party brings any action or legal proceeding with respect to this Sublease, the prevailing party shall be entitled to recover reasonable attorneys' fees, experts' fees, and court costs. Notwithstanding the foregoing and in addition thereto, Sublessor shall be entitled to immediate receipt from Sublessee, for each breach hereof, of such reasonable attorneys' fees (but not less than Fifty Dollars ($50.00)), as may be incurred in connection with each notice or demand delivered to Sublessee. Sublessee agrees that such sum constitutes reimbursement to Sublessor of the reasonable cost of the preparation and delivery of each notice caused by Sublessee's breach. 25. Other Sublease Terms: A. Incorporation by Reference. Except as otherwise provided in this Sublease, the terms and provisions contained in the Master Lease are incorporated herein by reference, and are made a part hereof as if set forth at length; provided, however, that: (i) each reference in such incorporated sections to "Lease" and to "Premises" shall be deemed a reference to this "Sublease" and the "Subleased Premises," respectively; (ii) each reference to "Landlord" and "Tenant" shall be deemed a reference to "Sublessor" and "Sublessee", respectively; (iii) with respect to work, services, repairs, restoration, insurance or the performance of any other obligation of Landlord under the Master Lease, the sole obligation of Sublessor shall be to request the same in writing from Master Lessor, as and when requested to do so by Sublessee, and to use Sublessor's reasonable efforts (provided Sublessee pays all costs incurred by Sublessor in connection therewith) to obtain Master Lessor's performance, including, if reasonably necessary under the circumstances, the commencement and prosecution of legal proceedings in the name of Sublessor or otherwise against Master Lessor, with counsel reasonably satisfactory to Sublessee, and Sublessor agrees to coordinate such enforcement proceedings with Sublessee, but control of such proceedings shall be with Sublessor; (iv) with respect to any obligation of Sublessee to be performed under this Sublease, wherever the Master Lease grants to Sublessor a specified number of days to perform its obligations under the Master Lease, except as otherwise provided herein, Sublessee shall have three (3) fewer days to perform the obligation, including, without limitation, curing any defaults; (v) Sublessor shall have no liability to Sublessee with respect to (a) representations and warranties made by Master Lessor under the Master Lease, (b) any indemnification obligations of Master Lessor under the Master Lease, or other obligations or liabilities of Master Lessor under the Master Lease with respect to compliance with laws, condition of the Subleased Premises or Hazardous Materials, and (c) obligations under the Master Lease to repair, maintain, restore, or insure all or any portion of the Premises, regardless of whether the incorporation of one or more provisions of the Master Lease might otherwise operate to -7- 8 make Sublessor liable therefor; (vi) with respect to any approval or consent required to be obtained from the Master Lessor under the Master Lease, such approval or consent must be obtained from both Master Lessor and Sublessor, and the approval of Sublessor may be withheld if Master Lessor's approval or consent is not obtained; (vii) the following provisions of the Master Lease are expressly not incorporated herein by reference: Paragraphs 1.a, 1.b, 1.d, l.g, 1.h, and 1.j through 1.o, inclusive; Paragraphs 2.a and 2.f; Section 3; Paragraphs 4.a and 4.b; Section 5; the second sentence of Subparagraph 12.b(4) (but only delete the words "Tenant Improvements as outlined in P. 28 hereof" and replace them with "demising wall to be constructed by Sublessor as outlined in this Sublease"); Section 12(b)(5); Section 13.a (but see Section 4.B of this Sublease regarding Tenant's obligation to pay Operating Expenses); Section 19 (except for the sixth sentence of Paragraph 19.a); Section 20; Paragraph 23.c; Sections 27, 28, 29, 30, 31, 32, 33, 34 and 35; Paragraph 36(d); Exhibits A and E; (viii) notwithstanding clause (ii) above, references to "Landlord" in the following provisions of the Master Lease shall mean Master Lessor, not Sublessor: 1.f; Paragraph 2.d (second sentence only); Subparagraph 7.c(2); Section 9; Paragraph 10.a (but only the first sentence and the and the last reference to "Landlord" in the second sentence); Paragraph 12.a; Subparagraph 12.b(5) and 12.d(1); Paragraph 13.b; Section 15; Subparagraph 16.b(2); Paragraph 16.c; Paragraphs 17.a, 17.b (also, replace the first reference to "Tenant" in the last sentence of this paragraph with "Sublessor or Sublessee") and 17.e; 18.a; and Paragraphs 23.a, 23.b and 36.f; and (ix) notwithstanding clause (ii) above, references to "Landlord" in the following provisions of the Master Lease shall mean both Master Lessor and Sublessor: Paragraphs 2.d (second sentence only) and 2.e; Section 6; Paragraphs 7.d and 7.f; Section 8; Paragraph 10.a (first sentence only); Paragraph 12.a; Subparagraph 12.b(4) (third sentence only); Paragraphs 13.c through 13.e, inclusive; Section 14 (the first, second, third and sixth sentences only); Subparagraph 16.b(1); Paragraph 18.c (the last sentence only); Sections 22, 24, and 25; and Paragraphs 36.c, 36.h and Exhibit C. B. Assumption of Obligations: This Sublease is and all times shall be subject and subordinate to the Master Lease and the rights of Master Lessor thereunder. Sublessee hereby expressly assumes and agrees: (i) to comply with all provisions of the Master Lease applicable to the Subleased Premises to the extent incorporated herein, (ii) to perform all the obligations on the part of the "Tenant" to be performed under the terms of the Master Lease applicable to the Subleased Premises during the term of this Sublease to the extent incorporated herein, and (iii) to hold Sublessor free and harmless of and from all liability, judgments, costs, damages, claims, demands. and expenses (including reasonable attorneys' and experts' fees) arising out of Sublessee's failure to comply with or to perform Sublessee's obligations hereunder or to act or omit to act in any manner which will constitute a breach of the Master Lease. C. Sublessor's Representations: To the best of Sublessor's knowledge, Sublessor represents and warrants with respect to the Subleased Premises (i) that the document attached as Exhibit a to this Agreement is a true, correct and complete copy of the Master Lease, and that the Master Lease is in full force and effect, (ii) there is no default, or any condition which with the passage of time or the giving of notice, or both, would constitute a default, on the part of either party to the Master Lease, and (iii) Sublessor has not assigned, encumbered or otherwise transferred any interest of Tenant under the Master Lease. Sublessor shall perform all obligations of the Tenant under the Master Lease to the extent that Sublessee has not agreed to perform such obligations under -8- 9 the Sublease and shall cooperate with Sublessee to obtain the consent of Master Lessor in a timely manner to any act which requires such consent and Sublessor shall not unreasonably withhold or delay consent to any such act. 26. Condition Precedent: Notwithstanding anything to the contrary contained herein, this Sublease and Sublessor's and Sublessee's obligations hereunder are conditioned upon having obtained the written consent of the Master Lessor. If Sublessor has not obtained Master Lessor's consent within thirty (30) days after the date of Sublessor's execution of this Sublease, either party may terminate this Sublease, and Sublessor shall return to Sublessee all sums paid by Sublessee to Sublessor in connection with its execution of this Sublease. Sublessee shall provide to Master Lessor all financial and other information requested by Master Lessor pursuant to Section 19 of the Master Lease. 27. Sublease Common Areas: A. Sublessee's Rights. The areas identified on Exhibit B as "Common Area" shall constitute the "Sublease Common Areas." All areas within the Building other than the Subleased Premises and the Sublease Common Areas are reserved for the exclusive use of Sublessor. Subject to the terms and conditions set forth herein, Sublessee and its employees, contractors and invitees shall have the non-exclusive right, in common with Sublessor and Sublessor's employees, contractors and invitees, to use the Sublease Common Areas as they exist from time to time, subject to any rights, powers or privileges reserved by Sublessor under the terms of this Sublease. Sublessor makes no warranty express or implied with respect to the condition of the Sublease Common Areas or any equipment located therein. Sublessee shall not store any property, temporarily or permanently, in the Sublease Common Areas. B. Rules and Regulations. Sublessor shall have the exclusive control and management of the Sublease Common Areas and may from time to time promulgate reasonable rules and regulations for the care and orderly management of the Sublease Common Areas and the safety of Sublessor, Sublessee and their employees, agents and invitees. Such rules and regulations shall be binding upon Sublessee upon delivery of a copy thereof to Sublessee, and Sublessee agrees to abide by such rules and regulations and to cause its employees, contractors and invitees to abide by such rules and regulations. C. Changes. Sublessor shall have the right from time to time to: (i) make physical changes to the Sublease Common Areas; (ii) close temporarily any of the Sublease Common Areas for maintenance purposes provided reasonable access to the Subleased Premises remains available; (iii) add improvements to the Sublease Common Areas; and (iv) to do or perform such other acts and make such other changes to the Sublease Common Areas and Building as Sublessor, in its reasonable discretion, deems appropriate. D. Parking. Sublessee and its employees, contractors and invitees shall be entitled to the non-exclusive use, in common with Sublessor and Sublessor's employees, contractors and -9- 10 invitees, of eighty (80) parking spaces only on those portions of the common areas of the Premises designated from time to time by Sublessor for parking. Sublessee and its employees, contractors and invitees shall not use more parking spaces than the foregoing number and no overnight parking shall be permitted. Said parking spaces may be used for parking by vehicles no larger than full-size passenger automobiles and pick-up trucks. If Sublessee permits or allows any vehicles to be parked on the Premises in violation of this Sublease, then Sublessor may, in addition to Sublessor's other rights and remedies, remove or tow away the vehicles involved and charge the cost thereof to Sublessee, which cost shall be immediately payable upon demand by Sublessor. 28. Board Approval: Sublessee represents and warrants to Sublessor that Sublessee's Board of Directors has authorized Sublessee's execution hereof. 29. Waiver of Subrogation: Notwithstanding anything to the contrary contained in this Sublease or the Master Lease, Sublessor, Sublessee and Master Lessor (by its consent to this Sublease) agree that the waiver of subrogation provisions set forth in paragraph 16.f of the Master Lease shall be deemed binding among and inure to the benefit of Sublessor, Sublessee and Master Lessor. [Signature page follows] -10- 11 IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written. SUBLESSEE: SUBLESSOR: INFOSEEK CORPORATION, REDBACK NETWORKS, INC., a California corporation a Delaware corporation By: /s/ LESLIE E. WRIGHT By: /s/ DENNIS BARSEMA ----------------------------- -------------------------------- Printed Printed Name: Leslie E. Wright Name: DENNIS BARSEMA ----------------------------- ------------------------------ Its: VP FINANCE & CFO Its: ----------------------------- ------------------------------- Address: Prior to the Commencement Date: Address: 1399 Moffett Drive 2570 North First Street, Ste. 401 Sunnyvale, CA 94089 San Jose, CA 94131 Attn: Chief Financial Officer After the Commencement Date: At the Subleased Premises CONSENT OF MASTER LESSOR Master Lessor hereby acknowledges receipt of a copy of this Sublease, and consents to this Sublease. By this consent, Master Lessor shall not be deemed in any way to have entered into the Sublease or to have consented to any further assignment or sublease. MASTER LESSOR: LIMAR REALTY CORP. #8, a California corporation By: /s/ THOMAS A. NUMAINVILLE -------------------------------------- Printed Name: THOMAS A. NUMAINVILLE ----------------------------------- Its: SENIOR VICE PRESIDENT ------------------------------------- -11- EX-10.6 9 FIRST AMENDMENT TO SUBLEASE 1 EXHIBIT 10.6 FIRST AMENDMENT TO SUBLEASE THIS FIRST AMENDMENT TO SUBLEASE ("Amendment") is dated for reference purposes only as of January 15, 1999, and is made by and between INFOSEEK CORPORATION, a Delaware Corporation ("Sublessor"), and REDBACK NETWORKS, INC., a Delaware corporation ("Sublessee"). RECITALS A. Pursuant to that certain Standard NNN Lease dated March 4, 1997, as amended by that certain First Amendment to Lease dated June 9, 1997, and that certain Second Amendment to Lease dated July 15, 1997 (collectively, the "Master Lease"), Sublessor leases that certain real property commonly known as 1399 East Moffett Park Drive, Sunnyvale, CA (the "Master Premises") from Limar Realty Corp. #8 (the "Master Lessor"). B. Pursuant to that certain Sublease dated as of January 12, 1998 (the "Sublease"), Sublessor subleases to Sublessee a portion of the Building located on the Master Premises, which subleased portion is deemed to contain 20,462 square feet of space (the "Subleased Premises"). C. Sublessor and Sublessee wish to amend the Sublease on the terms and conditions stated herein to increase the square footage of the Subleased Premises and to modify and amend certain other provisions of the Sublease. AGREEMENT NOW, THEREFORE, for consideration, the adequacy and receipt of which are hereby acknowledged, Sublessor and Sublessee agree as follows: 1. Incorporation of Recitals and Definitions. The foregoing recitals are incorporated into and made a part of this Amendment. Terms which are capitalized in this Amendment and which are not defined herein shall have the meanings ascribed to them in the Sublease. 2. Modifications of Sublease. Notwithstanding anything to the contrary contained in the Sublease, as of the Effective Date (as defined in Section 3 below), the Sublease shall hereby be modified and amended as follows: 2.1 Subleased Premises. The Subleased Premises shall be increased to include an additional twelve thousand (12,000) square feet of space (the "Additional Space") located on the first floor of the Building, as more particularly described on Exhibit A attached hereto and made a part hereof. The total square footage of the Subleased Premises, including the Additional Space, shall be deemed to be 32,462 square feet of space. 2.2 Rent. The Monthly Base Rent for the remainder of the Term shall be increased from Thirty-Three Thousand Three Hundred Fifty-Three Dollars ($33,353) to Fifty-Two Thousand Nine Hundred Thirteen Dollars ($52,913). 2.3 Additional Rent. The percentage share of Sublessor's Operating Expenses due and payable by Sublessee shall be increased from 22.27% to 35.32%. 1 2 2.4 Sublease Common Areas. 2.4.1 Exercise Room. As more particularly described on Exhibit A, the Sublease Common Areas shall include Sublessor's exercise room located on the first floor of the Building; provided, however, that the use of such exercise room by Sublessee and its employees shall be (i) restricted to only those employees of Sublessee who have signed a release and waiver of liability agreement in a form acceptable to Sublessor and shall be subject to all other rules, regulations and restrictions promulgated by Sublessor in its sole but reasonable discretion, (ii) subject to all other terms and conditions regarding the Sublease Common Areas stated in the Sublease, and (iii) at Sublessee's sole risk and responsibility, notwithstanding anything to the contrary contained in the Sublease. In addition to Sublessee's other indemnity obligations under the Sublease, Sublessee shall indemnify, protect, defend and hold harmless Sublessor and Master Lessor and their agents, employees, successors and assigns from and against all liabilities, losses, claims, demands costs, expenses (including reasonable attorneys fees), causes of action, and judgements, including, without limitation, injury or death to persons or damage or loss to property, arising from or in any way connected with Sublessee's or its employees' use of the exercise room. 2.4.2 Security Card Reader. Sublessee shall as soon as reasonably practicable, at Sublessee's sole cost and expense, and in accordance with all requirements of the Sublease regarding the installation of improvements or alterations to the Subleased Premises, install a security card reader on the "C" Lobby door located in the Building which will allow employees of either Sublessor or Sublessee to enter that set of doors. The plans and specifications for such installation work shall be subject to the advance written approval (not to be unreasonably withheld or delayed) of Sublessor and no such installation work will be performed by Sublessee unless and until such approval is given by Sublessor. 2.5 Office Cubicle Reimbursement. The cubicles currently located in the Additional Space (the "Cubicles") shall remain and be delivered with the Additional Space in "as-is, where is" condition, without any representation or warranty whatsoever by Sublessor as to the adequacy, condition, or suitability of such Cubicles for any particular use or purpose. Subject to the terms and conditions of the Sublease, as modified by this Amendment, Sublessee may use the Cubicles in the Additional Space during the Term. At the expiration or earlier termination of the Sublease, and in addition to Sublessee's other surrender obligations under the Sublease, Sublessee shall surrender all of the Cubicles to Sublessor in the same condition and location where they were received, normal wear and tear excepted. If the Cubicles are not so surrendered, Sublessee shall be deemed in default under the Sublease and, in addition to any other rights or remedies that Sublessor may have, Sublessor may perform any necessary repair or replacement of such Cubicles and deduct all costs incurred in connection therewith from Sublessee's security deposit. As reimbursement to Sublessor for the rental cost of the Cubicles, Sublessee shall pay to Sublessor during the Term Three Thousand Dollars ($3,000) per month, which reimbursement shall be paid to Sublessor at the same time that Rent is due and payable under the Sublease. 3. Effective Date. As used herein, the "Effective Date" shall mean the date upon which Sublessor has delivered possession of the Additional Space to Sublessee. Notwithstanding the foregoing, if for any reason, Sublessor does not deliver possession of the Additional Space to Sublessee by March 31, 1999, then Sublessee, as its sole and exclusive remedy, may by written notice delivered to Sublessor not later than April 10, 1999, cancel this Amendment, whereupon this Amendment shall be deemed null, void and of no further force or effect, except that Sublessee shall be obligated to immediately surrender possession of any temporary space (as 2 3 described below) to Sublessor in the condition required by the Sublease, and Sublessee shall continue to be bound by and to perform its obligations under the Sublease. 4. Temporary Space. If prior to the Effective Date, Sublessor determines that office space within the Building is available for temporary use by Sublessee's employees, then Sublessor shall offer such space to Sublessee on a temporary basis. The temporary use of such space by Sublessee's employees shall be subject to all of the terms and conditions of the Sublease, including without limitation, the payment of Rent (Monthly Base Rent for such temporary space shall be calculated at the rate of $1.63 per square foot of such space, reimbursement for the use of any cubicles will be calculated at the rate of $0.25 per square foot, and Sublessee's share of Sublessor's Operating Expenses shall be increased proportionately by the amount of such space), and any other terms and conditions reasonably requested by Sublessor. The parties shall memorialize their agreement regarding any such temporary space in writing as an amendment to the Sublease. 5. Miscellaneous. 5.1 Consent of Master Lessor. Notwithstanding anything to the contrary contained in this Amendment, this Amendment shall have no force or effect unless and until it has been approved by Master Lessor in writing. 5.2 Counterparts. This Amendment may be executed in any number of original counterparts, all of which evidence only one agreement, and only one of which need be produced for any purpose. 5.3 Confirmation. Sublessor and Sublessee hereby ratify and confirm all of the terms and provisions of the Sublease, as amended by this Amendment, and the Sublease, as so amended, shall continue in full force and effect. [Signature page follows] 3 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. "Sublessor" "Sublessee" INFOSEEK CORPORATION, REDBACK NETWORKS, INC., a Delaware corporation a Delaware corporation By: /s/ LESLIE E. WRIGHT By: /s/ Geoffrey C. Darby ------------------------- -------------------------- Printed Printed Name: Leslie E. Wright Name: Geoffrey C. Darby ------------------------- -------------------------- Title: COO/CFO Title: CFO ------------------------- -------------------------- By: By: ------------------------------ ------------------------------ Printed Printed Name: Name: ---------------------------- ---------------------------- Title: Title: --------------------------- --------------------------- CONSENT OF MASTER LESSOR Master Lessor hereby acknowledges receipt of a copy of this Amendment. Master Lessor hereby consents to this Amendment. By this consent, Master Lessor shall not be deemed to have entered into the Sublease or to have consented to any further amendment of the Sublease. Master Lessor: LIMAR REALTY CORP. #8, a California corporation By: /s/ THOMAS A. NUMAINVILLE ---------------------------------- Printed Name: THOMAS A. NUMAINVILLE -------------------------------- Its: SENIOR V.P. -------------------------------- 4 5 Exhibit A Depiction of Subleased Premises (To be attached) 5 6 BUILDING LAYOUT 6 7 MEMORANDUM OF UNDERSTANDING BETWEEN INFOSEEK, INC. AND REDBACK NETWORKS, INC. 1. RedBack will sublease the rest of Bldg. C's first floor - approximately 12,000 sq. ft. starting no later than 3/31/99. 2. Triple Net square foot cost before allocated/shared expenses, for $1.63 per sq. ft. 3. Monthly cost per square foot for leasing the existing cubicles will be 25 cents per sq. ft./mo. 4. Monthly allocated expense percentage will be recalculated using the formula in the original sublease. 5. The add-on sublease contract to be co-terminus with the current sublease termination date of 9/30/99. 6. Until RedBack can take over the rest of the first floor, Infoseek will work with RedBack, on a space available basis, to house additional employees. 7. Both companies will share the first floor workout room. 8. RedBack will install a security card reader on the "C" Lobby door so that either Infoseek or RedBack employees can use that set of doors. /s/ GEOFF DARBY /s/ LES WRIGHT - ------------------------------ ------------------------------- Geoff Darby, CFO, Redback Les Wright, COO, Infoseek 1/11/99 1/11/99 - ------------------------------ ------------------------------- Date Date THIS MEMORANDUM OF UNDERSTANDING ("MOU") IS INTENDED SOLELY TO FACILITATE DISCUSSIONS AMONG THE PARTIES. THIS MOU IS NOT INTENDED TO CREATE NOR SHALL IT BE DEEMED TO CREATE A LEGALLY BINDING OR ENFORCEABLE AGREEMENT, OFFER, OR THE LIKE OF ANY TYPE OR NATURE AND NEITHER PARTY SHALL HAVE ANY LEGAL OBLIGATION WHATSOEVER PURSUANT TO THIS MOU. EX-23.1 10 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 5, 1999 relating to the financial statements of Redback Networks Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ PricewaterhouseCoopers LLP San Jose, California March 15, 1999 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 8,189,000 0 2,682,000 340,000 821,000 11,614,000 4,027,000 1,205,000 14,682,000 7,153,000 0 0 18,884,000 6,741,000 (19,371) 6,254,000 9,206,000 9,206,000 3,603,000 3,603,000 15,482,000 340,000 251,000 (9,876,000) 0 (9,876,000) 0 0 0 (9,876,000) (3.57) (3.57)
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