-----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, KAova7Q70DgOTxSYkzBeXM0BIJdrzkuHsLq5hKzwlmFgFnzU/nF2BbfHYPGJhpQ1 9dTkWPTfVacCfpK+qS3y2A== /in/edgar/work/0000891618-00-004759/0000891618-00-004759.txt : 20001004 0000891618-00-004759.hdr.sgml : 20001004 ACCESSION NUMBER: 0000891618-00-004759 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20001003 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETGEAR INC CENTRAL INDEX KEY: 0001122904 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 770419172 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-45472 FILM NUMBER: 734056 BUSINESS ADDRESS: STREET 1: 4401 GREAT AMERICAN PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95052 BUSINESS PHONE: 4084955316 MAIL ADDRESS: STREET 1: 4401 GREAT AMERICAN PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95052 S-1/A 1 f65217a1s-1a.txt AMENDMENT NO.1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETGEAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3661 77-0419172 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
NETGEAR, INC. 4500 GREAT AMERICA PARKWAY SANTA CLARA, CA 95054 (408) 907-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ PATRICK C.S. LO NETGEAR, INC. 4500 GREAT AMERICA PARKWAY SANTA CLARA, CA 95054 (408) 907-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN T. SHERIDAN, ESQ. TODD H. BAKER, ESQ. ANTHONY T. KIKUTA, ESQ. STANLEY SZE, ESQ. RICHARD S. AU, ESQ. JONATHAN GORDON, ESQ. MICHELLE D. GREGORY, ESQ. GIBSON, DUNN & CRUTCHER LLP WILSON SONSINI GOODRICH & ROSATI, P.C. ONE MONTGOMERY STREET, TELESIS TOWER 650 PAGE MILL ROAD SAN FRANCISCO, CA 94104-4505 PALO ALTO, CALIFORNIA 94304-1050 (415) 393-8200 (650) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If 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, 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(2) - ------------------------------------------------------------------------------------------------------------------ Common Stock, par value $0.001 per share.............. $130,000,000 $34,320 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee, in accordance with Rule 457(a) promulgated under the Securities Act of 1933. (2) Previously submitted. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS 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 SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 3, 2000 [NETGEAR LOGO] SHARES COMMON STOCK NETGEAR, Inc. is offering shares of its common stock and the selling stockholder is selling an additional shares. This is our initial public offering and no public market currently exists for our shares. We have applied to have the shares we are offering approved for quotation on the Nasdaq National Market under the symbol "NTGR." We anticipate that the initial public offering price will be between $ and $ per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------
PER SHARE TOTAL ---------- ---------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to NETGEAR, Inc.................................... $ $ Proceeds to the Selling Stockholder......................... $ $
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. The selling stockholder has granted the underwriters a 30-day option to purchase up to an additional shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS UBS WARBURG LLC WIT SOUNDVIEW THE DATE OF THIS PROSPECTUS IS , 2000 3 EDGAR description of inside front cover: NETGEAR logo with the caption: Plug into the power of networking EDGAR description of interior fold-out pages: 1. Top caption: NETWORKING SOLUTIONS for small businesses and homes 2. Left facing page: - top left corner of the page: the GearGuy logo. - left side of the page below the GearGuy logo: a list of product awards. - right side of the page: picture of a middle-aged man sitting in front of a computer at his desk at his workplace and a picture of a woman with a young child in her lap sitting at a desk at home, with the caption: NETGEAR brings leading networking technology to small businesses and homes. NETGEAR's family of products include 56K, 128K and broadband (cable and DSL) Internet gateway products, 10, 100 and 1000 Mbps network connectivity products and printer and disk server products. These products enable small businesses and homes to benefit from the power of networking. 3. Right facing page: - middle of page: photograph of certain NETGEAR products, including the relevant packaging, with the caption: NETGEAR currently has over 60 products being sold through retail channels in over 28 countries around the world. - Broad Portfolio of Advanced Products Designed for Small Businesses and Homes - Value Pricing - Easy to Install, Use and Maintain - Quality and Reliability - bottom of page: yellow rectangles containing the following images and captions: - an image of a computer connected to a globe with the caption: Broadband and 56 Kbps Internet access - an image of a cluster of computers connected to a globe with the caption: Share Internet access - an image of an iron gate with the caption: Provide security to prevent intruders - an image of a computer printer with the caption: Share computing resources - an image of a CD-ROM with the caption: Cache, store and share digital content 4 YOU SHOULD RELY 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 THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK. IN THIS PROSPECTUS, "NETGEAR," "WE," "US," AND "OUR" REFER TO NETGEAR, INC., A DELAWARE CORPORATION. ------------------------------ TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 6 Forward-Looking Statements.................................. 18 Use of Proceeds............................................. 18 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Business.................................................... 30 Management.................................................. 42 Certain Relationships and Related Party Transactions........ 51 Principal and Selling Stockholders.......................... 54 Description of Capital Stock................................ 56 Shares Eligible for Future Sale............................. 59 Underwriting................................................ 61 Legal Matters............................................... 63 Experts..................................................... 63 Additional Information...................................... 63 Index to Financial Statements............................... F-1
------------------------------ NETGEAR is a registered trademark owned by us. NETGEAR.com, the NETGEAR logo and the GearGuy in Gearland logo are trademarks owned by us. This prospectus contains trademarks and trade names of other companies which are the property of their respective owners. 5 (This page intentionally left blank) 6 SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. OUR COMPANY We are a leading provider of branded, easy-to-use, reliable and technologically advanced networking products designed for small businesses and homes. Our suite of products enables small businesses and homes to share Internet access, peripherals, digital content and applications among multiple personal computers and other Internet-enabled devices. We primarily market and sell our products through distributors based in North America, Europe and the Asia/Pacific region to a network of resellers, including retail stores, mail order catalogs and online retailers. Since beginning operations in 1996, we have shipped more than five million units and currently sell our products primarily through over 4,000 retail stores, mail order catalogs and online retailers worldwide. Our products include Internet access, or gateway, products such as routers and cable modems, network connectivity products such as network interfaces, hubs and switches, and server products such as network disk and printer servers. We also offer network starter kits that include the key components required for a small business or home network. Our products are based both on wired and wireless technologies. The use of the Internet has become increasingly vital for the small business and home user. As the number of small businesses with multiple personal computers and high-speed, or broadband, Internet access increases, we expect that the desirability of networking products for these small businesses will expand rapidly. Similarly, the expansion of broadband Internet access and the increased use of digital content in homes with multiple computers has increased the desirability of home networks. However, the expense and complexity of traditional networking products make them unsuitable for the small business and home markets. As a result, small business and home networks have yet to be widely adopted. In a March 2000 report, International Data Corporation, or IDC, estimated that in 1999 only 38% of all small businesses, defined as businesses with less than 100 employees, in the United States with multiple personal computers had networks. Similarly, in a May 2000 report, IDC estimated that in 1999 only 15% of the 14.5 million homes in the United States with multiple personal computers had networks. Until recently, small business and home networking products have generally not been widely available through retail distribution channels, such as retail stores, mail order catalogs and online retailers. In addition, traditional network equipment providers generally have sold their products through value-added resellers and systems integrators and have not focused on the small business and home markets. Even where suitable networking products are available, few vendors offer a complete suite of networking products for the small business and home user. We believe a significant market opportunity exists for networking products that are widely available through retail channels. These products must address the specific needs of small businesses and homes by providing easy-to-use and cost-effective solutions that allow users to share Internet access, peripherals, digital content and applications. 1 7 Our objective is to be the leading provider of networking solutions specifically designed for the small business and home markets. The following are key elements of our strategy: - Maintain Our Technology Leadership. We have been a leader in providing new networking technologies to small business and home users. We will continue to focus on designing advanced networking products that incorporate leading technology and that are competitively priced, reliable and easy to install, use and maintain. - Continue to Enhance Our Product Portfolio. We intend to continue enhancing our product portfolio to satisfy a wide range of requirements for connecting Internet-enabled devices together to share resources in small businesses and homes. Products under development include wireless networks, multimedia servers and Internet gateways with enhanced security features, filtering functions and the ability to create virtual private networks between remote locations. - Expand Distribution Channels. We believe that our worldwide retail distribution strategy differentiates us from our competitors and enables us to quickly reach our end-user customers with new product offerings. We intend to expand our existing distribution network as well as add new distributors, such as general merchandise retailers. We also intend to aggressively develop joint sales and marketing relationships with Internet service providers to promote the sale of our products with their services. - Continue Building the NETGEAR Brand. We believe that our NETGEAR brand and our GearGuy icon are identified with high-quality networking equipment that incorporates advanced technology and is reliable and easy-to-use. We intend to continue building our brand identity through product design, packaging, public relations, advertising campaigns and marketing efforts. - Continue Our Focus on Small Businesses and Homes. We believe that our focus on developing technologies for the small business and home markets and our experience in packaging, merchandising and promoting branded networking products through the retail channel has provided us with a significant advantage over potential new entrants in these markets. We intend to maintain our focus on the small business and home networking markets. CORPORATE INFORMATION We are a Delaware corporation and were formed in Delaware on January 8, 1996. Our principal executive offices are located at 4500 Great America Parkway, Santa Clara, CA 95054, and our telephone number is (408) 907-8000. 2 8 THE OFFERING Common stock offered by NETGEAR..... shares Common stock offered by the selling stockholder......................... shares Common stock to be outstanding after the offering........................ shares Use of proceeds..................... For purchase of inventory from our third-party inventory logistics provider, settlement of certain inter-company transaction balances and for general corporate purposes, including working capital, sales and marketing expenditures and the development of new products and services. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. NTGR Common stock to be outstanding after the offering is based on zero shares of common stock and 33,794,900 shares of preferred stock, all of which will be converted into common stock upon completion of this offering, outstanding as of June 30, 2000. It does not include: - 4,036,058 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2000 with a weighted average exercise price of $3.95 per share; - 1,963,942 shares of common stock available for future grant or issuance under our 2000 stock option plan as of June 30, 2000; - 2,000,000 shares of common stock available for future grant or issuance under the 2000 stock plan adopted by our board of directors in August 2000, referred to as the new 2000 stock plan; - 500,000 shares of common stock available for future grant under the 2000 employee stock purchase plan adopted by our board of directors in August 2000; and - 3,000,000 shares of common stock issuable upon exercise of a warrant outstanding as of June 30, 2000, which will become exercisable at $5.00 per share upon the completion of this offering for a period of 45 days. Except as otherwise indicated, all of the information in this prospectus: - reflects a two-for-one stock split to be effected prior to the completion of this offering; - reflects the conversion of all of our outstanding preferred stock on a one-for-one basis into 33,794,900 shares of common stock effective upon the completion of this offering; - reflects the sale of 6,829,828 shares of preferred stock by Nortel Networks to seven investors in a private sale in September 2000; and - assumes no exercise of the underwriters' over-allotment option. 3 9 SUMMARY FINANCIAL DATA Until March 10, 2000, we were a wholly owned subsidiary of Nortel Networks NA Inc., formerly known as Bay Networks, Inc., which was acquired by Nortel Networks Limited on August 31, 1998 in a merger that was accounted for using the purchase method. Nortel Networks NA Inc. transferred its remaining ownership interest in NETGEAR to Nortel Networks Limited, a wholly owned subsidiary of Nortel Networks Corporation, effective September , 2000. Nortel Networks Corporation is a Canadian corporation whose common shares are publicly traded on the New York and Toronto stock exchanges and, together with its subsidiaries, is referred to in this prospectus as Nortel Networks. Summary financial data for periods through August 31, 1998 is referred to as the "Predecessor Company" information, while our selected financial data after August 31, 1998 includes the recording of fair value adjustments arising from the acquisition of Bay Networks. In addition, the term "Parent" as used in this document refers to Bay Networks, Inc. for the period prior to August 31, 1998 and Nortel Networks Corporation for the period subsequent to August 31, 1998. The data presented in these tables are from "Selected Financial Data" and our historical financial statements and notes to those statements included elsewhere in this prospectus. You should read those sections for a further explanation of the summary financial data.
PREDECESSOR COMPANY -------------------------------------------- PERIOD FROM PERIOD FROM PERIOD FROM JANUARY 8, 1996 JANUARY 1, SEPTEMBER 1, (INCEPTION) TO YEAR ENDED 1998 TO 1998 TO DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1996 1997 1998 1998 --------------- ------------ ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue.......... $ 4,035 $ 26,141 $ 32,801 $ 25,099 Gross profit......... 1,302 5,428 7,105 4,269 Total operating expenses........... 5,853 11,115 11,630 6,810 Income (loss) from operations......... (4,551) (5,687) (4,525) (2,541) Net income (loss).... $ (4,644) $ (6,185) $ (4,550) $ (2,693) ======== ======== ======== ======== Net income (loss) per share: Basic.............. $ (0.15) $ (0.21) $ (0.15) $ (0.09) ======== ======== ======== ======== Diluted............ $ (0.15) $ (0.21) $ (0.15) $ (0.09) ======== ======== ======== ======== Shares used in per share computations: Basic.............. 30,000 30,000 30,000 30,000 ======== ======== ======== ======== Diluted............ 30,000 30,000 30,000 30,000 ======== ======== ======== ======== Pro forma basic and diluted net income (loss) per share(2)........... Shares used in calculating pro forma basic and diluted net income (loss) per share(2)........... SIX MONTHS ENDED JUNE YEAR ENDED YEAR ENDED 30, DECEMBER 31, DECEMBER 31, ---------------------- 1998(1) 1999 1999 2000 ------------ ------------ --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue.......... $ 57,900 $111,856 $ 46,599 $ 83,736 Gross profit......... 11,374 20,591 8,680 17,693 Total operating expenses........... 18,440 27,065 12,469 16,370 Income (loss) from operations......... (7,066) (6,474) (3,789) 1,323 Net income (loss).... $ (7,243) $ (6,544) $ (3,932) $ 1,043 ======== ======== ======== ======== Net income (loss) per share: Basic.............. $ (0.24) $ (0.22) $ (0.13) $ 0.09 ======== ======== ======== ======== Diluted............ $ (0.24) $ (0.22) $ (0.13) $ 0.03 ======== ======== ======== ======== Shares used in per share computations: Basic.............. 30,000 30,000 30,000 11,538 ======== ======== ======== ======== Diluted............ 30,000 30,000 30,000 32,598 ======== ======== ======== ======== Pro forma basic and diluted net income (loss) per share(2)........... $ (0.22) $ 0.03 ======== ======== Shares used in calculating pro forma basic and diluted net income (loss) per share(2)........... 30,000 32,335 ======== ========
(1) Information for the year ended December 31, 1998 represents the combined results of NETGEAR and the Predecessor Company for the year ended December 31, 1998. (2) Pro forma amounts assume the weighted average number of common shares resulting from the automatic conversion of outstanding shares of convertible preferred stock, which will occur upon the closing of this offering. 4 10
JUNE 30, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash....................................................... $20,901 $20,901 $ Working capital............................................ 34,938 34,938 Total assets............................................... 77,592 77,592 Total current liabilities.................................. 41,150 41,150 Preferred stock............................................ 41,477 -- Common stock............................................... -- 41,477 Total stockholders' equity................................. 35,884 35,884
Pro forma amounts give effect to the automatic conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering. Pro forma as adjusted amounts give effect to the issuance and sale of shares of our common stock at an assumed initial public offering price of $ share, and the receipt and application of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth under "Use of Proceeds" and "Capitalization." 5 11 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the financial and other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In these circumstances, the market price of our common stock could decline, and you might lose all or part of the money you paid to buy our common stock. WE HAVE A SHORT OPERATING HISTORY AS AN INDEPENDENT COMPANY. IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS AS AN INDEPENDENT COMPANY, OUR ABILITY TO DEVELOP, MARKET AND SELL OUR NETWORKING PRODUCTS WILL BE HARMED. We were incorporated in January 1996. We have only been operating as an independent company since March 2000. Prior to that time, we were managed and financed as a wholly owned subsidiary of Nortel Networks. Immediately following this offering, we will begin operating as an independent public company, although Nortel Networks will own approximately % of our outstanding stock. If we are unable to successfully manage our operations as an independent company, our business will be harmed. Our separation from Nortel Networks results in several significant risks, including the following: - Our management has limited experience in operating an independent public company and we may need to hire additional management personnel. In addition, our Chief Financial Officer only recently joined us in August 2000. - Until recently, we have relied on Nortel Networks for most of our financing, corporate services, information systems, telecommunications and facilities needs. We are still transitioning some of our information and telecommunication systems and have only recently developed capabilities in other areas. - Our affiliation with Nortel Networks has provided access to business opportunities, business partners, financing, employee resources and business advice that we might not otherwise have had absent this affiliation. We do not expect these benefits to continue after this offering. If we are unable to quickly and successfully compensate for the loss of these business opportunities and other resources, our business will be harmed. WE HAVE A HISTORY OF LOSSES, AND ALTHOUGH WE ACHIEVED PROFITABILITY IN THE QUARTERS ENDED MARCH 31, 2000 AND JUNE 30, 2000, WE MAY NOT REMAIN PROFITABLE. Since our inception in January 1996 and through the completion of our last fiscal year, we incurred an aggregate of $24.6 million in net losses, including net losses of $4.6 million in 1996, $6.2 million in 1997, $7.2 million in 1998 and $6.5 million in 1999. Although we achieved profitability in the quarters ending March 31, 2000 and June 30, 2000, we may not realize sustained profitability on a quarterly or annual basis in the future. As we continue to develop our independent financing, corporate services, information systems, telecommunications and facilities capabilities to replace the services previously received from Nortel Networks, we may find that our expenditures in these areas are significantly higher than our historical costs. Furthermore, we expect that our other expenses will continue to increase significantly. For example, after this offering, we anticipate that we will substantially increase our sales and marketing expenditures to continue developing our brand. In addition, we expect to significantly increase our research and development expenditures, including the addition of personnel and payments to suppliers for design services, tooling and product certification. We may not generate a sufficient level of net revenue to offset these expenditures or be able to adjust spending in a timely manner to respond to any unanticipated decline in net revenue. If net revenue grows more slowly than we anticipate or if our operating expenditures exceed our expectations or cannot be adjusted quickly, we may experience significant losses on a quarterly and annual basis. 6 12 OUR QUARTERLY NET REVENUE AND OPERATING RESULTS MAY FLUCTUATE, AND IF OUR FUTURE RESULTS ARE BELOW INVESTORS' OR ANALYSTS' EXPECTATIONS, THE PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE. We believe that period-to-period comparisons of our operating results may not be a good indication of our future performance as we have experienced significant fluctuations in operating results in the past. Our net revenue, gross margins and operating results are difficult to forecast and may vary significantly from period to period due to a number of factors, many of which are not in our control. These factors include our ability to: - address the seasonality of our product sales, which are typically lower in the first and second quarters of the year than in the third and fourth quarters; - timely collect payment for our international sales, which affects our ability to recognize revenues in any given quarter with respect to these sales; - consistently introduce new products on a timely basis; - successfully manage product transitions so that announcements of new products or enhancements do not replace or shorten the life cycles of our existing products in an unforeseen manner; - prevent unforeseen supply interruptions by successfully finding second source suppliers for products that are currently available from sole or limited source suppliers; for example, we have occasionally experienced supply problems with respect to sole-sourced semiconductors, resulting in our inability to satisfy existing orders for some of our products; - achieve continuing cost reductions from our outside suppliers, manufacturers and warehousing providers; and - maintain production volumes and product quality levels while relying exclusively on third-party manufacturers. If any of these factors impact our business in a particular period, our operating results may be below investors' or analysts' expectations, in which case the market price of our common stock would likely decline. IF NETWORKING PRODUCTS DO NOT ACHIEVE WIDESPREAD ACCEPTANCE IN THE SMALL BUSINESS AND HOME MARKETS, WE WILL BE UNABLE TO INCREASE OR SUSTAIN OUR NET REVENUE AND OUR BUSINESS WILL BE SEVERELY HARMED. Our success will depend substantially upon the widespread acceptance of networking products for use in small businesses and homes. Acceptance of networking products will depend on the growth of the number of personal computers and other Internet-enabled devices used in small businesses and homes and increased demand for sharing resources, such as high-speed Internet access. Small businesses and homes have only recently begun to install networking products, and we cannot accurately predict the future growth rate or the ultimate size of the networking market for small businesses and homes. In addition, if single Internet access devices, such as 56 kilobits per second, or Kbps, modems that are currently used by many small businesses and homes, are deemed sufficient by users, then market acceptance of our products may be slower than expected or a market may not develop at all. Moreover, if networking functions are integrated more directly into computers and other Internet-enabled devices, market acceptance of our products would suffer and our business will be severely harmed. Potential users of our products may also have concerns regarding the security, reliability, cost, ease of installation and use and capability of networking products. If we do not adequately address these concerns, market acceptance of our products would suffer and our net revenue and business will be severely harmed. NORTEL NETWORKS' EFFECTIVE CONTROL OF US AFTER THIS OFFERING MAY LEAD TO CONFLICTS OF INTEREST, WHICH MAY NOT BE RESOLVED TO OUR BENEFIT OR TO THE BENEFIT OF OUR OTHER STOCKHOLDERS. We are currently 69% owned by Nortel Networks. Upon completion of this offering, Nortel Networks will own % of our common stock, or % if the underwriters' over-allotment option is exercised in full. At the closing of this offering, four out of the nine members of our board of directors will be employees 7 13 of Nortel Networks. Accordingly, Nortel Networks will be able to significantly influence major decisions of our corporate policy and to determine the outcome of any major transaction or other matters submitted to our stockholders or directors, including by: - amending our corporate documents; - approving or defeating mergers or takeover attempts; - approving significant financings; - declaring and paying dividends on our common stock; - issuing additional common stock and other securities; and - otherwise controlling management and operations and the outcome of most matters submitted for a stockholder vote. In particular, the affirmative vote of two-thirds of the outstanding voting stock is required to approve some amendments to our amended and restated certificate of incorporation. Consequently, Nortel Networks will be able to block approval of amendments that may be proposed in the future as long as it owns at least one-third of our common stock and may be able to make it difficult to approve amendments even if its ownership falls below one-third. Our other stockholders may have little or no influence on decisions regarding such matters. We have also entered into a registration rights agreement with Nortel Networks under which we granted Nortel Networks certain rights to require us to register the shares of our common stock owned by Nortel Networks. Certain other private investors are also parties to and have registration rights under this registration rights agreement. Nortel Networks is in the process of acquiring Alteon WebSystems, Inc., a sole source supplier of our gigabit network interface. Conflicts of interest may arise from time to time between us and Nortel Networks or its affiliates in a number of areas relating to our past and ongoing relationships, including: - competitive business activities; - corporate opportunities; - tax matters; - intellectual property matters; - indemnity agreements; - registration rights; - sales or distributions by Nortel Networks of all or any portion of its ownership interest in us; or - Nortel Networks' ability to control our management and affairs. We may be unable to resolve any potential conflict with Nortel Networks and even if resolved, we may receive a less favorable resolution than if we were dealing with an unaffiliated party. WE MUST CONTINUE TO REDUCE OUR MANUFACTURING AND LOGISTICS COSTS TO COMPETITIVELY PRICE OUR PRODUCTS. Some of our competitors currently offer networking products at prices lower than ours. In addition, many of our competitors are larger and may be able to obtain more favorable pricing from suppliers and manufacturers. To remain competitive, we must continually reduce the cost of manufacturing our products by working closely with our third-party manufacturers on design and engineering efforts. We must successfully manage our freight, product obsolescence and warranty costs in order to reduce overall product costs. If we are not successful in achieving sufficient cost reductions on an ongoing basis to allow us to keep pace with competitive pricing pressures, our business would be harmed. 8 14 THE SMALL BUSINESS AND HOME NETWORKING MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE AND MAINTAIN OR INCREASE OUR NET REVENUE, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS ON A TIMELY BASIS THAT ACHIEVE BROAD MARKET ACCEPTANCE. Our future success will depend in large part upon our ability to: - identify and respond to rapidly changing technologies and trends in the market, including the use of power-line technologies for network applications and emerging broadband Internet access technologies, such as satellite and fixed wireless, which may offer greater bandwidth than a traditional dial-up service; - develop products that incorporate current technologies and that include innovative features that differentiate our products from those of our competitors; - bring new products to market on a timely basis at competitive prices in the retail channel; - introduce products that are compatible with new technologies as they emerge; - respond effectively to new product announcements by our competitors; and - provide continued compatibility and interoperability of our products with products offered by other vendors as they emerge. We have experienced delays in releasing new products and product enhancements in the past, which delayed sales and resulted in lower quarterly net revenue than expected. For example, we recently delayed the introduction of a high-speed wireless solution, which we initially intended to introduce in June 2000, due to development problems. We may experience similar delays in product development in the future and any delay in product introduction could adversely affect our ability to compete and cause our operating results to fall below the expectations of public market analysts or investors. WE MUST DEVELOP AND EXPAND OUR RETAIL CHANNELS OR OUR NET REVENUE MAY DECLINE AND OUR OPERATING RESULTS MAY SUFFER. Our product distribution strategy focuses primarily on continuing to develop and expand our retail channels. We sell to our end-user customers through mass market retailers, mail order catalogs and online retailers. If we fail to develop and maintain relationships with the retail channel, our product sales may decrease and our operating results may suffer. Retailers typically have limited shelf space and promotional resources. Competition is intense in the small business and home networking industry for adequate levels of shelf space and promotional support, and competitors with more extensive product lines, more popular products and stronger brands have greater bargaining power with retailers. Accordingly, we may not be able to achieve the levels of support and shelf space that our competitors receive. We expect competition for retail shelf space to increase, which will require us to increase our marketing expenditures to maintain current levels of retail shelf space. Moreover, we rely heavily on our retail network for the sales and marketing activities that we believe are critical to the successful sale of our products in the retail market. However, our mass market retailers, mail order catalogs and online retailers may not market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Recently, Internet service providers and application service providers have become very important channels for selling computing products. They usually bundle their service with some initial product sales and recommend other hardware products to their installed base. It is important for us to establish joint sales and marketing relationships with these service providers. However, we may not be successful in establishing these relationships. If we are unable to establish relationships with Internet service providers and application service providers, we may be unable to compete effectively in these emerging channels. To support and develop our distribution channels, we plan to significantly expand our field sales staff, which consisted of 38 people as of July 31, 2000, including 16 people employed by Nortel Networks. We 9 15 cannot assure you that this internal expansion will be successfully completed, that the cost of this expansion will not exceed the net revenue generated from the expansion or that our expanded sales staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. If we are unable to effectively maintain and expand our distribution channels or manage the expansion of our sales staff, we may incur increased sales and marketing expenses and our ability to grow and increase net revenue would be harmed. WE RELY ON A SMALL NUMBER OF WHOLESALE DISTRIBUTORS FOR MOST OF OUR NET REVENUE, AND IF ANY OF THEM DISCONTINUED, DECREASED OR DELAYED PURCHASES OF OUR PRODUCTS, OUR NET REVENUE AND PROFITABILITY WOULD BE HARMED. We sell a substantial portion of our products through retail channels using approximately 60 wholesale distributors. We recognize revenue on most of our sales in the United States upon shipment from the wholesale distributor to the retail resellers, and for international sales upon receipt of payment from the wholesale distributor. To date, a small number of wholesale distributors have accounted for a significant portion of our net revenue. We anticipate that sales of our products to relatively few wholesale distributors will continue to account for a significant portion of our net revenue. During the six months ended June 30, 2000, sales to Ingram Micro accounted for 32% of our net revenue, Tech Data accounted for 20% of our net revenue and Computer 2000 accounted for 11% of our net revenue. Although our financial performance depends on a few key wholesale distributors, we do not have binding commitments from any of them. In addition, the prices that wholesale distributors pay for our products are subject to negotiation and change at any time and could fall more rapidly than our production costs. If any of our major wholesale distributors were to discontinue, reduce or delay purchases of our products, or if the prices that wholesale distributors pay for our products falls significantly or unexpectedly, our ability to meet the product demands of our retail channels and end-user customers would be disrupted and our net revenue and profitability would be harmed. In addition, because our accounts receivable are concentrated on a small group of wholesale distributors, the failure of any of them to pay on a timely basis would reduce our cash flow and negatively affect our operating results. WE DEPEND ON A LIMITED NUMBER OF THIRD-PARTY CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING NEEDS. IF THEY ARE UNABLE TO MANUFACTURE A SUFFICIENT QUANTITY OF HIGH-QUALITY PRODUCTS ON A TIMELY AND COST-EFFICIENT BASIS, OUR NET REVENUE AND PROFITABILITY WOULD BE HARMED AND OUR REPUTATION AND OUR BRAND MAY SUFFER. All of our products are manufactured by third-party contract manufacturers. In 1998, 1999 and in the first six months ended June 30, 2000, we derived the majority of our net revenue from the sale of products manufactured by Delta Networks and, to a lesser extent, by Lite-On Communications, our two primary third-party contract manufacturers. We rely on them to procure components and to assemble, test and package our products on a timely and cost-efficient basis. In many cases, the contract manufacturer is responsible for subcontract engineering work. If our contract manufacturers are unable to complete engineering work on a timely basis, we will experience delays in product development and our ability to compete may be harmed. In addition, because both Delta Networks and Lite-On Communications are headquartered in Taiwan and have manufacturing facilities in both Taiwan and China, their ability to provide us with adequate supplies of high quality products on a timely and cost-efficient basis is subject to a number of additional risks and uncertainties, including earthquakes and other natural disasters and political, social and economic instability. If our manufacturers are unable to provide us with adequate supplies of high quality products on a timely and cost-efficient basis, our operations would be disrupted and our net revenue and profitability would suffer. Moreover, if our third-party contract manufacturers cannot consistently produce high-quality products that are free of defects, we may experience a higher rate of product returns, which would also reduce our profitability and may harm our reputation and our brand. To remain competitive, we must rapidly achieve volume production and reduce costs by coordinating our efforts with those of our contract manufacturers. We have one-year contracts with our third-party contract manufacturers that automatically renew each year for a one-year period. These contracts may be terminated by either party upon 90 days' prior written 10 16 notice. The loss of the services of either Delta Networks or Lite-On Communications would cause a significant disruption in operations, delays in product shipments and result in a decrease in net revenue or an increase in costs. WE DEPEND ON CELESTICA ASIA FOR ALL OF OUR INVENTORY, WAREHOUSING AND DISTRIBUTION OPERATIONS AND ANY INTERRUPTION IN ITS OPERATIONS OR DELAYS IN ITS SHIPMENTS OF OUR PRODUCTS WOULD SIGNIFICANTLY DISRUPT OUR OPERATIONS AND HARM OUR ABILITY TO FULFILL ORDERS AND OUR OPERATING RESULTS. We currently outsource all of our inventory, warehousing and distribution logistics to Celestica Asia, based in San Jose, California. If Celestica Asia is unable to perform these services adequately, product shipments could be delayed, product returns could increase and our brand and customer relationships could be harmed. Moreover, under the terms of our agreement with Celestica Asia, our prices can be renegotiated on a quarterly basis and any increase in the prices charged by Celestica Asia for its services could adversely affect our gross margins and operating results. The loss of Celestica Asia's services would cause a significant disruption in operations and delays in product shipments and would harm our financial results while we obtained a replacement logistics subcontractor. In addition, we may not be able to find a replacement logistics subcontractor that would provide the same satisfactory level of services without an increase in our inventory, warehousing or distribution costs. IF WE ARE UNABLE TO SMOOTHLY TRANSITION OWNERSHIP OF OUR PRODUCT INVENTORY FROM CELESTICA ASIA, WE MAY LOSE INVENTORY VALUE AND OUR OPERATIONS AND FINANCIAL RESULTS WOULD BE HARMED. Our manufacturers deliver finished goods to Celestica Asia in Hong Kong and bill Celestica Asia for the full cost of the finished goods. Celestica Asia bills us for the full cost of the finished goods plus a percentage mark-up when the goods are shipped to our wholesale distributors and selected retail resellers. Celestica Asia currently maintains and owns our inventory at their warehouse. We are in the process of transitioning the ownership of the inventory from Celestica Asia to ourselves. Once the transition is complete, our subcontract manufacturers will bill us for the full cost of the finished goods and title will pass to us upon delivery to Celestica Asia's warehouses in Hong Kong, the United Kingdom or San Jose, California. We believe this transition will be completed prior to the end of 2000. Following the transition, we will need to implement new inventory processes and procedures to monitor our inventory at Celestica Asia. This will require us to develop additional accounting controls and have our employees on site at Celestica Asia to ensure the inventory is properly handled to prevent loss of value. If we are unable to properly monitor and control our inventory after the transition, we may lose inventory value and our operations and financial results would be harmed. WE PURCHASE SEVERAL KEY COMPONENTS AND ORIGINAL EQUIPMENT MANUFACTURERS' PRODUCTS FROM SOLE OR LIMITED SOURCES, AND IF THESE SOURCES FAIL TO SATISFY OUR SUPPLY REQUIREMENTS ON A TIMELY BASIS, WE MAY LOSE SALES AND EXPERIENCE INCREASED COMPONENT COSTS AND OUR CUSTOMER RELATIONSHIPS MAY BE HARMED. If we experience shortages or delays in the supply of any key product components currently obtained from a sole or limited source, our ability to meet scheduled product deliveries to customers may be harmed. Currently, our only sole-sourced products are our connector jacks, which are manufactured to our design, and phone line and wireless semiconductors. We anticipate that semiconductors used in future products will be sole sourced for a limited period. Our limited source components include local access network repeaters, switching fabric semiconductors, physical layer transceivers and other selected integrated circuits. Although we enter, either directly or through our contract manufacturers, into purchase orders with our suppliers for components based on our forecasts, we do not have any guaranteed supply arrangements with these suppliers. Moreover, as our demand for components increases, we may not be able to obtain these components in a timely manner in the future. In addition, if our suppliers experience financial or other difficulties or if worldwide demand for the components they provide increases significantly, the availability of these components could be limited. If we are unable to obtain, either directly or through our contract manufacturers, a sufficient supply of components, or if we experience any interruption in the supply of components, we could experience difficulties in obtaining alternative sources or in altering product designs to use alternative components. Any resulting delays or 11 17 reductions in product shipments could affect our ability to meet scheduled product deliveries to customers and could damage customer relationships. We may also be subject to increases in component costs in these circumstances, which would adversely affect our gross margins. We use a rolling forecast of demand to determine our component requirements. Lead times for manufacturing our materials and components vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. Our components that have long lead times include local access network repeaters, switching fabric chips, physical layer transceivers, dynamic random access memories, transformers, connector jacks and metal tooled enclosures. If our forecasts do not match our actual requirements, we may have excess or inadequate inventory of components, which could result in delays in the delivery of our products and the loss of existing or potential customers. IF WE DO NOT SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE MARKETS FOR SMALL BUSINESS AND HOME NETWORKING PRODUCTS, WE WILL LOSE CUSTOMERS AND MARKET SHARE AND OUR NET REVENUE WOULD BE HARMED. We compete in a new, rapidly evolving and highly competitive market, and we expect competition to persist and intensify in the future. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which would seriously harm our business and results of operations. Our principal competitors in the small business and home markets are 3Com Corporation, Intel Corporation, The Linksys Group, Inc., D-Link Systems, Inc. and Allied Telesyn International. Other current competitors include numerous local vendors such as PCI in Japan and Diamond Multimedia Systems, Inc. and Proxim, Inc. in the United States. We also compete with networking vendors, such as Cisco Systems, Inc., Nortel Networks and Hewlett Packard Company, who may increase their focus on the small business and home markets in the future. Our potential future competitors may also include consumer electronics vendors such as SONY Corporation, Panasonic Consumer Electronics Company, Hitachi, Ltd., Fujitsu Limited, Philips Electronics N.V. and RCA, which have significant experience in retail sales of personal computers and home electronics. Nortel Networks increased its focus on small and medium-sized businesses in the second half of 1999 by introducing a new line of networking products targeting this market. These products are sold through value-added resellers and networks systems integrators. If retailers or other resellers start selling these products, Nortel Networks could become a more significant competitor. In addition, Nortel Networks sells Internet gateway products, including cable and DSL modems, that directly compete with some of our products in both the small business and home markets. Nortel Networks in the future may decide to expand its line of products for the home market. We do not have a non-compete agreement with Nortel Networks. Nortel Networks is in the process of acquiring Alteon WebSystems, Inc., a sole source supplier of our gigabit network interface, and could use that relationship in the future against us. Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer service and access to more customers than we do. These competitors may, among other things, be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to distribution partners than we can. IF WE LOSE OUR KEY PERSONNEL, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY OR OPERATE OUR BUSINESS. Our future success depends in large part upon the continued services of our key technical, sales, marketing and senior management personnel. The loss of any of our senior management or other key research, development, sales and marketing personnel, particularly if lost to competitors, would adversely affect our ability to implement our business strategy and may adversely affect our strategic direction. In particular, the services of Patrick Lo, our Chief Executive Officer, and Mark Merrill, our Vice President of Engineering, would be difficult to replace. We do not maintain life insurance for any of our key personnel. 12 18 IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES. We have experienced growth in net revenue and expansion of our operations which have placed significant demands on our management and engineering staff. To continue our growth, we will need to hire additional personnel in all areas. Competition for qualified personnel in our industry is intense, particularly in the San Francisco Bay area where we are located, and we may not be able to hire the quality and number of personnel needed to accomplish our business objectives. In the past, we have experienced difficulty in hiring and retaining personnel with appropriate qualifications, particularly in technical areas. If we do not succeed in attracting and training new personnel, or retaining and motivating existing personnel, we may not be able to implement our growth strategy. OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND THE DEVELOPMENT OF THE INTERNET INFRASTRUCTURE. Our success is directly tied to the widespread acceptance and increased use of the Internet by small businesses and homes. Our products are primarily designed to enable high-speed Internet access and shared access to the Internet and other resources, such as peripheral devices. As a result, the emergence and growth of the market for our products will depend on increased use of the Internet by small businesses and homes and increased demand for shared Internet access. If use of the Internet does not grow as expected, our business, results of operations and financial condition will be severely harmed. In addition, if the cost of high-speed Internet access decreases to the point where there is no perceived need for shared Internet access by small businesses and homes, then demand for our products would be harmed significantly. CONTINUED RAPID GROWTH MAY STRAIN OUR OPERATIONS, INCREASE OUR COSTS AND DECREASE OUR MARGINS. We intend to expand our operations and pursue market opportunities domestically and internationally, and to grow our customer base. To accommodate anticipated growth and expansion, we will be required to: - manage our existing relationships and enter into new relationships with suppliers, distributors, resellers and other service providers; - improve existing and implement new operational, financial and managerial systems, procedures and controls; and - hire, train, manage, motivate and retain qualified personnel. These measures will place a significant burden on our management and internal resources and may increase our costs and decrease our margins. IF OUR PRODUCTS CONTAIN UNDETECTED DEFECTS OR ERRORS, WE COULD INCUR SIGNIFICANT UNEXPECTED EXPENSES, EXPERIENCE PRODUCT RETURNS AND LOST SALES, LOSE CUSTOMERS AND BE SUBJECT TO PRODUCT LIABILITY CLAIMS. Our products are complex and may contain undetected defects, errors or failures, particularly when first introduced or as new enhancements and versions are released. Despite our testing procedures, defects or errors may be found in new products or in new versions or enhancements of existing products after commencement of commercial shipments. For example, as a result of a software defect, in early 1999 we recalled a laptop computer network interface product. In addition, our third-party contract manufacturers, whom we rely on to manufacture, assemble, test and package our products, may not produce products free of defects or errors. If defects or errors in our products are discovered in the future, we could experience adverse customer reactions or negative publicity regarding us or our products, which may result in damage to our reputation and our brand. In addition, we could experience delays in market acceptance of our products, product returns, lost sales and unexpected expenses. Sales and support of our products generally involve the risk of product liability claims. A successful product liability claim brought against us could harm our business. 13 19 OUR SALES INTO INTERNATIONAL MARKETS MAY EXPOSE US TO ADDITIONAL RISKS, ANY OF WHICH COULD HARM OUR OPERATING RESULTS. We have committed significant resources to expanding our international sales and support channels. Our efforts to expand and develop additional international sales and support channels may not be successful. International sales represented 38% of our net revenue in 1998, 34% in 1999 and 34% for the six months ended June 30, 2000. International sales are subject to a number of risks, including: - changes in foreign government regulations and communications standards; - export license requirements, tariffs and taxes and other barriers; - exchange rate fluctuations; - longer payment cycles; - difficulty in collecting accounts receivable; - difficulty in managing foreign operations; and - political and economic instability. Except for sales to Japan, our foreign sales are currently invoiced in United States dollars and, accordingly, we do not currently plan to engage in foreign currency hedging transactions. However, as we expand our international operations, we may allow payment in additional foreign currencies and our exposure to losses in foreign currency transactions may increase. We may lose customers if exchange rate fluctuations, currency devaluations or economic crises increase the local currency price of our products or reduce our customers' ability to purchase products. We do not know if foreign markets for our products will continue to develop. WE HAVE NO EXCLUSIVE INTELLECTUAL PROPERTY RIGHTS IN THE TECHNOLOGY EMPLOYED IN MANY OF OUR PRODUCTS, WHICH MAY LIMIT OUR ABILITY TO COMPETE. We do not hold any United States or foreign patents and do not have any patents pending. In addition, we do not have any other exclusive intellectual property rights in the technology employed in our products. We do not actively seek to protect our rights in the technology that we develop or that our third-party contract manufacturers develop. In addition, these parties share the technologies with other parties, including some of our competitors. If we are wrong in our assumptions about the need for exclusive intellectual property rights, our ability to compete will be harmed. The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the data communications markets have extensive patent portfolios with respect to networking technology. From time to time, third parties, including these leading companies, have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to us. Although we have not been a party to any litigation asserting claims that allege infringement of intellectual property rights, we may be a party to such litigation in the future. In addition, third parties may initiate litigation against our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to existing or future products. Any such claims, with or without merit, could be time consuming, resulting in costly litigation and diversion of technical and management personnel or requiring us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to license the proprietary rights on a timely basis or on commercially reasonable terms, we may be unable to offer competitive products, our product portfolio may be limited, we may experience increased expenses and our business, operating results and financial condition could be significantly harmed. We rely on third-party licensors, including Nortel Networks, and other vendors for patented hardware and software license rights in technology that are incorporated into and are necessary for the operation and 14 20 functionality of our products. Our success will depend in part on our continued ability to have access to these technologies. In addition, although we received most of the intellectual property used in our products through transfers or licenses from Nortel Networks, Nortel Networks has not agreed to indemnify us from infringement claims or other liabilities associated with the use of that intellectual property. Moreover, our licenses may result in royalty payments to third parties, the cross-license of technology by us, or the payment of other consideration. If we become unable to continue to procure or use necessary technology, or if our licensing arrangements cannot be agreed to on commercially reasonable terms, we may be unable to offer competitive products, our product portfolio may be limited, we may experience increased expenses and our business, operating results and financial condition could be significantly harmed. We rely on a combination of copyright, trademark and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our proprietary rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our product design or to obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts that we have entered into, and we may not be able to enforce our rights in the event of these breaches. Furthermore, our competitors may independently develop similar products or duplicate any technology developed by us, and technology incorporated into our products may infringe upon patents or other rights owned by others. Our inability to protect our proprietary rights could significantly harm our brand and our business, operating results and financial condition. THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR FUTURE MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE. Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. Most of these shares are held by a small number of stockholders. Sales of a substantial number of shares after this offering could significantly reduce the market price of our common stock. In addition, the perception that our current stockholders might sell common stock could depress the trading price of the common stock. These sales, and the possibility of these sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we consider appropriate. Holders of 33,794,900 shares of common stock, which will represent approximately % of our outstanding shares after completion of this offering, have the right to require us to register their common stock with the Securities and Exchange Commission. The holder of shares issuable upon exercise of a warrant to purchase 3,000,000 shares of common stock will also have the right to require us to register their common stock with the Securities and Exchange Commission. In addition, after this offering, we intend to register all common stock that we may issue under our stock option plans and employee stock purchase plan. Once we register these shares, they can be freely sold in the public market upon issuance. If these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. ANY FAILURE OF OUR PRODUCTS TO COMPLY WITH GOVERNMENT REGULATIONS MAY PREVENT US FROM SUSTAINING OUR NET REVENUE OR PROFITABILITY. In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission. Internationally, products that we develop may be required to comply with standards established by the European Commission and telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. We rely on our contract manufacturers to obtain the necessary regulatory approvals for our products. If our contract manufacturers fail to obtain timely domestic or foreign regulatory approvals or certificates, we would not be able to sell our products where these regulations apply, which may prevent us from sustaining our net revenue or profitability. 15 21 WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IF WE ARE UNABLE TO OBTAIN ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US, WE MAY BE UNABLE TO TAKE ADVANTAGE OF MARKET OPPORTUNITIES, DEVELOP NEW PRODUCTS OR OTHERWISE RESPOND TO COMPETITIVE PRESSURES. We currently anticipate that the proceeds of this offering, together with our existing cash balances and cash flows from operations, will be sufficient to meet our liquidity needs for at least the next 12 months. However, we may need to raise additional funds if our estimates of net revenue, working capital or capital expenditure requirements change or prove inaccurate, if we need to respond to unforeseen technological or marketing hurdles or if we choose to take advantage of unanticipated opportunities. We may not be able to obtain additional funds as needed, and these funds may not be available on terms acceptable to us. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights, preferences or privileges senior to those of the securities held by our stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants. If we need additional capital and cannot raise it on acceptable terms and on a timely basis, we may not be able to, among other things: - develop or enhance our products; - take advantage of market opportunities; - acquire new technologies, products or businesses; - expand operations; - hire, train and retain employees; or - respond to unanticipated competitive pressures or unanticipated capital requirements. Our failure to do any of these things could result in lower revenues and could seriously harm our business. WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT. Prior to this offering, there has not been a public market for our common stock, and an active trading market for our shares may not develop or be sustained. If you purchase our common stock in this offering, you will pay a price that was not established in a competitive market. The initial public offering price for the shares of our common stock will be determined by negotiations between us, Nortel Networks and the representatives of the underwriters. The price of our common stock that will prevail in the market may be lower than the price you pay. The market price of our common stock may fluctuate significantly in response to factors, such as changes in securities analysts' estimates of our financial performance, changes in market valuations of similar companies and other factors beyond our control. Moreover, the market for technology and Internet-related companies has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance. As a result, you may be unable to sell your common stock at or above the offering price. WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT IMPROVE OUR OPERATING RESULTS OR INCREASE THE VALUE OF YOUR INVESTMENT. We will have broad discretion in how we use the proceeds from this offering, and we may spend these proceeds in ways that do not improve our operating results or increase the value of your investment. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions regarding how to use the proceeds from this offering. 16 22 SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF A CHANGE IN CONTROL WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions of our certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our stockholders. These provisions also may prevent changes in our management. INVESTORS IN THIS OFFERING WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION IN THE BOOK VALUE OF THEIR INVESTMENT. The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $ in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $ per share. The exercise of outstanding options and warrants will result in further dilution. 17 23 FORWARD-LOOKING STATEMENTS Certain statements made in this prospectus are "forward-looking statements" that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements include statements about: - the future growth of the small business and home networking markets; - our strategies and keys to our future success; - new products and technologies; - future expenses and financing requirements; - competition and competitive factors in the small business and home networking markets; and - other statements that are not historical facts. This prospectus also contains forward-looking statements attributable to third parties relating to the growth in broadband Internet access in small businesses and homes, the growth in the number of networked small businesses and homes and the growth in the small business and home networking markets. When used in this prospectus, the words "anticipate," "believe," "expect," "estimate" and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve risks and uncertainties and apply only as of the date of this prospectus. Several important factors could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including: - changes in general economic and business conditions, and changes in the small business and home markets for networking products; - actions of our competitors; - the level of demand and market acceptance of our products; - changes in our business strategies; and - other factors discussed earlier under "Risk Factors" as well as elsewhere in this prospectus. USE OF PROCEEDS We estimate that our net proceeds from the sale of shares of common stock that we are selling in this offering will be $ , after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the common stock sold by the selling stockholder. We intend to use approximately $20 million of the net proceeds of the offering to purchase inventory from our third-party inventory logistics provider. We intend to use approximately $5 million of the net proceeds of the offering to settle our inter-company transaction balances with Nortel Networks. We intend to use the remaining proceeds primarily for general corporate purposes, including working capital, sales and marketing expenditures and the development of new products and services. Although we may use a portion of the net proceeds to acquire technology or businesses that are complementary to our business, we have no current plans in this regard. Pending such uses, we plan to invest the net proceeds in securities that are short term, investment grade and interest bearing. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to fund the development and growth of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. 18 24 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock on a one-to-one basis into 33,794,900 shares of common stock upon the closing of this offering; and - on a pro forma as adjusted basis to reflect the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share and the receipt and application of the net proceeds from the offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
AS OF JUNE 30, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Cash....................................................... $20,901 $20,901 $ ------- ------- ------- Stockholders' equity: Preferred stock, $0.001 par value; 33,794,904 shares authorized: Series A convertible participating preferred stock: 30,000,000 shares designated; shares issued and outstanding: 30,000,000 actual, none pro forma and none pro forma as adjusted............................ 29,123 -- Series B convertible participating preferred stock: 3,794,900 shares designated; shares issued and outstanding: 3,794,900 actual, none pro forma and none pro forma as adjusted................................. 12,354 -- Common stock, $0.001 par value; 60,000,000 shares authorized: 60,000,000 actual, 60,000,000 pro forma and 200,000,000 pro forma as adjusted; issued and outstanding: none actual, 33,794,900 pro forma and pro forma as adjusted.......................... -- 41,477 Common stock warrant....................................... 2,601 2,601 Accumulated deficit........................................ (8,194) (8,194) ------- ------- ------- Total stockholders' equity................................. $35,884 $35,884 $ ======= ======= =======
The table above excludes: - 4,036,058 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2000 with a weighted average exercise price of $3.95 per share; - 1,963,942 shares of common stock available for future grant or issuance under our 2000 stock option plan as of June 30, 2000; - 2,000,000 shares of common stock available for future grant or issuance under the new 2000 stock plan adopted by our board of directors in August 2000; - 500,000 shares of common stock available for future grant under the 2000 employee stock purchase plan adopted by our board of directors in August 2000; and - 3,000,000 shares of common stock issuable upon exercise of a warrant outstanding as of June 30, 2000, which will become exercisable at $5.00 per share upon the completion of this offering for a period of 45 days. You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this prospectus. 19 25 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Investors participating in this offering will incur immediate and substantial dilution. The pro forma net tangible book value of our common stock as of June 30, 2000 was $34.8 million, or $1.03 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of common stock outstanding assuming the conversion of all shares of preferred stock outstanding as of June 30, 2000 into 33,794,900 shares of common stock. Assuming the sale by us of shares of common stock offered in this offering at an initial public offering price of $ per share, and after deducting the underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2000 would have been $ , or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share of common stock to our existing stockholders and an immediate dilution of $ per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of June 30, 2000................................................... $1.03 Increase in pro forma net tangible book value per share attributable to this offering.......................... ----- Pro forma as adjusted net tangible book value per share after this offering....................................... ------- Dilution per share to new investors......................... $ =======
The following table sets forth on a pro forma as adjusted basis as of June 30, 2000 the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of common stock and by the new investors, before deducting the underwriting discounts and commissions and estimated offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.................. 33,794,900 % $44,113,000 % $1.31 New investors.......................... $ ---------- ----- ----------- ----- Total............................. 100.0% 100.0% ========== ===== =========== =====
The discussion and tables above assume no exercise of the underwriters' over-allotment option, the outstanding warrant or any outstanding stock options. As of June 30, 2000, there were 4,036,058 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $3.95 per share and 1,963,942 shares available for future grant or issuance under our 2000 stock option plan. As of June 30, 2000, there were also 3,000,000 shares of common stock issuable upon exercise of a warrant which will become exercisable at $5.00 per share upon the completion of this offering for a period of 45 days. In August 2000, our board of directors approved a new 2000 stock plan under which they reserved 2,000,000 shares for future grant or issuance and a 2000 employee stock purchase plan under which they reserved 500,000 shares for future issuance. To the extent that these options and this warrant are exercised, there will be further dilution to new investors. If the underwriters' over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to approximately % of the total number of shares of common stock to be outstanding after this offering; and the number of shares of common stock held by the new investors will be increased to % of the total number of shares of common stock outstanding after this offering. See "Principal and Selling Stockholders." 20 26 SELECTED FINANCIAL DATA Until March 10, 2000, we were a wholly owned subsidiary of Nortel Networks NA Inc., formerly known as Bay Networks, Inc., which was acquired by Nortel Networks Limited on August 31, 1998 in a merger that was accounted for using the purchase method. Nortel Networks NA Inc. transferred its ownership interest in NETGEAR to Nortel Networks Limited, a wholly owned subsidiary of Nortel Networks Corporation, effective September , 2000. Selected financial data for periods through August 31, 1998 is referred to as the "Predecessor Company" information, while our selected financial data after August 31, 1998 includes the recording of fair value adjustments arising from the acquisition of Bay Networks. The selected statements of operations data for NETGEAR and its Predecessor Company for the year ended December 31, 1997, the period from January 1, 1998 through August 31, 1998, the period from September 1, 1998 through December 31, 1998, the year ended December 31, 1999 and the six months ended June 30, 2000, and the balance sheet data as of December 31, 1998 and 1999 and as of June 30, 2000 are derived from audited financial statements included elsewhere in this prospectus. The selected statements of operations data for NETGEAR and its Predecessor Company for the period from January 8, 1996 (inception) through December 31, 1996, and the selected balance sheet data as of December 31, 1996 and 1997 have been derived from audited financial statements not included in this prospectus. The statements of operations data for the six months ended June 30, 1999 have been derived from unaudited financial statements included elsewhere in this prospectus. We believe that the unaudited financial statements contain all adjustments necessary to present fairly the information included in those statements, and that the adjustments consist only of normal recurring adjustments. Historical results are not necessarily indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year or for any other period.
PREDECESSOR COMPANY ------------------------------------------- PERIOD FROM JANUARY 8, PERIOD FROM PERIOD FROM 1996 JANUARY 1, SEPTEMBER 1, (INCEPTION) TO YEAR ENDED 1998 TO 1998 TO YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, 1996 1997 1998 1998 1998(1) -------------- ------------ ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue................. $ 4,035 $26,141 $32,801 $25,099 $57,900 Cost of revenue............. 2,733 20,713 25,696 20,830 46,526 ------- ------- ------- ------- ------- Gross profit................ 1,302 5,428 7,105 4,269 11,374 Operating expenses: Research and development............. 1,174 1,559 1,175 676 1,851 Sales and marketing....... 3,693 7,681 8,081 5,104 13,185 General and administrative.......... 986 1,875 2,374 918 3,292 Goodwill amortization..... -- -- -- 112 112 ------- ------- ------- ------- ------- Total operating expenses.............. 5,853 11,115 11,630 6,810 18,440 ------- ------- ------- ------- ------- Income (loss) from operations................ (4,551) (5,687) (4,525) (2,541) (7,066) Other income (expense), net....................... (93) (498) (25) (152) (177) ------- ------- ------- ------- ------- Income (loss) before taxes..................... (4,644) (6,185) (4,550) (2,693) (7,243) Provision for income taxes..................... -- -- -- -- -- ------- ------- ------- ------- ------- Net income (loss)........... $(4,644) $(6,185) $(4,550) $(2,693) $(7,243) ======= ======= ======= ======= ======= Net income (loss) per share: Basic..................... $ (0.15) $ (0.21) $ (0.15) $ (0.09) $ (0.24) ======= ======= ======= ======= ======= Diluted................... $ (0.15) $ (0.21) $ (0.15) $ (0.09) $ (0.24) ======= ======= ======= ======= ======= Shares used in per share computations: Basic..................... 30,000 30,000 30,000 30,000 30,000 ======= ======= ======= ======= ======= Diluted................... 30,000 30,000 30,000 30,000 30,000 ======= ======= ======= ======= ======= Pro forma basic and diluted net income (loss) per share(2).................. Shares used in calculating pro forma basic and diluted net income (loss) per share(2).............. SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------------------- 1999 1999 2000 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue................. $111,856 $46,599 $83,736 Cost of revenue............. 91,265 37,919 66,043 -------- ------- ------- Gross profit................ 20,591 8,680 17,693 Operating expenses: Research and development............. 2,641 1,209 1,244 Sales and marketing....... 20,320 9,321 12,969 General and administrative.......... 3,769 1,772 1,990 Goodwill amortization..... 335 167 167 -------- ------- ------- Total operating expenses.............. 27,065 12,469 16,370 -------- ------- ------- Income (loss) from operations................ (6,474) (3,789) 1,323 Other income (expense), net....................... (70) (143) 427 -------- ------- ------- Income (loss) before taxes..................... (6,544) (3,932) 1,750 Provision for income taxes..................... -- -- 707 -------- ------- ------- Net income (loss)........... $ (6,544) $(3,932) $ 1,043 ======== ======= ======= Net income (loss) per share: Basic..................... $ (0.22) $ (0.13) $ 0.09 ======== ======= ======= Diluted................... $ (0.22) $ (0.13) $ 0.03 ======== ======= ======= Shares used in per share computations: Basic..................... 30,000 30,000 11,538 ======== ======= ======= Diluted................... 30,000 30,000 32,598 ======== ======= ======= Pro forma basic and diluted net income (loss) per share(2).................. $ (0.22) $ 0.03 ======== ======= Shares used in calculating pro forma basic and diluted net income (loss) per share(2).............. 30,000 32,335 ======== =======
(1) Information for the year ended December 31, 1998 represents the combined results of NETGEAR and the Predecessor Company for the year ended December 31, 1998. (2) Pro forma amounts assume the weighted average number of common shares resulting from the automatic conversion of outstanding shares of convertible preferred stock, which will occur upon the closing of this offering. 21 27
DECEMBER 31, --------------------------------------- JUNE 30, 1996 1997 1998 1999 2000 ------ ------- ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash........................................................ $1,146 $ 961 $ 1,313 $10,427 $ 20,901 Working capital............................................. 3,523 4,902 6,649 22,989 34,938 Total assets................................................ 8,731 17,472 32,618 62,220 77,592 Total current liabilities................................... 5,105 12,357 23,862 37,635 41,150 Preferred stock............................................. -- -- -- -- 41,477 Common stock................................................ 8,270 15,889 11,260 33,366 -- Total stockholders' equity.................................. 3,627 5,060 8,567 24,129 35,884
22 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this prospectus. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the information relating to the year ended December 31, 1998 represents the combined results of NETGEAR and the Predecessor Company for the years then ended. Information relating to the years ended December 31, 1996 and 1997 represents the Predecessor Company financial information. OVERVIEW We are a leading provider of branded, technologically advanced networking products that are designed to address the specific needs of the small business and home markets in terms of ease-of-use, quality, reliability, performance and price. From our inception in January 1996 until May 1996, our operating activities related primarily to research and development, developing relationships with outsourced design, manufacturing and technical support partners, staffing a sales and marketing organization, establishing relationships with distributors and resellers and testing prototype designs. We began product shipments during the quarter ended June 30, 1996, and recorded net revenue of $4.0 million in 1996. Our net revenue grew to $111.9 million in 1999. From our inception through December 31, 1999, we incurred cumulative losses of $24.6 million. We were profitable in the quarters ended March 31, 2000 and June 30, 2000. We shipped our initial product, a 10 megabit per second, or Mbps, Ethernet hub, in the quarter ended June 30, 1996. By the end of 1996, our product offerings had expanded to include stackable 10 Mbps Ethernet hubs, 10/100 Mbps Ethernet hubs, 10 Mbps Ethernet switches, routers and a 10/100 Mbps network interface card. Throughout 1997, we continued to expand our product offerings with greater density and higher speed hubs and switches, including 10/100 Mbps Ethernet switches. In 1997, we also introduced a network starter kit that includes all of the necessary hardware and software to build a small business or home network. In 1998, we commenced shipment of 10/100 Mbps autosensing dual speed hubs, additional 10/100 Mbps switches, enhanced network starter kits and printer servers. In 1999, we introduced a one gigabit per second, or gigabit, Ethernet switch, a network disk server, a home Internet gateway and a phoneline network interface. In 2000, we introduced a line of gigabit products using Ethernet cables. We sell our products primarily through an indirect distribution channel generally comprised of approximately 60 wholesale distributors who sell our products to a network of retail stores, mail-order catalogs and online retailers. We also currently sell our products direct to Circuit City, Fry's Electronics and MicroCenter. We sell our products to both wholesale distributors and resellers. For domestic wholesale distributors, we defer revenue upon shipment to the wholesale distributors, and revenue is generally recognized upon subsequent resale by them. Sales made directly to domestic retail resellers are recognized upon shipment. For international sales, revenue is deferred upon shipment and generally recognized upon receipt of payment by us which is when title transfers. Provisions are made at the time the related revenue is recognized for estimating product returns, price protection and warranty. A substantial portion of our net revenue to date has been derived from a limited number of wholesale distributors. In 1997, Ingram Micro accounted for 25% of our net revenue, Computer 2000 accounted for 14% of our net revenue, Tech Data accounted for 13% of our net revenue, Fuji Xerox Japan accounted for 11% of our net revenue and Synnex accounted for 11% of our net revenue. In 1998, Ingram Micro accounted for 33% of our net revenue, Tech Data accounted for 20% of our net revenue and Computer 2000 accounted for 10% of our net revenue. In 1999, Ingram Micro accounted for 34% of our net revenue and Tech Data accounted for 18% of our net revenue. For the six months ended June 30, 2000, Ingram Micro accounted for 32% of our net revenue, Tech Data accounted for 20% of our net revenue and Computer 2000 accounted for 11% of our net revenue. The level of sales to any customer may vary from period to period. However, we expect that these wholesale distributors will continue to contribute a significant percentage of our net revenue for the foreseeable future. Cost of revenue consists primarily of the cost of finished products from our third-party contract manufacturers, documentation and overhead costs and freight, warranty and inventory costs. We outsource 23 29 manufacturing of our products to Delta Networks, Lite-On Communications and other third-party contract manufacturers. We outsource our inventory, warehousing and distribution logistics to Celestica Asia. Celestica Asia currently owns and maintains our inventory in their warehouse. We are in the process of transitioning the ownership of the inventory from Celestica Asia to ourselves. Once the transition is complete, our subcontract manufacturers will bill us for the full cost of the finished goods and title will pass to us upon delivery to Celestica Asia's warehouses in Hong Kong, the United Kingdom or San Jose, California. We believe this transition will be completed prior to the end of 2000. The small business and home markets are characterized by intense competition and rapid price erosion. Our gross margins may decline if we are unable to offset average sales price erosion by aggressively negotiating with our manufacturing and component suppliers to reduce unit costs of incoming inventory. We expect to experience continuing rapid erosion of average selling prices of our products due to competitive pricing pressures and technological advances. Our gross margin varies between different products and product categories, and therefore changes in product mix may cause variations in gross margin, which may result in an unfavorable impact on our financial results. Gross margin will be affected by additional factors including warranty costs, overhead and increases in excess or obsolete inventory caused by fluctuations in manufacturing volumes and transitions from older products to newer product versions. Research and development expenses consist primarily of personnel expenses, payment to suppliers for design services, tooling and product certification expenditures incurred by suppliers on our behalf and consulting fees. Research and development expenses are recognized as they are incurred. We believe that research and development expenses will increase substantially in absolute dollars and to a lesser extent as a percentage of net revenue, as we address home networking product technologies and broaden our core competencies. Sales and marketing expenses consist primarily of cooperative advertising, product promotion, trade shows and other marketing expenses, personnel expenses for sales staff, technical support expenses and product marketing expenses. We believe building brand awareness is key to both net revenue growth and maintaining gross margins. We also believe that maintaining widely available and high quality technical support is key to building and maintaining brand awareness. Accordingly, we expect marketing expenses to increase significantly in absolute dollars in the future. General and administrative expenses consist of salaries and related expenses for executive and finance personnel, professional fees, bad debt provision and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional expenses related to the growth of our business and operations as an independent company. 24 30 RESULTS OF OPERATIONS The following table sets forth the statements of operations data for the periods indicated as a percentage of net revenue.
PREDECESSOR COMPANY ------------ SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------- 1997 1998(1) 1999 1999 2000 ------------ ------------ ------------ ------ ------ Net revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue..................... 79.2 80.4 81.6 81.4 78.9 ----- ----- ----- ----- ----- Gross profit........................ 20.8 19.6 18.4 18.6 21.1 Operating expenses: Research and development.......... 6.0 3.2 2.4 2.6 1.5 Sales and marketing............... 29.4 22.7 18.1 20.0 15.4 General and administrative........ 7.2 5.7 3.4 3.7 2.4 Goodwill amortization............. -- 0.2 0.3 0.4 0.2 ----- ----- ----- ----- ----- Total operating expenses....... 42.6 31.8 24.2 26.7 19.5 ----- ----- ----- ----- ----- Income (loss) from operations....... (21.8) (12.2) (5.8) (8.1) 1.6 Other income (expense), net......... (1.9) (0.3) (0.1) (0.3) 0.5 ----- ----- ----- ----- ----- Income (loss) before taxes.......... (23.7) (12.5) (5.9) (8.4) 2.1 Provision for income taxes.......... -- -- -- -- 0.9 ----- ----- ----- ----- ----- Net income (loss)................... (23.7)% (12.5)% (5.9)% (8.4)% 1.2% ===== ===== ===== ===== =====
- ------------ (1) Information for the year ended December 31, 1998 represents the combined results of NETGEAR and the Predecessor Company for the year ended December 31, 1998. Six months ended June 30, 2000 compared to the six months ended June 30, 1999 Net Revenue. Net revenue for the six months ended June 30, 2000 was $83.7 million, an increase of $37.1 million, or 80%, compared to $46.6 million for the six months ended June 30, 1999. The increase resulted primarily from increased sales of 10/100 Mbps hubs and switches, network interfaces, home Internet gateway and home phone line network interfaces, reflecting continued acceptance of our product line in the small business and home markets. This increase in sales during this period was partially offset by a reduction in average selling prices. Gross Profit. Gross profit for the six months ended June 30, 2000 was $17.7 million, an increase of $9.0 million, or 104%, compared to $8.7 million for the six months ended June 30, 1999. Gross profit increased to 21% for the six months ended June 30, 2000, from 19% for the six months ended June 30, 1999. The increase in gross margin is due to reductions in material costs which were greater than decreases in average selling prices during this period. Research and Development. Research and development expenses for the six months ended June 30, 2000 were $1.2 million, which is equal to the research and development expenses for the six months ended June 30, 1999. This was due to an increase in employee compensation offset by a reduction in payments to suppliers for design services, tooling and product certification. Sales and Marketing. Sales and marketing expenses for the six months ended June 30, 2000 were $13.0 million, an increase of $3.7 million, or 39%, compared to $9.3 million for the six months ended June 30, 1999. The increase was primarily due to outside product promotion and advertising expenditures and salary expenses associated with the hiring of additional sales and marketing personnel and outside support for technical services. 25 31 General and Administrative. General and administrative expenses for the six months ended June 30, 2000 were $2.0 million, an increase of $218,000, or 12%, compared to $1.8 million for the six months ended June 30, 1999. The increase was primarily due to increased salary expenses as a result of hiring additional accounting personnel. Goodwill Amortization. Goodwill amortization represents the purchase price allocation from the acquisition of Bay Networks by Nortel Networks in 1998. Goodwill amortization of $167,000 was recorded for both the six months ended June 30, 2000 and June 30, 1999. Other Income (Expense), Net. Other income (expense) primarily consists of interest income, interest expense and foreign exchange translation. Other income was $427,000 for the six months ended June 30, 2000, compared to other expense of $143,000 for the six months ended June 30, 1999, due to interest income earned on higher cash balances offsetting foreign exchange losses. Provision for Income Taxes. Our operating results historically have been included in Nortel Networks consolidated United States Federal and state income tax returns. Provision for income taxes for our financial statements had been determined on a separate return basis. Our effective tax rate was 40% for the six months ended June 30, 2000. Our income taxes were zero for the six months ended June 30, 1999 because we operated at a loss. All historical net operating losses have been used by Nortel Networks and will not be carried forward by us. Years ended December 31, 1999, 1998 and 1997 Net Revenue. We generated net revenue of $111.9 million in 1999, $57.9 million in 1998 and $26.1 million in 1997. The 93% increase in net revenue from 1998 to 1999 and the 121% increase in net revenue from 1997 to 1998 was primarily due to greater unit demand in adapter cards and 10/100 Mbps hubs and switches. This unit growth was partially offset by a reduction in average selling prices for both time periods. Gross Profit. Gross profit was $20.6 million in 1999, representing 18% of net revenue, $11.4 million in 1998, representing 20% of net revenue, and $5.4 million in 1997, representing 21% of net revenue. The decreases in gross margin from 1998 to 1999 and from 1997 to 1998 were primarily due to lower average selling prices as we made a significant effort to gain market share. Research and Development. Research and development expenses were $2.6 million in 1999, $1.9 million in 1998 and $1.6 million in 1997. Research and development expenses increased 43% from 1998 to 1999, reflecting an increase in investments to suppliers for design services, tooling and product certification and additional salary expenses. Research and development expenses increased 19% from 1997 to 1998, reflecting salary expenses for additional engineers. Sales and Marketing. Sales and marketing expenses were $20.3 million in 1999, $13.2 million in 1998 and $7.7 million in 1997. Sales and marketing expenses increased 54% from 1998 to 1999 and 72% from 1997 to 1998, reflecting salary expenses for additional sales and marketing personnel, outside manufacturers representatives and other related sales support expenses, product promotion and advertising expenses, and outside support for technical services. General and Administrative. General and administrative expenses were $3.8 million in 1999, $3.3 million in 1998 and $1.9 million in 1997. General and administrative expenses increased 14% from 1998 to 1999, reflecting increased salaries as a result of additional employees and related support expenses, such as legal, facilities and other outside services. General and administrative expenses increased 76% from 1997 to 1998, reflecting bad debt expenses, personnel costs associated with additional employees and other related support expenses. Goodwill Amortization. Goodwill amortization was $335,000 for 1999 and $112,000 for 1998. We recorded no goodwill amortization for fiscal 1997. 26 32 Other Income (Expense), Net. Other expense was $70,000 for 1999, $177,000 for 1998 and $498,000 for 1997. The other expense for these years was primarily due to foreign exchange losses associated with the decrease of the Japanese Yen as compared to the United States dollar. Selected quarterly results The following tables set forth unaudited operating results for each of our last six quarters in dollars and as a percentage of our net revenue. In the opinion of our management, this unaudited quarterly information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting of normal and recurring adjustments, that management considers necessary for a fair presentation of the data. These quarterly results are not necessarily indicative of future quarterly patterns or future patterns or results. This information should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus.
THREE MONTHS ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1999 1999 1999 1999 2000 2000 --------- -------- ------------- ------------ --------- -------- (IN THOUSANDS) Net revenue...................... $22,436 $24,163 $32,047 $33,210 $39,716 $44,020 Cost of revenue.................. 18,341 19,578 26,349 26,997 31,523 34,520 ------- ------- ------- ------- ------- ------- Gross profit..................... 4,095 4,585 5,698 6,213 8,193 9,500 Operating expenses: Research and development....... 546 664 812 619 548 696 Sales and marketing............ 4,409 4,912 5,304 5,695 6,332 6,637 General and administrative..... 836 935 946 1,052 950 1,040 Goodwill amortization.......... 83 84 84 84 83 84 ------- ------- ------- ------- ------- ------- Total operating expenses............... 5,874 6,595 7,146 7,450 7,913 8,457 ------- ------- ------- ------- ------- ------- Income (loss) from operations.... (1,779) (2,010) (1,448) (1,237) 280 1,043 Other income (expense), net...... (71) (72) 81 (8) 122 305 ------- ------- ------- ------- ------- ------- Income (loss) before taxes....... (1,850) (2,082) (1,367) (1,245) 402 1,348 Provision for income taxes....... -- -- -- -- 162 545 ------- ------- ------- ------- ------- ------- Net income (loss)................ $(1,850) $(2,082) $(1,367) $(1,245) $ 240 $ 803 ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1999 1999 1999 1999 2000 2000 --------- -------- ------------- ------------ --------- -------- Net revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.................. 81.7 81.0 82.2 81.3 79.4 78.4 ------- ------- ------- ------- ------- ------- Gross profit..................... 18.3 19.0 17.8 18.7 20.6 21.6 Operating expenses: Research and development....... 2.4 2.7 2.5 1.9 1.4 1.6 Sales and marketing............ 19.7 20.4 16.5 17.0 15.9 15.0 General and administrative..... 3.7 3.9 3.0 3.2 2.4 2.4 Goodwill amortization.......... 0.4 0.3 0.3 0.3 0.2 0.2 ------- ------- ------- ------- ------- ------- Total operating expenses.... 26.2 27.3 22.3 22.4 19.9 19.2 ------- ------- ------- ------- ------- ------- Income (loss) from operations.... (7.9) (8.3) (4.5) (3.7) 0.7 2.4 Other income (expense), net...... (0.3) (0.3) 0.2 -- 0.3 0.7 ------- ------- ------- ------- ------- ------- Income (loss) before taxes....... (8.2) (8.6) (4.3) (3.7) 1.0 3.1 Provision for income taxes....... -- -- -- -- 0.4 1.3 ------- ------- ------- ------- ------- ------- Net income (loss)................ (8.2)% (8.6)% (4.3)% (3.7)% 0.6% 1.8% ======= ======= ======= ======= ======= =======
Net Revenue. Our net revenue has increased in each quarter since March 31, 1999 due to the introduction of new products, development of our retail channels and increased sales and marketing efforts. 27 33 Gross Profit. Gross profit as a percentage of net revenue declined from 19% for the three months ended June 30, 1999 to 18% for the three months ended September 30, 1999. This decrease was caused by rapid average sales price erosion during this period. Gross profit as a percentage of net revenue has increased in each of the three subsequent quarters due to our ability to decrease product costs faster than the decline in average selling prices. Research and Development. Research and development expenses increased from $664,000 for the three months ended June 30, 1999 to $812,000 for the three months ended September 30, 1999 and subsequently declined to $619,000 for the three months ended December 31, 1999 and $548,000 for the three months ended March 31, 2000, due to fluctuations in payments to suppliers for design services, tooling and product certification caused by the timing of new product introductions. General and Administrative. General and administrative expenses increased from $946,000 for the three months ended September 30, 1999 to $1.1 million for the three months ended December 31, 1999, due to an increase in bad debt expense associated with a higher level of aged accounts receivable. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have satisfied our cash requirements primarily through net capital contributions of $42.5 million from our Parent and $15.0 million received in connection with the purchase of our capital stock by another investor. As of June 30, 2000, we had cash of $20.9 million. Operating activities during the six months ended June 30, 2000 provided cash of $23,000 primarily from a net income of $1.0 million and non-cash items of $353,000 partially offset by deferred income taxes of $972,000 and a use of working capital of $401,000. Investing activities for this period used $261,000 due to investments in property and equipment. Financing activities for this period provided cash of $10.7 million primarily due to the proceeds from the sale of preferred stock and a warrant of $15.0 million offset by capital distributions to our Parent of $4.2 million. Operating activities in 1999 used cash of $12.8 million primarily from a net loss of $6.5 million and a use of working capital of $7.0 million. Investing activities in 1999 used $186,000 due to investments in property and equipment. Financing activities in 1999 provided cash of $22.1 million due to capital contributions from our Parent. Operating activities in 1998 used cash of $7.8 million primarily from a net loss of $7.2 million. Investing activities in 1998 used $582,000 due to investments in property and equipment. Financing activities in 1998 provided cash of $8.7 million due to the net capital contributions from our Parent. Operating activities in 1997 used cash of $7.6 million primarily from a net loss of $6.2 million and use of working capital of $1.5 million. Investing activities in 1997 used $198,000 due to investments in property and equipment. Financing activities in 1997 provided cash of $7.6 million due to capital contributions from our Parent. We expect significant growth in our operating expenses and working capital for the foreseeable future. As a result, we anticipate that operating expenses and working capital will constitute a material use of our cash resources. In addition, we may use cash resources, including net proceeds from this offering, to fund acquisitions or investments in technologies or products. We believe that our cash on hand and the net proceeds from the sale of the common stock in this offering will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are exposed to financial market risks, which include changes in foreign currency exchange rates and interest rates. We do not currently use derivative financial instruments to hedge interest rate or foreign currency exchange risks and currently do not intend to enter into hedging contracts. Internationally, our sales are denominated in United States dollars in all geographical areas except Japan, where our sales are denominated in Japanese Yen. Hypothetically, a 10% change in the foreign currency 28 34 exchange rates at June 30, 2000, December 31, 1999, and December 31, 1998 would not have had a material impact on our results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board (FASB), issued FASB Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25, which sets forth the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation award in a business combination. We are required to implement FIN 44 beginning July 1, 2000. We are currently evaluating FIN 44 and do not expect the pronouncement to have a material effect on our financial position, results of operations or cash flows. In December 1999, the staff of the Securities and Exchange Commission, or the SEC, issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles, or GAAP, to revenue recognition in financial statements. We are required to adopt SAB 101 in the fourth quarter of 2000. Although we believe that our revenue recognition policies are in accordance with GAAP, we are currently assessing SAB 101 and have not yet determined its impact, if any, on our financial statements. In June 1998, FASB issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133, as amended, will be effective for our fiscal year beginning January 1, 2001. Although we have not fully assessed the implications of SFAS No. 133, we do not believe adoption of this statement will have a material impact on our financial position, results of operations or cash flows. 29 35 BUSINESS OVERVIEW We are a leading provider of branded, technologically advanced networking products that are designed to address the specific needs of the small business and home markets in terms of ease-of-use, quality, reliability, performance and price. Our products include Internet access, or gateway, products such as routers and cable modems, network connectivity products such as network interfaces, hubs and switches, and server products such as network disk and printer servers. We also offer network starter kits that include the key components required for a small business or home network. Our products are based both on wired and wireless technologies. Since beginning operations in 1996, we have shipped more than five million units. We currently sell our products primarily through wholesale distributors based in North America, Europe and the Asia/Pacific region to over 4,000 retail stores, mail order catalogs and online retailers worldwide. INDUSTRY BACKGROUND AND OPPORTUNITY The increasing use of the Internet to access information and entertainment, as well as advancements in broadband Internet access technology and the ability to share data among multiple devices, is changing how small businesses and homes use their personal computers and related devices. Increased Demand for Broadband Internet Access Internet use by small business and home users has increased dramatically over the past several years, and is expected to expand rapidly in the future as more users access the Internet and as more applications become available over the Internet. Many of the emerging applications available to small business and home users are data intensive and require more speed, or bandwidth, than a traditional dial-up service to work effectively. Data intensive applications targeted at small business users include video conferencing, video streaming, file sharing and sophisticated graphics programs. Data intensive applications targeted at home users include video streaming, audio downloading, live Internet radio and television and interactive computer gaming. Broadband Internet access technologies, such as digital subscriber line, or DSL, data over cable and fixed wireless, have been developed to offer greater bandwidth than traditional dial-up services. The adoption of these technologies has been increasing rapidly. According to a March 2000 report by IDC, the number of small businesses in the United States with broadband Internet access is expected to grow from 534,000 in 1999 to 3.3 million in 2003. Similarly, according to a May 2000 report by IDC, the number of online households in the United States with broadband access is expected to increase from 2.1 million in 1999 to 21.2 million in 2003. Increased Use of Multiple Computing Resources in Small Businesses and Homes In addition to the growing number of users accessing the Internet, the number of small businesses and homes with multiple personal computers is also increasing. According to a February 2000 report by IDC, 75% of all small businesses in the United States will have multiple personal computers by 2003. Similarly, according to a May 2000 report by IDC, 27% of all households in the United States will have multiple personal computers by 2003. We believe that the increasing use of multiple personal computers is creating demand for networks to share Internet access, peripherals, such as disk servers, printers and scanners, digital content and applications among multiple computers and other devices. As the number of products and applications using large digital content files continues to grow, small business and home users will benefit from networks to facilitate the efficient distribution and sharing of these files. In a February 2000 report, IDC estimates that the number of small businesses in the United States with networks will increase from 1.7 million in 1999 to 2.4 million in 2003. Similarly, in a May 2000 report, IDC estimates that the number of networked homes in the United States will grow from 2.1 million in 1999 to 14.4 million in 2003. 30 36 Elements of Small Business and Home Networks Small business networks are designed primarily to allow the use of e-mail, business communications with suppliers, remote office access, and the sharing of peripherals, files and Internet access. A typical configuration for a small business network consists of: - multiple personal computers; - peripherals, such as printers, disk drives and scanners; - an Internet access and security device, such as a router; - a network interface for each personal computer; and - a central network controller, commonly referred to as a hub or a switch. These devices are typically linked together through Ethernet cables, which can operate at speeds of 10, 100 or 1000 Mbps. Home networks are designed primarily to allow the sharing of peripherals, digital file storage and Internet access among multiple personal computers and other Internet-enabled devices, such as network ready printers and personal digital assistants. A typical configuration for a home network consists of: - two or more personal computers; - peripherals, such as printers and scanners; - Internet access devices, such as a router combined with a cable, DSL or 56 Kbps dial-up modem; and - a network interface for each personal computer. These devices are typically linked together through existing telephone lines, Ethernet cables or wireless connections. While access speeds vary, the speed of home networks today is typically 10 Mbps. Lack of Networking Products Suitable for Small Businesses and Homes As the number of small businesses with multiple personal computers and broadband Internet access increases, the desirability of networking products for these small businesses is expanding rapidly. However, small business networks have yet to be widely adopted due to the expense and complexity associated with traditional networks and the historical lack of networking products designed specifically for small businesses. IDC estimates that as of 1999, only 38% of all small businesses in the United States with multiple personal computers had networks. The local area networks that have been widely adopted by larger organizations are often prohibitively expensive for small businesses. In addition to the initial cost of the equipment, traditional networks are generally difficult and costly to install and maintain, requiring special installation equipment and wiring and dedicated maintenance technicians. Similar to small businesses, the expansion of broadband access and the increased use of digital content in homes with multiple personal computers has increased the desirability of home networks. However, the expense and complexity of traditional networking products make such products even more unsuitable for home networks. In addition, there has been a general lack of standards governing the products and technologies developed for home networks. We believe that the expense, complexity and lack of standards have limited the adoption of home networks. In a May 2000 report, IDC estimated that in 1999 only 2.1 million, or approximately 15%, of the 14.5 million homes in the United States with multiple personal computers had home networks. Lack of Widespread Availability of Networking Products for Small Businesses and Homes Until recently, small business and home networking products have generally not been widely available through retail distribution channels, such as retail stores, mail order catalogs and online retailers. In addition, traditional network equipment providers generally have sold their products through value-added resellers and systems integrators and have not focused on the small business and home markets. Even where suitable 31 37 networking products are available, few vendors offer a complete suite of networking products for the small business and home user. The Market Opportunity for Networking Products for Small Businesses and Homes According to a February 2000 report by Cahners' In-Stat Group, the home network market for connectivity and Internet gateway devices is expected to grow from $174.2 million in 1999 to $3.3 billion in 2004 in North America, and from $232.6 million to $5.7 billion in the same period worldwide. As a result, a significant market opportunity exists for networking products that are widely available through retail channels. These products must address the specific needs of small businesses and homes by providing reliable, easy-to-use and cost-effective solutions that allow users to efficiently share Internet access, peripherals, digital content and applications. OUR SOLUTION We are a leading provider of branded, easy-to-use, reliable and technologically advanced networking products designed specifically for small businesses and homes. Our family of products includes Internet gateway, network connectivity and server products. We also offer network starter kits that include the key components required for a small business or home network. Since beginning operations in 1996, we have shipped more than five million units, and we currently sell our products through over 4,000 retail stores, mail order catalogs and online retailers in North America, Europe and the Asia/Pacific region. We offer small business and home users the following key benefits: Complete Product Set We provide a broad portfolio of products that allow users to connect personal computers and other Internet-enabled devices together to share resources, such as Internet access, peripherals, digital content and applications. Our family of products includes Internet gateway, network connectivity and server products. These products allow users to: - access the Internet through broadband and 56 Kbps dial-up connections; - share Internet access among multiple personal computers and other Internet-enabled devices; - share computing resources, such as disk servers, printers, scanners and rewritable compact disk drives among multiple personal computers; - cache (a process by which information is stored in memory or on a server in anticipation of the next request for such information), store and share digital content among multiple personal computers; and - prevent intruders from entering the network. We currently provide network connectivity devices for personal computers based on both wired technologies, such as Ethernet cables and telephone lines, and wireless technologies. Technology Leadership Since our founding in 1996, we have focused exclusively on providing networking solutions designed specifically for small businesses and homes. We believe that this focus has enabled us to identify and address the products, technologies and price points that are appropriate for these markets and efficiently deliver them on a timely basis. We were among the first to introduce to the retail market the following products: 56 Kbps Internet access routers, 100 Mbps Ethernet hubs, gigabit Ethernet switches, 10 Mbps telephone line based home networks and Internet security devices. We believe that our ability to get products to the retail market quickly makes us an attractive partner for many providers of new technology, which often enables us to evaluate new technologies before they become generally available to other companies. Our products currently incorporate technologies from Broadcom, Galileo, National Semiconductor, Intel, Sharewave and Amphenol Corporation. This early access to new technology in turn enables us to provide innovative and timely products to our end users. 32 38 Attractive Value Proposition We focus on providing competitively priced products to small business and home users. We believe that our products offer high value to these users by incorporating advanced technologies that offer rich functionality relative to product price. To allow users to take advantage of investments in their existing network equipment, our products enable customers to work with most existing Internet protocol-based products and with standard operating systems, such as Windows or UNIX. Ease of Installation, Use and Maintenance We design our products to be easy to install, use and maintain by minimizing the need for the user to perform hardware or software configuration and by providing automatic detection of other network equipment. Our products include step-by-step installation instructions and easy-to-follow diagrams and illustrations for a variety of network environments. In addition, we provide free technical support through the telephone and Internet to further assist consumers in using our products. We have established a customer service and support organization for the United States, Canada, the United Kingdom and Australia, which is available 24 hours a day, 7 days a week and 365 days a year. We also provide local language support during local business hours in Japan, Germany, Sweden and France. Broad Accessibility through the Retail Channel We have established a significant, worldwide presence in the retail channel that enables our end-user customers to purchase our products with the same ease with which they purchase personal computers and software. We have developed a family of products with prices that are attractive to the traditional personal computer retail channels. Our products are currently sold primarily through more than 4,000 retail outlets worldwide. Domestic retail stores include Best Buy, Circuit City, CompUSA, Fry's Electronics and Staples. International retail stores include Aisan Denki in Japan, Dixons Stores in the United Kingdom, Future Shops in Canada, Harris Technology in Australia, Media Markt in Germany and Austria, Siba Radio and TV in Sweden and Surcouf in France. Mail order catalogs include CDW and PC Connections domestically and MicroWarehouse and Insight Direct internationally. Online retailers include Buy.com, Egghead.com and Onvia.com both domestically and internationally. Quality and Reliability We focus on providing high quality, reliable products that incorporate the functionality and performance desired by small business and home users. We believe that our focus on high quality design and rigorous technology evaluation and product testing has allowed us to achieve a high degree of customer satisfaction and a low rate of product returns and defects to date. Our products have been recognized through several product awards, including the 1998 PC Magazine Editor's Choice award for overall product line, a 1999 PC Week magazine Best of Comdex finalist award on our telephone line home networks and a 2000 Best Buy Award from Computer Shoppers magazine for our telephone line 10X home network interface product. OUR STRATEGY Our objective is to be the leading provider of networking solutions specifically designed for the small business and home markets. The following are key elements of our strategy: Maintain Our Technology Leadership We believe that our experience in the small business and home networking markets and our access to leading technology is key to our success in these markets. We have been a leader in providing new technologies to small business and home users. We believe that our access to new technologies will allow us to maintain our time-to-market advantage on new products. We will continue to focus on designing advanced networking products that are competitively priced, reliable and easy to install, use and maintain. We also intend to extend our technology leadership by continuing to develop relationships with both established technology companies and startups. 33 39 Continue to Enhance Our Product Portfolio We intend to continue enhancing our product portfolio to satisfy a wide range of requirements to connect Internet-enabled devices together to share resources in small businesses and homes. We will continue to expand the capabilities of our products to accommodate new user requirements and to incorporate new technologies. For example, we are currently developing a set of connectivity products for wireless home networks as well as a multimedia server for the home that will cache, store, catalog and permit shared playback of multimedia digital content. Additional products under development also include Internet gateways with enhanced security features, filtering functions and the ability to create virtual private networks between remote locations. Expand Distribution Channels We believe that the most effective way to sell networking products to the small business and home markets today is through the retail stores, mail order catalogs and online retailers that small business and home consumers use to buy personal computing and other Internet-enabled devices. We also believe that Internet service providers are becoming an effective way to sell networking products to small businesses and homes since they are increasingly offering broadband Internet access to these markets and can bundle our networking products with their services. Since beginning operations in 1996, we have shipped more than five million units, and we currently sell our products through over 4,000 retail stores, mail order catalogs and online retailers in North America, Europe and the Asia/Pacific region. We believe that our worldwide retail distribution strategy differentiates us from our competitors and enables us to quickly reach our end-user customers with new product offerings. We intend to expand our existing distribution network as well as add new distributors, such as general merchandise retailers like COSTCO, where we began selling our products in the second quarter of 2000. We also intend to aggressively develop joint sales and marketing relationships with Internet service providers to promote the sale of our products with their services. Continue Building the NETGEAR Brand We intend to continue building our brand identity through product design, packaging, public relations, advertising campaigns and marketing efforts. We believe that the purchasing decisions of small business and home users are significantly affected by brand recognition. Consequently, we have made significant investments to establish the NETGEAR brand and our GearGuy icon. We believe our brand is identified with high-quality networking equipment that incorporates advanced technology and is reliable and easy-to-use. We intend to continue developing, marketing and merchandising products to reinforce the NETGEAR brand. Continue Our Focus on Small Businesses and Homes Since our founding, we have focused exclusively on providing networking products designed specifically for the small business and home markets. We believe that the competencies necessary to provide competitively priced, technologically advanced, reliable and easy to install, use and maintain networking products to the small business and home markets through the retail channels are fundamentally different from the attributes needed to address the traditional enterprise networking equipment market. We believe that our focus on developing technologies for the small business and home markets and our experience in packaging, merchandising and promoting branded networking products through the retail channel has provided us with a significant advantage over potential new entrants in these markets. We intend to maintain our focus on the small business and home networking markets. PRODUCTS We provide networking products that are designed to address the specific needs of the small business and home markets in terms of ease-of-use, quality, reliability, performance and price. Our products include: - Internet gateway products, such as routers and cable modems; - network connectivity products, such as network interfaces, hubs and switches; 34 40 - server products, such as network disk and printer servers; and - network starter kits. The following table identifies our principal products, with date of first shipment in parentheses: - -------------------------------------------------------------------------------------------------- HOME SMALL BUSINESS - -------------------------------------------------------------------------------------------------- INTERNET GATEWAY ROUTERS ROUTERS PRODUCTS - 10 Mbps Ethernet to 56 Kbps - 10 Mbps Ethernet to integrated (Sept. 1998) synchronous digital network, - 10 Mbps Ethernet to cable or DSL commonly known as ISDN (July modems (Nov. 1999) 1996) - 10 Mbps phoneline to cable or DSL - 10 Mbps Ethernet to 56 Kbps modems (Est. fourth quarter 2000) (Sept. 1998) - 11 Mbps wireless to cable or DSL - 10 Mbps Ethernet to cable or DSL modems (Est. fourth quarter 2000) modems (Nov. 1999) CABLE MODEMS - 10 Mbps Ethernet to cable (Oct. 1998) - -------------------------------------------------------------------------------------------------- NETWORK INTERFACES NETWORK INTERFACES - 10/100 Mbps using Ethernet cables - 10/100 Mbps using Ethernet cables (Dec. 1996) (Dec. 1996) - 10 Mbps for computers with a - 100/1000 Mbps using fiber-optic Universal Serial Bus, commonly cables (June 1999) known as a USB port, using - 100/1000 Mbps using Ethernet Ethernet cables (June 1999) cables (June 2000) - 10 Mbps using telephone lines (Nov. 1999) - 11 Mbps using wireless connections (Est. fourth quarter 2000) CONNECTIVITY PRODUCTS HUBS HUBS - 10 Mbps using Ethernet cables - 10/100 Mbps using Ethernet cables (May 1996) (Mar. 1998) - 10/100 Mbps using Ethernet cables (Mar. 1998) SWITCHES SWITCHES - 10/100 Mbps using Ethernet cables - 10/100 Mbps using Ethernet cables (July 1997) (July 1997) - 100/1000 Mbps using fiber-optic cables (June 1999) - 100/1000 Mbps using Ethernet cables (June 2000) - -------------------------------------------------------------------------------------------------- NETWORK DISK SERVER - 10 Mbps or 100 Mbps Ethernet to a 8 Gb or 20 Gb disk drive (June 1999) SERVERS PRINTER SERVER - 10 Mbps or 100 Mbps Ethernet to one, two or three parallel printer ports (Sept. 1998) - --------------------------------------------------------------------------------------------------
The following are general descriptions of our products: Hubs. Hubs are multiple port devices that connect two or more personal computers together to form a network. Networking cables connect the network interfaces on the personal computers to the hub. The hub receives, retimes and amplifies data signals received on any port, and repeats them to all of the other ports. Hubs are shared traffic devices in which each personal computer takes a turn in transmitting data to all other personal computers connected to the network. Switches. Switches, like hubs, are multiple port devices that connect multiple personal computers together in a network. Unlike hubs, however, switches are dedicated traffic devices, capable of filtering or 35 41 forwarding data between specific connected personal computers as necessary based on their network addresses. This allows simultaneous communication among multiple pairs of personal computers, and results in higher data throughput than possible with hubs. Switches are generally more complex than hubs, and are therefore more expensive. Routers. Routers are intelligent devices that direct and forward packets of data between networks. Unlike switches, routers contain sophisticated software to direct and forward data packets. A router creates or maintains a table of the available routes and their conditions and uses this information along with distance and cost formulas to determine the best route for a given packet. Routers are used in small businesses and homes primarily for directing traffic from the office or home network to the Internet and vice versa. Cable modems. Cable modems are devices that allow high-speed data access to the Internet through a data-over-cable service network. A cable modem typically has two connections, one to the cable wall outlet and the other to a personal computer. Most cable modems are external devices that connect to the personal computer through a standard Ethernet network interface or USB. Network interfaces. Network interfaces allow a personal computer to connect to a network. They physically connect a computer to the network cabling and convert data into electrical signals, which can then be transmitted over the network. Network disk and printer servers. Network servers are intelligent devices that run specific applications. Examples of such devices include printer servers, which control the sharing of a common printer on the network, and disk servers, which control the storing or sharing of digital content files on a common disk. Dedicated servers allow the connection of printing or digital storage devices directly to the network so that all users can share access to them. Servers eliminate the need for a dedicated personal computer to be turned on in order to enable its attached shared devices to be used on the network. PRODUCTS UNDER DEVELOPMENT Our product development strategy is to design and develop networking products that incorporate advanced technologies for the specific performance and price requirements of the small business and home markets. We are actively developing new Internet gateway, network connectivity and disk and multimedia server products. Internet Gateway Products We are developing new Internet gateways with enhanced security features, which will add to our current ability to block unauthorized access and the ability to detect and monitor these intruders. These new Internet gateways will also feature filtering functions that will block access to unwanted websites and will enable virtual private networks to be established between remote locations. In addition, we are developing home Internet gateways that will connect directly to the telephone or wireless network in the home, eliminating the need for an Ethernet bridge. We plan to continue enhancing the capabilities of these gateways to permit voice calls over the Internet. Network Connectivity Products We are currently enhancing our new family of gigabit Ethernet switches to enable them to be connected together to provide expanded capabilities. In addition, we are in the final stage of developing our first set of connectivity products for wireless home networks. This initial set of products is expected to include network interfaces and Ethernet bridges that will connect to DSL and cable modems. We are working closely with a provider of semiconductor chips and software to provide high speed uninterrupted multimedia transmission over wireless connections. We are also developing the next generation of our telephone line and wireless network connectivity products that will be capable of speeds of up to 100 Mbps. 36 42 Disk and Multimedia Server Products We are developing additional versions of our network disk servers, which will allow small business users to add more hard disk capacity and expand the capabilities and fail safe features of their networks. The primary applications for these products will be file sharing and archiving. We are also developing a multimedia server for the home. This server will allow users to cache, store and catalog multimedia digital content, including digital pictures, digital videos and downloaded video and audio from the Internet. Users can then share this content at their convenience among multiple personal computers and other Internet devices in the home. RESEARCH AND DEVELOPMENT Once we have identified and qualified a new networking technology, we work with our technology suppliers and subcontract manufacturers to develop products using one of two design methodologies. These include original design manufacturing, commonly referred to as ODM, and original equipment manufacturing, commonly referred to as OEM. We believe that this development approach allows us to introduce new products to the small business and home markets faster and at lower prices than most of our major competitors. ODM. Under the ODM methodology, which we use for most of our product development activities, we define the product concept and specification and perform the technology selection and semiconductor supplier qualification. We then work with our suppliers to develop the product and detailed circuit designs. If additional software is required, we either develop the software, subcontract the development of the software or buy it from a third party. Once prototypes are completed, we work with our suppliers to complete the debugging and systems integration and testing. Our suppliers conduct all of the agency approval processes for electrical safety and electromagnetic interference. After completion of the final tests, agency approvals and product documentation, the product is released for production. OEM. Under the OEM methodology, we define the product specification and then purchase the product from OEM suppliers that have existing products fitting at least 95% of our design requirements. Once a supplier's product is selected, we work with the OEM supplier to complete the cosmetic changes to fit into our mechanical and packaging design, as well as our documentation standard. If software is involved, the look and feel of the software is modified by the OEM supplier to meet our standard. The OEM supplier completes agency approvals on our behalf. When all design verification and agency testing is completed, the product is released for production. As of July 31, 2000, we had seven employees engaged in research and development. Our total research and development expenses were $1.6 million in 1997, $1.9 million in 1998, $2.6 in 1999 and $1.2 million for the six months ended June 30, 2000. CUSTOMERS AND RETAIL NETWORK We sell our products to end-user customers primarily through over 4,000 retail outlets, including domestic and international stores, mail order catalogs and online retailers. We believe that these are the primary channels that small business and home consumers use to buy personal computing and other Internet- enabled devices. We intend to expand our existing distribution network as well as add new distributors, such as general merchandise retailers like COSTCO, where we began selling our products in the second quarter of 2000. We also intend to aggressively develop joint sales and marketing relationships with Internet service 37 43 providers to promote the sale of our products with their services. The top ten resellers as of July 31, 2000 in each category by dollar value are set forth in alphabetical order in the table below: - ---------------------------------------------------------------------------------------------------------------------- DOMESTIC STORES INTERNATIONAL STORES MAIL ORDER CATALOGS ONLINE RETAILERS - ---------------------------------------------------------------------------------------------------------------------- - Best Buy - Aisan Denki (Japan) - Action Computer (UK) - Buy.com - Central Computer Systems - Dixons Stores (UK) - CDW (US) - Computers4Sure - Circuit City - Future Shops (Canada) - DABS (UK) - Cyberian Outpost - Compucare - Harris Technology - Dustins (Sweden) - Dellware - CompUSA (Australia) - Global/Misco - Egghead.com - Computer Stop - Harvey Norman Holdings - Insight Direct - NECX - Fry's (Australia) - MicroWarehouse - Onvia.com - J&R Music World - Media Markt (Germany, - PC Connection (US) - PCStop - MicroCenter Austria) - PC World Business Direct - Simply Computers - Staples - Rewe-Promarkt (Germany) (UK) - Zone.com - Saturn (Germany, Austria) - RS Components (UK) - SIBA Radio and TV (Sweden) - Surcouf (France) - ----------------------------------------------------------------------------------------------------------------------
While our products are generally sold through retail outlets, some of our products are sold through non-retail distribution channels, such as value added resellers and systems integrators. TECHNICAL SUPPORT We believe that providing widely available and high quality technical support for our products is a key competitive factor in the small business and home markets. We currently provide free technical support worldwide over the phone and Internet. We currently subcontract technical support for our products to third parties. In the United States, Canada, the United Kingdom and Australia, technical support is provided 24 hours a day, 7 days a week, 365 days a year on toll-free lines. Local language support is also available during local business hours in France, Germany, Japan and Sweden. As of July 31, 2000, there were approximately 55 third party technical support representatives dedicated to our products. SALES AND MARKETING We primarily distribute our products through approximately 60 wholesale distributors to our retail network. We currently have wholesale distributors in the United States, Japan, Canada and 28 other countries. We also sell our products direct to Circuit City, Fry's Electronics and MicroCenter. In addition, in the United States, we use manufacturers' representatives who promote our products in the retail channel. We work directly with our retail channel on market development activities, such as co-advertising, in-store promotions and demonstrations, event sponsorship and sales associate training. We also participate in major industry trade shows and marketing events. In addition, we have a direct shopping site, NETGEAR-store.com, which offers consumers the convenience of purchasing directly from the NETGEAR product page on the web. We have also recently started selling our products in the United States through independent generic personal computer builders. We believe that these vendors will supply an increasing portion of the small business and home personal computer market in the United States. As of July 31, 2000, we had 38 people in our sales and marketing organization, of which 16 people were employees of Nortel Networks. 38 44 MANUFACTURING Our primary subcontractors are Delta Networks and Lite-On Communications, both of which are headquartered in Taiwan.Delta Networks and Lite-On Communications purchase all necessary parts and materials to produce complete finished goods and are responsible for the manufacturing of our products. To maintain strict quality standards for our suppliers, we have established our own product testing procedures with the quality engineers at Celestica Asia, our logistics subcontractor, to perform incoming quality control. Celestica Asia also audits and qualifies our suppliers' manufacturing processes and quality control programs on our behalf. Currently, our sole-sourced products are our connector jacks and phone line and wireless semiconductors. We also outsource certain products from other original equipment manufacturers, primarily in Taiwan. Several key components in our products are available from limited sources. We depend upon supply from these sources to meet our needs. Our principal limited-sourced components include local access network repeaters, switching fabric semiconductors, physical layer transceivers and other selected integrated circuits. WAREHOUSING AND LOGISTICS We currently outsource inventory, warehousing and distribution logistics to Celestica Asia, which provides us with these services in Hong Kong, the United Kingdom and San Jose, California. Our manufacturers deliver finished goods to Celestica Asia in Hong Kong and bill Celestica Asia for the full cost of the finished goods. In addition to incoming quality control, Celestica Asia is also responsible for some final packaging, such as bundling components to form kits, and inserting appropriate documentation and power adapters. Celestica Asia ships our products directly to our distributors and authorized retailers. They bill us the full cost of the finished goods plus a percentage upon the shipment of the goods to our distributors and authorized retailers. We are in the process of transitioning the ownership of our inventory from Celestica Asia to ourselves. Once the transition is complete, our subcontract manufacturers will bill us for the full cost of the finished goods upon their delivery to Celestica Asia's warehouses in Hong Kong, the United Kingdom or San Jose, California. Please see "Use of Proceeds" and "Risk Factors -- If we are unable to smoothly transition ownership of our product inventory from Celestica Asia, we may lose inventory value and our operations and financial results would be harmed", for a further discussion of the transition of our inventory from Celestica Asia. COMPETITION Our principal competitors in the small business and home markets are 3Com Corporation, Intel Corporation, The Linksys Group, Inc., D-Link Systems, Inc. and Allied Telesyn International. Other current competitors include numerous local vendors such as PCI in Japan and Diamond Multimedia Systems, Inc. and Proxim Inc. in the United States. We also compete with networking vendors, such as Cisco Systems, Inc., Nortel Networks and Hewlett Packard Company, who may increase their focus on the small business and home markets in the future. Potential future competitors may also include consumer electronics vendors, such as SONY Corporation, Panasonic Consumer Electronics Company, Hitachi, Ltd., Fujitsu Limited, Philips Electronics N.V. and RCA, which have significant experience in retail sales of personal computers and home electronics. Nortel Networks increased its focus on small and medium-sized businesses in the second half of 1999 by introducing a new line of networking products targeting this market. These products are sold through value-added resellers and networks systems integrators. If retailers or other resellers start selling these products, Nortel Networks could become a more significant competitor. In addition, Nortel Networks sells Internet gateway products, including cable and DSL modems, that directly compete with some of our products in both the small business and home markets. Nortel Networks in the future may decide to expand its line of products for the home market. We do not have a non-compete agreement with Nortel Networks. Nortel Networks is in the process of acquiring Alteon WebSystems, Inc., a sole source supplier of our gigabit network interface, and could use that relationship in the future against us. 39 45 We believe that the principal competitive factors in the small business and home markets are: - product performance, features, functionality and reliability; - price; - ease of installation, maintenance and use; - brand name; - customer service and support; - timeliness of new product introductions; and - size and scope of distribution network. We believe that our competitive strengths are product performance and quality, our focus on the needs of the small business and home markets, our technological leadership, our extensive retail presence, time to market and our brand. To remain competitive, we believe we must invest significant resources in developing new products and enhancing our current products and maintain customer satisfaction worldwide. INTELLECTUAL PROPERTY We do not hold any United States or foreign patents and do not have any patent applications pending. We believe that our continued success will depend primarily on the technical expertise, speed of technology implementation, creative skills and management abilities of our officers, directors and key employees rather than on ownership of patents, copyrights or trade secrets. We have obtained trademark registration for the NETGEAR name in the United States, as well as in Argentina, Australia, Brazil, the European Union and New Zealand. We have also applied for registration for the NETGEAR name in foreign countries in which we anticipate expanding our international business. We have also entered into confidentiality or license agreements with our employees, consultants and corporate partners. We rely on a combination of copyright, trademark and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our proprietary rights. We have trade secret rights for our products, consisting mainly of product design, technical product documentation and software. We also own and use distinctive trademarks on or in connection with our products, including NETGEAR, which is a registered trademark, and the GearGuy logo. We believe that the NETGEAR trademark and the GearGuy logo have strong brand name recognition in the marketplace, and we plan to strengthen its reach worldwide. We further believe that establishment of the NETGEAR mark and GearGuy logo in the United States and abroad is material to our operations and future success. We rely on third-party licensors, including Nortel Networks, and other vendors for patented hardware and/or software license rights in technology that is incorporated into and is necessary for the operation and functionality of our products. Our success will depend in part on our continued ability to have access to such technologies. BACKLOG Our backlog was $5.8 million at June 30, 2000, as compared to $3.2 million at June 30, 1999, and $872,000 at June 30, 1998. All but $135,000 of our current backlog at June 30, 2000 was scheduled for delivery before September 30, 2000. Our orders are subject to cancellation or rescheduling by customers with limited or no penalties. Therefore, our backlog at any particular date is not necessarily indicative of our actual sales for any succeeding period. EMPLOYEES As of July 31, 2000, we had 60 employees, with 38 in sales and marketing, seven in research and development, four in operations and 11 in finance and administration. Of these 60 employees, 16 were employed by Nortel Networks and are currently in the process of transitioning to our employment. We have 40 46 never had a work stoppage and no personnel are represented under collective bargaining agreements. We consider our relations with our employees to be good. We have entered into a services agreement with TRINET Employer Group, Inc. to provide human resource services to NETGEAR and our employees including payroll, employee relations and certain employee benefit plans subsequent to the effective date of this offering. The agreement is terminable by either party with 60 days notice. FACILITIES Our principal administrative, sales, marketing and research and development facilities occupies approximately 33,000 square feet in an office complex in Santa Clara, California, under a sublease from Nortel Networks which expires in November 2001. Our international sales personnel reside in local sales offices in Great Britain, Germany, France, Japan, Korea, Sweden and Australia. We believe our existing facilities are adequate for our current needs. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 41 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages and positions of our executive officers and directors as of the date of this prospectus:
NAME AGE POSITION ---- --- -------- Patrick C.S. Lo........................... 44 President, Chief Executive Officer and Director Robert E. Collins......................... 54 Vice President and Chief Financial Officer Stephen J. Dix............................ 41 Vice President of Sales and Marketing Richard A. Fabiano........................ 41 Vice President of Finance Mark G. Merrill........................... 45 Vice President of Engineering Arthur J. Smith........................... 45 Vice President of Operations Michael Dadoun............................ 32 Director Albert J. DeLorenzi....................... 52 Director Susan M. King............................. 38 Director James P. McNiel........................... 37 Director Gerald A. Poch............................ 53 Director Michael P. Ressner........................ 52 Director
- ------------ Mr. DeLorenzi, Ms. King and Mr. McNiel are members of the compensation committee. Messrs. Dadoun, Poch and Ressner are members of the audit committee. Patrick C.S. Lo has served as our President and Chief Executive Officer since March 2000. Prior to that time, Mr. Lo served as Vice President and General Manager since our inception in 1996. Mr. Lo joined Bay Networks in August 1995 to launch a division targeting the small business and home networking markets, and established the NETGEAR division in January 1996. From 1983 until 1995, Mr. Lo worked at Hewlett Packard Company, a computer and test equipment company, where he served in various management positions in software sales, technical support, network product management, sales support and marketing in the United States and Asia, most recently as the Asia Pacific Marketing Director for Unix servers. Mr. Lo received a B.S. degree in Electrical Engineering from Brown University. Robert E. Collins has served as our Vice President and Chief Financial Officer since August 2000. From 1999 to 2000, Mr. Collins was Vice President and Chief Financial Officer of P-Com, Inc., a broadband telecommunications company. From 1996 to 1998, Mr. Collins served as Vice President and Chief Financial Officer for Zilog, Inc., a semiconductor company. From 1994 to 1996, Mr. Collins served as Vice President and Chief Financial Officer of ChemTrak Corporation, a medical device company. Mr. Collins received a B.A. degree in Business Administration from Adelphi University and an M.B.A. degree in Finance from California State University at Hayward. Stephen J. Dix has served as our Vice President of Sales and Marketing since January 1998. Mr. Dix joined us in February 1996 as our National Sales Manager. From 1995 to 1996, Mr. Dix was the Vice President of Channel Management for SysKonnect, a German fiber network interface card company. From 1993 to 1994, Mr. Dix was Director of International Sales and Marketing for Asante, a computer networking company. Prior to 1993, Mr. Dix served in sales capacities for Borland International, a personal computer software company and Farallon Computing, a networking company. Richard A. Fabiano has served as our Vice President of Finance since October 1999. Mr. Fabiano joined us as Director of Finance in November 1997. From 1996 to 1997, Mr. Fabiano held Director of Finance positions for Bay Network's Hub Product Business Unit and Enterprise Business Group. From 1990 to 1996, Mr. Fabiano held various finance positions at Tandem Computers Incorporated, most recently as Controller for the Worldwide Manufacturing Operations group. Mr. Fabiano received a B.A. degree in Political Science from the University of Illinois at Urbana-Champaign and an M.A. degree in Public Policy and Administration from the University of Wisconsin at Madison. 42 48 Mark G. Merrill has served as our Vice President of Engineering since March 2000 and previously served as Director of Engineering from September 1995 to March 2000. From 1987 to 1995, Mr. Merrill worked at SynOptics Communications, a local area networking company, which later merged with Wellfleet to become Bay Networks, where his responsibilities included system design and analog implementations for SynOptic's first 10BASE-T products. Mr. Merrill received both B.S. and M.S. degrees in Electrical Engineering from Stanford University. Arthur J. Smith has served as our Vice President of Operations since October 1999. Mr. Smith joined us in July 1997 as our Director of Operations. From 1990 to 1997, Mr. Smith was the Director of Manufacturing and Distribution for Logitech Inc., a computer input device company. Michael Dadoun has served as one of our directors since March 2000. From January 1995 to the present, Mr. Dadoun has worked for Nortel Networks Corporation, currently serving as the Senior Manager of Mergers and Acquisitions. Mr. Dadoun received a degree in Finance and International Business from the Hautes Etudes Commerciales school of the University of Montreal and holds the Chartered Financial Analyst professional designation. Albert J. DeLorenzi has served as one of our directors since October 1999. Since September 1998, Mr. DeLorenzi has served as the Chief Technology Officer of Nortel Networks Enterprise Solutions. From 1990 to 1998, Mr. DeLorenzi served as Vice President of Nortel Networks. Mr. DeLorenzi received a degree in Electrical Engineering from the University of Toronto. Susan M. King has served as one of our directors since March 2000. From February 1999 to the present, Ms. King has served as the Vice President and General Manager of the Clarify e-Business Applications division at Nortel Networks. From 1995 to 1999, Ms. King served as the Director of Communications of Nortel Networks Corporation. Ms. King received a B.S. degree in Biophysics from The Johns Hopkins University. James P. McNiel has served as one of our directors since March 2000. Mr. McNiel is currently a Senior Vice President with Pequot Capital Management Inc., an investment funds group. From 1997 to 1998, Mr. McNiel served as an Executive Vice President and Director for Spike Technologies, Inc., a semiconductor design consulting company. From 1996 to 1997, Mr. McNiel served as an Executive Vice President of USWeb, an Internet professional services company. From 1990 to 1996, Mr. McNiel founded and served in various positions at Cheyenne Software, Inc., a provider of software products for desktops and personal networks, most recently as Executive Vice President of Corporate Development. Mr. McNiel serves on the board of directors of Netegrity Inc., FutureLink Corp. and Asia Online. Gerald A. Poch has served as one of our directors since March 2000. Mr. Poch has served as Managing Director of Pequot Capital Management, an investment funds group, since January 2000. From August 1998 through January 2000, he was a principal of Pequot Capital Management. From August 1996 to June 1998, he was the Chairman, President and Chief Executive Officer of G.E. Capital Information Technology Solutions, Inc., a technology solutions provider. Prior to that, he served as Co-Chairman and Co-President of AmeriData Technologies, Inc., a value-added reseller and systems integrator of hardware and software systems. Mr. Poch is Co-Chairman of MessageMedia, Inc. and a director at FutureLink Corp., BriteSmile, Inc. and Elastic Networks, Inc. Mr. Poch received a B.S. degree from the University of Connecticut Honors College and a J.D. degree from Boston University Law School. Michael P. Ressner has served as one of our directors since October 1999. From 1981 to the present, Mr. Ressner has served in a number of executive positions at Nortel Networks, most recently as the Vice President of Finance of Nortel Networks Enterprise Solutions. Mr. Ressner is also a member of the board of directors of Entrust Technologies, Inc, an Internet infrastructure company. Mr. Ressner received a B.A. degree in History, a B.B.A. degree in Marketing, and an M.B.A. degree in Finance from the University of Wisconsin at Madison. 43 49 BOARD OF DIRECTORS Currently the board of directors is comprised of Messrs. Dadoun, DeLorenzi, Lo, McNiel, Poch and Ressner and Ms. King. It is anticipated that following completion of this offering, the board of directors will consist of four Nortel Networks representatives, one Pequot Private Equity Fund II, L.P. representative, one Shamrock Holdings of California, Inc. representative, our chief executive officer and two directors not affiliated with NETGEAR or Nortel Networks, other than in their capacity as directors of NETGEAR. In addition, the board members will be divided into three classes: three members will be Class I, whose term will expire at the annual meeting of the stockholders to be held in 2001; three members will be Class II, whose term will expire at the annual meeting of the stockholders to be held in 2002; and the remaining three members will be Class III, whose term will expire at the annual meeting of the stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms expire will be elected to serve a term of three years. This classification of directors may have the effect of delaying or preventing changes in our control. BOARD COMMITTEES We have established an audit committee. The audit committee is primarily responsible for reviewing our audited financial statements and accounting practices, and for considering and recommending the employment of, and approving the fee arrangements with, independent accountants for both audit functions and for advisory and other consulting services. The audit committee is comprised of Messrs. Dadoun, Poch and Ressner. We also have established a compensation committee. The compensation committee is primarily responsible for reviewing and approving the compensation and benefits for our key executive officers, administering our employee benefit plans and making recommendations to our board of directors regarding these matters. The compensation committee is comprised of Mr. DeLorenzi, Ms. King and Mr. McNiel. DIRECTOR COMPENSATION Directors do not receive any cash fees for their services on our board of directors but are entitled to reimbursement of all reasonable out-of-pocket expenses incurred in connection with their attendance at board of directors and board committee meetings. In addition, non-employee directors are eligible to receive stock options under our new 2000 stock plan. Non-employee directors who join our board of directors after completion of the offering will receive a grant under the new 2000 stock plan of options to purchase 40,000 shares of common stock subject to four year vesting. See "Stock Option Plans -- Director Option Program." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. Mr. DeLorenzi and Ms. King, who are members of the compensation committee, are employees of Nortel Networks. Please see "Certain Relationships and Related Party Transactions" for a discussion of our transactions with Nortel Networks. 44 50 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation paid by Nortel Networks to our Chief Executive Officer and each of our four other most highly compensated executive officers, collectively referred to as the named executive officers, during the year ended December 31, 1999: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION --------------------------- -------- ------- ------------ ------------ Patrick C.S. Lo............................. $177,538 $42,758 -- $1,681 President and Chief Executive Officer Stephen J. Dix.............................. 133,076 -- $93,113 82 Vice President of Sales and Marketing Richard A. Fabiano.......................... 157,923 -- -- 1,582 Vice President of Finance Mark G. Merrill............................. 178,154 -- 42,800 1,768 Vice President of Engineering Arthur J. Smith............................. 129,138 -- -- 1,582 Vice President of Operations
- ------------ Other annual compensation for Stephen J. Dix and Mark G. Merrill represents deferred compensation. All other compensation includes matching contributions in the amount of $1,500 by Nortel Networks to the 401(k) savings and incentive plans of each of Messrs. Lo, Fabiano, Merrill and Smith. All other compensation also includes cash received upon the conversion of partial shares at the time Bay Networks was acquired by Nortel Networks. None of the named executive officers received options to purchase our stock during the year ended December 31, 1999, nor did any of the named executive officers exercise any options to purchase our stock during the year ended December 31, 1999. On June 29, 1999, Patrick C.S. Lo, our President and Chief Executive Officer, was granted an option to purchase 12,000 shares of Nortel Networks common stock at an exercise price of $21.94 per share. EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS Pursuant to an employment agreement between Patrick C.S. Lo and us, dated December 3, 1999, we agreed to employ Mr. Lo as our President and Chief Executive Officer, with an annual base salary of $180,000 and an annual bonus of up to $66,500. Mr. Lo's employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. In the event we conduct an initial public offering of stock before the first anniversary of the signing of Mr. Lo's employment agreement, 10% of the shares vest on the day of the offering, 15% of the shares vest on the first anniversary of the signing of the employment agreement, and 1/48th of the shares vest monthly for three years thereafter. If Mr. Lo is terminated by us without cause, he will be entitled to severance payments at his base salary rate for one year and will continue to have stock options vest for one year. If Mr. Lo resigns for good reason within one year following any change of control, he will be entitled to severance payments and full accelerated vesting of stock options. As a condition precedent to Mr. Lo's receipt of any severance payments or accelerated vesting of options, he must agree not to compete with us for one year and not to solicit our employees for two years. Pursuant to an employment agreement between Robert E. Collins and us, dated August 3, 2000, we agreed to employ Mr. Collins as our Vice President and Chief Financial Officer with an annual base salary of $225,000 and a potential annual bonus of up to $45,000. Mr. Collins' employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. If Mr. Collins is terminated by us without cause, then he will be entitled to severance payments at his base salary rate for a period of 26 weeks following his termination and will continue to have stock options vest for one year. If Mr. Collins resigns for good reason within one year following any change of control, he 45 51 will be entitled to severance payments and two years accelerated vesting of stock options. As a condition precedent to Mr. Collins' receipt of any severance payments and continued stock vesting, he must agree not to compete with us for 26 weeks and not to solicit our employees for one year. Pursuant to an employment agreement between Stephen J. Dix and us, dated December 9, 1999, we agreed to employ Mr. Dix as our Vice President of Sales and Marketing, with an annual base salary of $148,000 and a potential annual commission of $63,000. Mr. Dix's employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. In the event we conduct an initial public offering of stock before the first anniversary of the signing of Mr. Dix's employment agreement, 10% of the shares vest on the day of the offering, 15% of the shares vest on the first anniversary of the signing of the employment agreement and 1/48th of the shares vest monthly for three years thereafter. If Mr. Dix's employment is terminated without cause, then Mr. Dix is entitled to payment of his base salary plus targeted commission for up to 26 weeks, and to continue to have stock options vest during the one year period immediately following such termination. If, within one year following any change in our control, Mr. Dix resigns for good reason, he would be entitled to a lump sum payment equal to 26 weeks of his base salary plus targeted commission and two years accelerated vesting of stock options. As a condition precedent to Mr. Dix's receipt of any severance payments and continued stock vesting, he must agree not to compete with us for 26 weeks or to solicit our employees for two years. Pursuant to an employment agreement between Richard A. Fabiano and us, dated December 9, 1999, we agreed to employ Mr. Fabiano as our Vice President of Finance with an annual base salary of $174,000 and a bonus of up to 20% of his annual base salary. Mr. Fabiano's employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. In the event we conduct an initial public offering of stock before the first anniversary of the signing of Mr. Fabiano's employment agreement, 10% of the shares vest on the day of the offering, 15% of the shares vest on the first anniversary of the signing of the employment agreement and 1/48th of the shares vest monthly for three years thereafter. If Mr. Fabiano is terminated by us without cause, or if he resigns for good reason within one year after the initial appointment of our Chief Financial Officer, he will be entitled to severance payments at his base salary rate for 26 weeks and to continue to have options vest for one year. If within one year of a change in control, Mr. Fabiano resigns for good reason or if he is terminated by us without cause, he will be entitled to severance payments and two years accelerated vesting of stock options. As a condition precedent to Mr. Fabiano's receipt of any severance payments and continued stock vesting, he must agree not to compete against us for 26 weeks or to solicit our employees for two years. Pursuant to an employment agreement between Mark G. Merrill and us, dated December 9, 1999, we agreed to employ Mr. Merrill as our Vice President of Engineering, with an annual base salary of $190,000 and a bonus of up to 20% of his annual base salary. Mr. Merrill's employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. In the event we conduct an initial public offering before the first anniversary of the signing of Mr. Merrill's employment agreement with us, 10% of the shares vest on the day of the offering, 15% of the shares vest on the first anniversary of the signing of the employment agreement and 1/48th of the shares vest monthly for three years thereafter. If Mr. Merrill is terminated by us without cause, he will be entitled to severance payments at his base salary rate for 26 weeks and continued stock option vesting for one year. If Mr. Merrill resigns for good reason within one year following any change in control, he is entitled to severance payments and two years accelerated vesting of options. As a condition precedent to Mr. Merrill's receipt of any severance payments and continued stock vesting, he must agree not to compete with us for 26 weeks or to solicit Company employees for two years. Pursuant to an employment agreement between Arthur J. Smith and us, dated December 9, 1999, we agreed to employ Mr. Smith as our Vice President of Operations with an annual base salary of $142,000 and a bonus of up to 20% of his annual base salary. Mr. Smith's employment agreement also provides that he be granted certain stock options under our 2000 stock option plan to vest over the course of four years. In the event we conduct an initial public offering of stock before the first anniversary of the signing of Mr. Smith's employment agreement with us, 10% of the shares vest on the day of the offering, 15% of the shares vest on the first anniversary of the signing of the employment agreement with us, and 1/48th of the shares vest monthly 46 52 for three years thereafter. If Mr. Smith is terminated by us without cause, he will be entitled to severance payments at his base salary rate for 26 weeks and to continue to have options vest for one year. If Mr. Smith resigns for good reason within one year following any change in control, he is entitled to severance payments and two years accelerated vesting of options. As a condition precedent to Mr. Smith's receipt of any severance payments and continued stock vesting, he must agree not to compete with us for 26 weeks and not to solicit employees for two years. STOCK OPTION PLANS 2000 Stock Option Plan Our 2000 stock option plan was adopted by our board of directors in April 2000, and our stockholders initially approved the plan in April 2000. Our 2000 stock option plan provides for the grant of incentive stock options, which may provide for preferential tax treatment, to our employees and for the grant of nonstatutory stock options to our employees, directors and consultants. The board of directors has determined that no future options will be granted under our 2000 stock option plan following the effective date of this offering. However, our board of directors or a committee of our board of directors will administer the options granted under our 2000 stock option plan that are outstanding on the effective date of this offering. A total of 6,000,000 shares of our common stock were authorized for issuance under this plan. As of September 7, 2000, options to purchase an aggregate of 5,230,058 shares of our common stock were outstanding. As of September 7, 2000, 769,942 shares were available for future grant. The options outstanding at the time of this offering will remain subject to the terms of the agreements evidencing those options and the terms of the 2000 stock option plan. The 2000 stock option plan provides that in the event of our merger with or into another corporation, the successor corporation may assume or substitute each option. If the successor corporation refuses to assume or substitute for the option, the optionee's options will become fully vested and exercisable as of ten days prior to the merger. New 2000 Stock Plan Our new 2000 stock plan was adopted by our board of directors in August 2000. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options and stock purchase rights to our employees, directors and consultants. As of August 2000, a total of 2,000,000 shares of our common stock were reserved for issuance pursuant to our new 2000 stock plan. The shares may be authorized, but unissued or reacquired common stock. No options have yet been issued pursuant to our new 2000 stock plan. The number of shares reserved for issuance under our new 2000 stock plan will increase annually on the first day of our fiscal year beginning in 2001 by an amount equal to the lesser of: - 2% of the outstanding shares of our common stock on the first day of the year; - 2,000,000 shares; or - a lesser amount as our board of directors may determine. If an option or stock purchase right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an option exchange program, the unpurchased shares which were subject to the plan will become available for future grant or sale under the plan (unless the plan has terminated). However, shares that have actually been issued under the plan, upon exercise of either an option or stock purchase right, will not be returned to the plan and will not be available for future distribution under the plan except if shares of restricted stock are repurchased by us at their original price, the shares will be available for future grant under the plan. Our board of directors or a committee of our board administers our new 2000 stock plan. The administrator has the power to determine the terms of the options or stock purchase rights granted, including 47 53 the exercise price, the number of shares subject to each option or stock purchase right, the exercisability of the options, the initiation of an option exchange program, and the form of consideration payable upon exercise. The administrator determines the exercise price of options granted under our new 2000 stock plan. However, with respect to incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. Additionally, the term of an incentive stock option may not exceed ten years. The administrator determines the term of all other options. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated in the option agreement. If termination is due to death or disability, the option will generally remain exercisable for 12 months following such termination. In all other cases, the option will generally remain exercisable for three months. However, an option may never be exercised later than the expiration of its term. The administrator determines the exercise price of stock purchase rights granted under our new 2000 stock plan. Unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason including death or disability. The purchase price for shares we repurchase will generally be the original price paid by the purchaser. The administrator determines the rate at which our repurchase option will lapse. Our new 2000 stock plan generally does not allow for the transfer of options or stock purchase rights and only the optionee may exercise an option and stock purchase right during his or her lifetime. Our new 2000 stock plan provides that in the event of our merger with or into another corporation or a sale of substantially all of our assets, the successor corporation will assume or substitute for options or rights each option or stock purchase right. If the outstanding options or stock purchase rights are not assumed or substituted for, the optionee will be notified that his or her options or stock purchase rights will be fully exercisable as to all optioned stock, including shares that would not otherwise be vested and exercisable, for a period of 15 days from the date of such notice. The option or purchase right will terminate at the end of the 15 day period. Our stock option plan will automatically terminate in 2010, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate our new 2000 stock plan provided it does not adversely affect any option previously granted under the plan. Directors Option Program The director option program is part of our new 2000 stock plan and provides for the periodic grant of nonstatutory stock options to our non-employee directors. All grants of options to our non-employee directors who join our board after completion of this offering under the director program are automatic. We will grant to each individual who first becomes a non-employee director on or after this offering, an option to purchase 40,000 shares when such person first becomes a non-employee director, except for those directors who became non-employee directors by ceasing to be employee directors. Twenty-five percent of the shares subject to the option become exercisable on the anniversary of the date of grant, and 1/48th of the shares subject to the option vest each month thereafter, provided the individual remains an outside director on such dates. All options granted under our director program have a term of ten years and an exercise price equal to fair market value on the date of grant. After termination as a non-employee director with us, an optionee must exercise an option at the time set forth in his or her option agreement. If termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will remain exercisable for a period of three months. However, an option may never be exercised later than the expiration of its term. A non-employee director may not transfer options granted under our director program other than by will or the laws of descent and distribution. Only the non-employee director may exercise the option during his or her lifetime. 2000 EMPLOYEE STOCK PURCHASE PLAN Concurrently with this offering, we intend to establish an employee stock purchase plan. A total of 500,000 shares of our common stock will be made available for sale. In addition, our plan provides for 48 54 annual increases in the number of shares available for issuance under the purchase plan on the first day of our fiscal year beginning in 2001 in an amount equal to the lesser of: - 1,000,000 shares; - 0.5% of the outstanding shares of our common stock on such date; or - a lesser amount determined by our board of directors. Our board of directors or a committee of our board administers the plan. Our board of directors or its committee has full and exclusive authority to interpret the terms of the plan and determine eligibility. All of our employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the plan if such employee: - immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or - whose rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year. Our plan is intended to qualify for preferential tax treatment and contains consecutive, overlapping 24 month offering periods. Each offering period includes four six month purchase periods. The offering periods generally start on the first trading day on or after February 15 and August 15 of each year, except for the first such offering period which will commence on the first trading day on or after the effective date of this offering and will end on the last trading day on or before February 15, 2000. The plan permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation which includes a participant's base straight time gross earnings and commissions but excluding all other compensation paid to our employees. A participant may purchase no more than 25,000 shares during any six month purchase period. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six month purchase period. The price is 85% of the lower of the fair market value of our common stock at the beginning of an offering period or after a purchase period ends. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be re-enrolled in the immediately following offering period. Participants may end their participation at any time during an offering period, and will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. A participant may not transfer rights granted under our employee stock purchase plan other than by will, the laws of descent and distribution or as otherwise provided under the plan. In the event of our merger with or into another corporation or a sale of all or substantially all of our assets, a successor corporation may assume or substitute each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the purchase period then in progress will be shortened by setting a new exercise date and any offering period then in progress will end on the new exercise date. Our plan will terminate in 2010. However, our board of directors has the authority to amend or terminate our plan, except that, subject to certain exceptions described in the plan, no such action may adversely affect any outstanding rights to purchase stock under our plan. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the 49 55 corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: - any breach of the director's duty of loyalty to us or our stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; or - any transaction from which the director derived an improper personal benefit. Our certificate of incorporation allows us to indemnify our officers, directors and other agents to the full extent permitted by Delaware law. We intend to enter into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and that may provide additional procedural protection. The indemnification agreements require us, among other things, to: - indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors; - advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; or - obtain directors' and officers' insurance. Our bylaws also permit us to purchase insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether Delaware law would permit indemnification, and to provide indemnification in circumstances in which indemnification is otherwise discretionary under Delaware law. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. 50 56 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS We describe below transactions, or series of similar transactions, as of July 31, 2000, to which we were or will be a party: - in which the amounts involved exceeded or will exceed $60,000; and - in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. OUR FORMATION AND RECENT SEPARATION FROM NORTEL NETWORKS We were incorporated in 1996 as a wholly owned subsidiary of Bay Networks. Nortel Networks acquired Bay Networks in August 1998. We remained a wholly owned subsidiary of Nortel Networks until March 2000 when we issued and sold 3,794,900 of our Series B preferred stock to Pequot Private Equity Fund II, L.P. The sale of our Series B preferred stock to Pequot was part of a joint effort by us and Nortel Networks to dilute Nortel Networks' ownership interest in us and to allow us to begin operating as an independent company. To further facilitate our transition to become an independent company, we entered into a number of agreements with Nortel Networks, including a contribution agreement, an intellectual property license agreement, a transition services agreement and a loaned employee agreement. We entered into these agreements in consideration for certain fee payments to be made by us and the assumption of certain liabilities by us. Under the contribution agreement, Nortel Networks transferred to us its rights in and to the NETGEAR and GearGuy trademarks and certain technical trade secrets, its interest in executory contracts with distributors and suppliers of our products, equipment, personal property and fixtures used by employees and contractors dedicated to our business and the records relating to our business. Under the intellectual property agreement, we received a perpetual, non-exclusive, royalty-free license to continue to use Nortel Networks' world-wide intellectual property rights underlying our products, other than those rights transferred pursuant to the contribution agreement, for use in the production, distribution and sale of our products. Pursuant to the transition services agreement, Nortel Networks has agreed to provide us with administrative, financial, management, facilities-related and other services and to grant us a real estate license for a period of six months ending September 10, 2000 in exchange for fees, based upon allocation of its current costs for such services not to exceed fair market value, which we believe are substantially consistent with the allocation of the costs of such services set forth in our historical financial statements. We paid $1.1 million, $1.7 million, $3.2 million, $4.2 million and $2.0 million in the years ended December 31, 1996, 1997, 1998 and 1999 and for the six months ended June 30, 2000, respectively, for services provided by Parent. Under the loaned employee agreement, Nortel Networks agreed to provide us with the services of 16 persons employed by Nortel Networks in exchange for fees, based upon allocation of its current costs associated with such personnel, including all of the international sales and marketing personnel currently providing services to us. We have offered employment to all these persons and, with the exception of one person, all have accepted. We have also entered into an agreement with Nortel Networks which provides that we sublease from Nortel Networks approximately 33,000 square feet of space in an office complex located in Santa Clara, California. We intend to use this office space to house our principal administrative, sales, marketing and research and development facilities. We pay a base monthly rent of $61,000 to Nortel Networks under the sublease, which expires in November 2001. Nortel Networks is in the process of acquiring Alteon WebSystems, Inc., a sole source supplier of our gigabit network interface. 51 57 Mr. Dadoun, Mr. DeLorenzi, Ms. King and Mr. Ressner, who are directors, are also employees of Nortel Networks, and may be deemed to have an indirect material interest in the transactions between us and Nortel Networks. TRANSACTIONS WITH PEQUOT CAPITAL MANAGEMENT On March 10, 2000, we issued and sold an aggregate of 3,794,900 Series B preferred stock to Pequot Private Equity Fund II, L.P. for an aggregate purchase price of $15.0 million. The Series B preferred stock is convertible into an equal number of shares of common stock, subject to future adjustments for dilution. On March 10, 2000, we granted a warrant to purchase an aggregate of 3,000,000 shares of our common stock to Pequot Private Equity Fund II, L.P. with an exercise price of $5.00 per share. The warrant becomes fully vested and exercisable upon completion of this offering and expires 45 days after completion of this offering. NORTEL NETWORKS STOCK SALE In September 2000, Nortel Networks sold an aggregate of 6,829,828 shares of its NETGEAR Series A preferred stock at $6.34 per share to the following entities:
PURCHASER NO. OF SHARES PURCHASE PRICE --------- ------------- -------------- Shamrock Holdings of California, Inc. ................. 2,364,354 $14,990,004 Blue Ridge Limited Partnership......................... 1,261,830 8,000,002 BMO Nesbitt Burns Capital (U.S.), Inc. ................ 1,104,100 6,999,994 The Abernathy Group Institutional HSN Fund, L.P. ...... 853,570 5,411,634 The Abernathy Group HSN Fund, L.P. .................... 741,242 4,699,474 Delta International Holding Limit...................... 473,186 2,999,999 Blue Ridge Private Equity Fund, LLC.................... 31,546 200,002 --------- ----------- Total........................................ 6,829,828 $43,301,109 ========= ===========
Patrick C.S. Lo, our Chief Executive Officer, is a limited partner in The Abernathy Group HSN Fund, L.P. and holds approximately a 15% interest in that fund. Delta International Holding Limit is an affiliate of Delta Networks, one of our primary subcontractors. Please see "Business -- Manufacturing" for a further discussion of Delta Networks. In connection with this transaction, we made certain representations and warranties to the purchasers, agreed to indemnification obligations with respect to those representations and warranties and entered certain other agreements with the purchasers. 52 58 TRANSACTIONS WITH OFFICERS On various occasions during 2000 and the three preceding fiscal years, the following options to purchase shares of NETGEAR and Nortel Networks common stock to the following executive officers were granted:
SHARES UNDERLYING PRICE PER DATE OF NAME OPTIONS GRANTED SHARE GRANT GRANTOR ---- ----------------- --------- ------------- --------------- Patrick C.S. Lo............. 1,139,156 $ 3.95 04/05/00 NETGEAR 12,000 21.94 07/29/99 Nortel Networks 7,456 13.41 08/19/98 Nortel Networks 28,546 13.41 08/19/98 Nortel Networks 75,328 10.00 12/15/97 Nortel Networks 21,118 6.72 03/20/97 Nortel Networks 14,448 6.72 03/20/97 Nortel Networks Robert E. Collins........... 416,000 6.34 08/29/00 NETGEAR Stephen J. Dix.............. 341,746 3.95 04/05/00 NETGEAR 5,094 13.41 08/19/98 Nortel Networks 9,308 13.41 08/19/98 Nortel Networks 2,400 13.05 02/12/98 Nortel Networks 2,100 10.00 12/15/97 Nortel Networks Richard A. Fabiano.......... 341,746 3.95 04/05/00 NETGEAR 7,456 13.41 08/19/98 Nortel Networks 7,666 13.41 08/19/98 Nortel Networks 4,800 10.00 12/15/97 Nortel Networks Mark G. Merrill............. 607,550 3.95 04/05/00 NETGEAR 7,456 13.41 08/19/98 Nortel Networks 21,346 13.41 08/19/98 Nortel Networks 10,000 10.00 12/15/97 Nortel Networks 802 10.00 12/15/97 Nortel Networks Arthur J. Smith............. 189,860 3.95 04/05/00 NETGEAR 3,600 10.84 05/21/98 Nortel Networks 2,400 10.00 12/15/97 Nortel Networks 8,404 11.90 07/17/97 Nortel Networks 3,598 11.90 07/17/97 Nortel Networks
53 59 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock, as of September 7, 2000 and as adjusted to reflect the sale of common stock offered by us and Nortel Networks in this offering, for: - each person who we know beneficially owns more than 5% of our common stock; - each of our directors; - each executive officer named in the Summary Compensation Table; and - all of our directors and officers as a group. Unless otherwise indicated, the principal address of each of the stockholders below is c/o NETGEAR, Inc., 4500 Great America Parkway, Santa Clara, California 95054. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all common stock shown to be held by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person or entity includes common stock underlying options or a warrant held by the person or entity that are exercisable within 60 days of September 7, 2000, but excludes common stock underlying options or warrants held by any other person or entity. Percentage of beneficial ownership is based on 33,794,900 shares of common stock outstanding as of September 7, 2000, after giving effect to the conversion of all outstanding preferred stock upon the closing of this offering. The numbers shown in the table assume no exercise by the underwriters of their over-allotment option.
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING SHARES AFTER THE OFFERING -------------------------- BEING -------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ------------------------ ------------- --------- ------------ ----------- ----------- 5% Stockholders: Nortel Networks(1)............... 23,170,172 68.6% Pequot Capital Management, Inc.(2)....................... 6,794,900 18.5 Shamrock Holdings of California, Inc.(3) .......... 2,364,354 7.0 Executive Officers and Directors: Patrick C.S. Lo(4)............... 855,158 2.5 Robert E. Collins................ -- -- Stephen J. Dix(5)................ 34,175 * Richard A. Fabiano(6)............ 34,175 * Mark G. Merrill(7)............... 60,755 * Arthur J. Smith(8)............... 18,986 * Michael Dadoun(9)................ 23,170,172 68.6 Albert J. DeLorenzi(9)........... 23,170,172 68.6 Susan M. King(9)................. 23,170,172 68.6 Michael P. Ressner(9)............ 23,170,172 68.6 James P. McNiel(10).............. 6,794,900 18.5 Gerald A. Poch(10)............... 6,794,900 18.5 All executive officers and directors as a group (12 persons)(11)..................... 30,968,321 83.2
- ------------ * Represents beneficial ownership of less than 1%. (1) Nortel Networks is the only selling stockholder. The address of Nortel Networks is 8200 Dixie Road, Brampton, Ontario, Canada, L6T 5P6. 54 60 (2) Shares beneficially owned by Pequot Capital Management, Inc. represents 3,794,900 shares held of record by Pequot Private Equity Fund II, L.P., and 3,000,000 shares issuable upon the exercise of a warrant held by Pequot Private Equity Fund II, L.P.. Gerald A. Poch and James P. McNiel, directors of NETGEAR, are Managing Directors of Pequot Capital Management, which holds voting and dispositive power for all shares held by Pequot Private Equity Fund II, L.P. The address of Pequot Capital Management and Pequot Private Equity Fund II, L.P. is 500 Nyala Farm Rd., Westport, CT 06880. (3) Shares beneficially owned by Shamrock Holdings of California, Inc. represents 2,364,354 shares acquired from Nortel Networks on September 6, 2000. The address of Shamrock Holdings of California, Inc. is 4444 Lakeside Dr., Second Floor, Burbank, CA 91505. (4) Shares beneficially owned by Patrick C.S. Lo include 113,916 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000 and 741,242 shares held by The Abernathy Group HSN Fund, L.P. which acquired these shares from Nortel Networks on September 6, 2000. Mr. Lo, our President, Chief Executive Officer and a Director is a limited partner and holds an approximate 15% interest in The Abernathy Group HSN Fund, L.P. Mr. Lo disclaims beneficial ownership of the shares held by The Abernathy Group HSN Fund, L.P. except to the extent of his pecuniary interest therein. The address of the Abernathy Group HSN Fund, L.P. is Wall Street Tower, 38th Floor, Twenty Exchange Place, New York, NY 10005. (5) Shares beneficially owned by Stephen Dix includes 34,175 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000. (6) Shares beneficially owned by Richard Fabiano includes 34,175 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000. (7) Shares beneficially owned by Mark Merrill includes 60,755 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000. (8) Shares beneficially owned by Arthur Smith includes 18,986 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000. (9) Shares beneficially owned by Messrs. Dadoun, DeLorenzi and Ressner and Ms. King include 23,170,172 shares held by Nortel Networks. Messrs. Dadoun, DeLorenzi and Ressner and Ms. King, directors of NETGEAR, are employees of Nortel Networks. They disclaim beneficial ownership of the shares held by Nortel Networks except to the extent of their pecuniary interest therein. (10) Mr. McNiel is a Senior Vice President of Pequot Capital Management, and Mr. Poch is a Managing Director of Pequot Capital Management. Each disclaims beneficial ownership of the shares held by Pequot Capital Management except to the extent of his pecuniary interest therein. (11) Shares beneficially owned by all executive officers and directors as a group include 262,007 shares of common stock issuable pursuant to options exercisable within 60 days of September 7, 2000 and 3,000,000 shares of common stock issuable upon exercise of a warrant. 55 61 DESCRIPTION OF CAPITAL STOCK Upon consummation of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. 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. As of September 7, 2000, there were no shares of common stock outstanding and there were 33,794,900 shares of preferred stock outstanding held by nine stockholders of record, all of which will be converted into common stock upon the closing of this offering. COMMON STOCK Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available for distribution at these times and in such amounts as the board of directors from time to time may determine. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not authorized by our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding-up of NETGEAR, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation of any preferred stock. All shares of common stock to be outstanding upon completion of this offering will be, upon payment therefor, duly and validly issued, fully paid and nonassessable. PREFERRED STOCK The board of directors is authorized, without action by the stockholders, to designate and issue preferred stock in one or more series. The board of directors can fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions thereon. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, among other things, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of NETGEAR. We have no current plans to issue any shares of preferred stock. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of NETGEAR by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of NETGEAR to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging these proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of these proposals could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law. This provision generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date this stockholder became an interested stockholder, unless: - prior to this date the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; 56 62 - 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 by persons who are directors and also officers and 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 this date, 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; - 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, an interested stockholder is any entity or person who, together with affiliates and associates, owns, or within three years, did own, 15% or more of a corporation's outstanding voting stock. Our certificate of incorporation and bylaws include provisions that: - allow the board of directors to issue, without further action by the stockholders, up to 5,000,000 shares of undesignated preferred stock; - require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; - divide the board of directors into three classes, with each class serving for a term of three years; - prohibit cumulative voting in the election of directors; - require that special meetings of our stockholders be called only by the board of directors, the chairman of the board, the chief executive officer and the president; - establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors; and - require that certain amendments to the certificate of incorporation and the bylaws require the approval of the holders of at least 66 2/3% of the voting power of all outstanding stock. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board and in the policies formulated by the board and to discourage certain types of transactions that may involve an actual or threatened change of control of NETGEAR. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of our company. These provisions, however, could discourage potential acquisition proposals and could complicate, delay or prevent a change in control of NETGEAR. They may also have the effect of preventing changes in our management. We believe that the benefits of increased protection of our potential ability to negotiate with the 57 63 proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging these proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of these proposals could result in an improvement of their terms. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Chase Mellon Shareholder Services L.L.C. NASDAQ NATIONAL MARKET LISTING We have applied to list our common stock on the Nasdaq National Market under the trading symbol "NTGR." 58 64 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Upon completion of this offering, we will have outstanding an aggregate of shares of common stock, assuming the issuance of shares of common stock. Of these outstanding shares, the shares sold by us and the selling stockholder in the offering will be freely tradable without restriction or further registration under the Securities Act of 1933, unless these shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 33,794,900 shares of common stock outstanding upon completion of the offering and held by existing stockholders will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted shares may be sold in the public market only if registered or if they qualify for exemption under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below, or another exemption. Sales of the restricted shares in the public market, or the availability of these shares for sale, could adversely affect the market price of common stock. LOCK-UP AGREEMENTS We intend to obtain lock-up agreements from all of our officers, directors, stockholders and optionholders under which they will agree not to transfer or dispose of, directly of indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the date of this prospectus without the prior written consent of Robertson Stephens, Inc. However, Robertson Stephens, Inc. may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. As a result of these lock-up agreements and rules of the Securities Act, the restricted shares will be available for sale in the public market, subject to certain volume and other restrictions, as follows:
NUMBER OF DAYS AFTER THE SHARES EFFECTIVE DATE ELIGIBLE FOR SALE COMMENT ---------------- ----------------- ------------------------------------------------------------ On effectiveness Shares not locked up and eligible for sale under Rule 144 180 days 26,965,072 Lock-up released; shares eligible for sale under Rule 144
RULE 144 In general, under Rule 144 as currently in effect, a person who owns shares that were acquired from us or an affiliate of us at least one year prior to the proposed sale is entitled to sell upon expiration of the lock-up described above, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate of us, is entitled to sell those shares without complying with the manner of sale, public information, 59 65 volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, these shares may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell these shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS After the expiration of the 180 day lock-up period and for a term expiring five years after the date of this offering, holders of our preferred stock prior to the completion of this offering will be entitled to rights with respect to the registration of 36,794,900 shares under the Securities Act, including 3,000,000 shares of common stock issuable upon exercise of a warrant held by Pequot Private Equity Fund II, L.P. Under the terms of our agreement with these stockholders, if we propose to register any of our securities under the Securities Act, these stockholders are entitled to notice of that registration and are entitled to include shares of their registrable common stock in that registration. Nortel Networks and certain other holders of our pre-offering preferred stock are also entitled to four 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. Shamrock Holdings of California, Inc. also has the right to require that Nortel Networks exercise a demand registration right, upon which exercise the holders of our preferred stock prior to the completion of this offering will have the right to participate in that registration. Further, Nortel Networks and Pequot Private Equity Fund II, L.P. may require us to file additional registration statements on Form S-3. All of these registration rights are subject to 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 this offering. OPTIONS As of September 7, 2000, options to purchase 5,230,058 shares of common stock were issued and outstanding. Upon the expiration of the lock-up agreements described above, at least 1,339,894 shares of common stock will be subject to vested options, based on options outstanding as of September 7, 2000. Immediately after the completion of this offering, we intend to file a registration statement under the Securities Act covering shares of common stock issued or reserved for issuance under our stock option and employee stock purchase plans. This registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under this registration statement will, subject to vesting provisions and Rule 144 volume limitation, manner of sale, notice and public information requirements applicable to our affiliates, be available for sale in the open market immediately after the 180 day lock-up agreements expire. WARRANT As of September 7, 2000, Pequot Private Equity Fund II, L.P. held a warrant to purchase 3,000,000 shares of our common stock with an aggregate exercise price of $15.0 million. The warrant is exercisable upon the completion of this offering and expires 45 days after the completion of this offering. If the exercise price is paid in cash, the shares must be held for one year after exercise before they can be sold under Rule 144. However, this warrant contains net exercise provisions. These provisions allow the holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued in this case would be based upon the market price of the common stock at the time of the net exercise. If the holder net exercises the warrants, the shares of common stock could be sold under Rule 144 one year following the date the holder purchased the warrant. After the lock-up agreements described above expire, these warrants will have expired or have been exercised. 60 66 UNDERWRITING The underwriters named below, acting through their representatives, Robertson Stephens, Inc., UBS Warburg LLC and Wit SoundView Corporation have severally agreed with us and the selling stockholder, subject to the terms and conditions of the underwriting agreement, to purchase from us and the selling stockholder the number of shares of common stock set forth below opposite their respective names. The underwriters are committed to purchase and pay for all shares if any are purchased.
NUMBER UNDERWRITER OF SHARES ----------- --------- Robertson Stephens, Inc. ................................... UBS Warburg LLC............................................. Wit SoundView Corporation................................... --------- Total.................................................. =========
The representatives have advised us and the selling stockholder that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us or the selling stockholder as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus has been determined through negotiations among the representatives, the selling stockholder and us. Among the factors considered in these negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Robertson Stephens, Inc., UBS Warburg LLC and Wit SoundView Corporation have advised us that the representatives, other than Wit SoundView Corporation, do not intend to engage in an electronic distribution in connection with this offering. It is possible, however, that an electronic prospectus may be posted by any member of the syndicate or even by third parties that might have the prospectus available to them and choose to post it online. Robertson Stephens, Inc. has included in a communication to the syndicate the following: "The Securities and Exchange Commission has asked us to inform you that you may not make an online distribution of shares of Common Stock of NETGEAR, Inc. unless the Securities and Exchange Commission has agreed to such distribution or you are following procedures for online distributions previously cleared with the Securities and Exchange Commission. Unless otherwise agreed to by the Securities and Exchange Commission, by accepting an allocation from us, you will be deemed to be representing to us either (1) you are not making an online distribution or (2) you are following procedures for online distributions previously cleared with the Securities and Exchange Commission." A prospectus in electronic format is being made available on an Internet website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition, other dealers purchasing shares from Wit SoundView in this offering have agreed to make a prospectus in electronic format available on websites maintained by each of these dealers. 61 67 Over-Allotment Option The selling stockholder has granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock, to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. The selling stockholder will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. The following table summarizes the compensation to be paid to the underwriters by NETGEAR and the selling stockholder:
TOTAL -------------------------------- PER WITHOUT WITH SHARE OVER-ALLOTMENT OVER-ALLOTMENT ----- -------------- -------------- Underwriting Discounts and Commissions payable by NETGEAR............................................... $ $ $ Underwriting Discounts and Commissions payable by the selling stockholder................................... $ $ $
We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $ . Indemnity The underwriting agreement contains covenants of indemnity among the underwriters, us and the selling stockholder against certain civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each of our executive officers and directors and all of our other stockholders and optionholders will agree, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Robertson Stephens, Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, Robertson Stephens, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our shareholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of Robertson Stephens, Inc., subject to certain exceptions, consent to the disposition of any shares held by shareholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of our common stock upon the exercise of outstanding options or warrants, and the issuance of options under existing stock option and 62 68 incentive plans provided that those options do not vest prior to the expiration of the lock-up period. See "Shares Eligible for Future Sale." Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act of 1933, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering" transaction is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by this underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by this underwriter or syndicate member. The representatives have advised us that these transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California. EXPERTS The financial statements of NETGEAR as of December 31, 1998 and 1999, and June 30, 2000, and for the period from September 1, 1998 to December 31, 1998, the year ended December 31, 1999 and the six months ended June 30, 2000; and of the Predecessor Company for the year ended December 31, 1997 and for the period from January 1, 1998 to August 31, 1998 included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules filed therewith. For further information with respect to NETGEAR and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of this 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 these offices upon the payment of the fees 63 69 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. 64 70 NETGEAR, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Stockholders' Equity.......................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 71 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of NETGEAR, Inc.: We have audited the accompanying balance sheets of NETGEAR, Inc. (the "Company") as of December 31, 1998 and 1999 and June 30, 2000, and the related statements of operations, stockholders' equity, and cash flows for the period from September 1, 1998 to December 31, 1998, the year ended December 31, 1999 and the six months ended June 30, 2000. We have also audited the accompanying statements of operations, stockholders' equity, and cash flows of the predecessor of the Company for the year ended December 31, 1997 and for the period from January 1, 1998 to August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of NETGEAR, Inc. as of December 31, 1998 and 1999 and June 30, 2000, and the results of its operations and its cash flows for the period from September 1, 1998 to December 31, 1998, the year ended December 31, 1999 and the six months ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the above-mentioned financial statements of the predecessor of the Company present fairly, in all material respects, its results of operations and its cash flows for the year ended December 31, 1997 and for the period from January 1, 1998 to August 31, 1998 in conformity with accounting principles generally accepted in the United States of America. San Jose, California August 21, 2000 ( , 2000 as to the second paragraph of Note 6 and as to Note 12) ------------------------ To the Board of Directors and Stockholders of NETGEAR, Inc.: The financial statements included herein assume the approval by the Company's stockholders of the Company's increase of the authorized number of common and preferred stock and the two-for-one stock split of the common and preferred stock as described in Notes 6 and 12 to the financial statements. The above report is in the form that will be signed by Deloitte & Touche LLP upon the effectiveness of such event assuming that from August 21, 2000 to the effective date of such event, no other events shall have occurred that would affect the accompanying financial statements or notes thereto. DELOITTE & TOUCHE LLP San Jose, California September 6, 2000 F-2 72 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA DECEMBER 31, (NOTE 2) ------------------ JUNE 30, JUNE 30, 1998 1999 2000 2000 ------- ------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash............................................ $ 1,313 $10,427 $20,901 Accounts receivable (net of allowances of $1,275 in 1998, $1,661 in 1999 and $1,654 in 2000)........................................ 19,374 32,298 31,766 Inventories..................................... 9,824 17,887 21,310 Deferred income taxes........................... -- -- 972 Prepaids and other current assets............... -- 12 1,139 ------- ------- ------- Total current assets....................... 30,511 60,624 76,088 Property and equipment, net....................... 544 368 443 Goodwill, net..................................... 1,563 1,228 1,061 ------- ------- ------- Total assets............................... $32,618 $62,220 $77,592 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 7,940 $12,148 $ 5,467 Payable to Nortel Networks ..................... -- -- 4,712 Accrued compensation and related benefits....... 534 880 639 Other accrued liabilities....................... 1,661 4,797 6,084 Income taxes payable............................ -- -- 1,679 Deferred revenue................................ 13,727 19,810 22,569 ------- ------- ------- Total current liabilities.................. 23,862 37,635 41,150 Long-term warranty obligations.................... 189 456 558 ------- ------- ------- Total liabilities.......................... 24,051 38,091 41,708 ------- ------- ------- Commitments and contingencies (Notes 5 and 9) Stockholders' equity: Preferred stock, $0.001 par value; 33,794,904 shares authorized: Series A convertible preferred stock, 30,000,000 shares designated, shares issued and outstanding: none in 1998 and 1999 and 30,000,000 in 2000......................... -- -- 29,123 $ -- Series B convertible preferred stock, 3,794,900 shares designated, shares issued and outstanding: none in 1998 and 1999 and 3,794,900 in 2000.......................... -- -- 12,354 -- Common stock, $0.001 par value; 60,000,000 shares authorized: shares issued and outstanding: 30,000,000 in 1998 and 1999 and none in 2000................................. 11,260 33,366 -- 41,477 Common stock warrant............................ -- -- 2,601 2,601 Accumulated deficit............................. (2,693) (9,237) (8,194) (8,194) ------- ------- ------- ------- Total stockholders' equity................. 8,567 24,129 35,884 35,884 ------- ------- ------- ------- Total liabilities and stockholders' equity.................................. $32,618 $62,220 $77,592 $77,592 ======= ======= ======= =======
SEE NOTES TO FINANCIAL STATEMENTS. F-3 73 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR COMPANY ------------------------- PERIOD PERIOD FROM FROM JANUARY 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED JUNE 30, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, --------------------- 1997 1998 1998 1999 1999 2000 ------------ ---------- ------------ ------------ ----------- ------- (UNAUDITED) Net revenue................... $26,141 $32,801 $25,099 $111,856 $46,599 $83,736 Cost of revenue............... 20,713 25,696 20,830 91,265 37,919 66,043 ------- ------- ------- -------- ------- ------- Gross profit.................. 5,428 7,105 4,269 20,591 8,680 17,693 Operating expenses: Research and development.... 1,559 1,175 676 2,641 1,209 1,244 Sales and marketing......... 7,681 8,081 5,104 20,320 9,321 12,969 General and administrative........... 1,875 2,374 918 3,769 1,772 1,990 Goodwill amortization....... -- -- 112 335 167 167 ------- ------- ------- -------- ------- ------- Total operating expenses............... 11,115 11,630 6,810 27,065 12,469 16,370 ------- ------- ------- -------- ------- ------- Income (loss) from operations.................. (5,687) (4,525) (2,541) (6,474) (3,789) 1,323 Other income (expense), net... (498) (25) (152) (70) (143) 427 ------- ------- ------- -------- ------- ------- Income (loss) before taxes.... (6,185) (4,550) (2,693) (6,544) (3,932) 1,750 Provision for income taxes.... -- -- -- -- -- 707 ------- ------- ------- -------- ------- ------- Net income (loss)............. $(6,185) $(4,550) $(2,693) $ (6,544) $(3,932) $ 1,043 ======= ======= ======= ======== ======= ======= Net income (loss) per share: Basic....................... $ (0.21) $ (0.15) $ (0.09) $ (0.22) $ (0.13) $ 0.09 ======= ======= ======= ======== ======= ======= Diluted..................... $ (0.21) $ (0.15) $ (0.09) $ (0.22) $ (0.13) $ 0.03 ======= ======= ======= ======== ======= ======= Shares used in per share computations: Basic....................... 30,000 30,000 30,000 30,000 30,000 11,538 ======= ======= ======= ======== ======= ======= Diluted..................... 30,000 30,000 30,000 30,000 30,000 32,598 ======= ======= ======= ======== ======= ======= Pro forma basic and diluted net income (loss) per share (Note 2).................... $ (0.22) $ 0.03 ======== ======= Shares used in calculating pro forma basic and diluted net income (loss) per share (Note 2).................... 30,000 32,335 ======== =======
SEE NOTES TO FINANCIAL STATEMENTS. F-4 74 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK COMMON -------------------- ---------------------- STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT WARRANT DEFICIT TOTAL ---------- ------- ----------- -------- -------- ----------- ------- Predecessor Company: Balances, January 1, 1997......... -- $ -- 30,000,000 $ 8,270 $ -- $ (4,644) $ 3,626 Capital contributions............. -- -- -- 7,619 -- -- 7,619 Net loss.......................... -- -- -- -- -- (6,185) (6,185) ---------- ------- ----------- -------- ------ -------- ------- Balances, December 31, 1997....... -- -- 30,000,000 15,889 -- (10,829) 5,060 Capital contributions............. -- -- -- 4,255 -- -- 4,255 Net loss.......................... -- -- -- -- -- (4,550) (4,550) ---------- ------- ----------- -------- ------ -------- ------- Balances, August 31, 1998......... -- $ -- 30,000,000 $ 20,144 $ -- $(15,379) $ 4,765 ========== ======= =========== ======== ====== ======== ======= - ---------------------------------------------------------------------------------------------------------------------- NETGEAR, Inc.: Balances, September 1, 1998....... -- $ -- 30,000,000 $ 6,800 $ -- $ -- $ 6,800 Capital contributions............. -- -- -- 4,460 -- -- 4,460 Net loss.......................... -- -- -- -- -- (2,693) (2,693) ---------- ------- ----------- -------- ------ -------- ------- Balances, December 31, 1998....... -- -- 30,000,000 11,260 -- (2,693) 8,567 Capital contributions............. -- -- -- 22,106 -- -- 22,106 Net loss.......................... -- -- -- -- -- (6,544) (6,544) ---------- ------- ----------- -------- ------ -------- ------- Balances, December 31, 1999....... -- -- 30,000,000 33,366 -- (9,237) 24,129 Issuance of Series A preferred stock in exchange for common stock........................... 30,000,000 29,123 (30,000,000) (29,123) -- -- -- Issuance of Series B preferred stock (net of issuance cost of $35)............................ 3,794,900 12,354 -- -- -- -- 12,354 Issuance of warrant in connection with issuance of Series B preferred stock................. -- -- -- 2,601 -- 2,601 Capital distributions............. -- -- -- (4,243) -- -- (4,243) Net income........................ -- -- -- -- -- 1,043 1,043 ---------- ------- ----------- -------- ------ -------- ------- Balances, June 30, 2000........... 33,794,900 $41,477 -- $ -- $2,601 $ (8,194) $35,884 ========== ======= =========== ======== ====== ======== =======
SEE NOTES TO FINANCIAL STATEMENTS. F-5 75 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR COMPANY -------------------------- PERIOD PERIOD FROM FROM JANUARY 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED JUNE 30, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, --------------------- 1997 1998 1998 1999 1999 2000 ------------ ----------- ------------ ------------ ----------- ------- (UNAUDITED) Cash flows from operating activities: Net income (loss).................. $(6,185) $(4,550) $(2,693) $ (6,544) $(3,932) $ 1,043 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation..................... 84 133 113 361 173 186 Goodwill amortization............ -- -- 112 335 167 167 Loss on sale of fixed assets..... 4 -- 5 1 -- -- Deferred income taxes............ -- -- -- -- -- (972) Changes in assets and liabilities: Accounts receivable............ (5,248) (6,817) (4,233) (12,924) (5,940) 532 Inventories.................... (3,568) 779 (2,269) (8,063) (5,327) (3,423) Prepaids and other current assets...................... -- -- -- (12) -- (1,127) Accounts payable............... 2,296 2,052 1,410 4,208 1,202 (6,681) Payable to Nortel Networks..... -- -- -- -- -- 4,712 Accrued compensation and related benefits............ 125 174 57 346 227 (241) Other accrued liabilities and warranty obligations........ 1,221 287 165 3,403 2,177 1,389 Income taxes payable........... -- -- -- -- -- 1,679 Deferred revenue............... 3,666 3,170 4,324 6,083 5,149 2,759 ------- ------- ------- -------- ------- ------- Net cash provided by (used in) operating activities................ (7,605) (4,772) (3,009) (12,806) (6,104) 23 ------- ------- ------- -------- ------- ------- Net cash used in investing activities -- Property and equipment additions... (198) (444) (138) (186) (86) (261) ------- ------- ------- -------- ------- ------- Cash flows from financing activities: Net capital contributions (distributions) from (to) Parent........................... 7,619 4,255 4,460 22,106 9,838 (4,243) Proceeds from sale of preferred stock and warrant, net........... -- -- -- -- -- 14,955 ------- ------- ------- -------- ------- ------- Net cash provided by financing activities...... 7,619 4,255 4,460 22,106 9,838 10,712 ------- ------- ------- -------- ------- ------- Net increase (decrease) in cash...... (184) (961) 1,313 9,114 3,648 10,474 Cash -- beginning of period.......... 1,145 961 -- 1,313 1,313 10,427 ------- ------- ------- -------- ------- ------- Cash -- end of period................ $ 961 $ -- $ 1,313 $ 10,427 $ 4,961 $20,901 ======= ======= ======= ======== ======= ======= Noncash investing and financing activities: Conversion of common stock into preferred stock.................... $ -- $ -- $ -- $ -- $ -- $29,123 ======= ======= ======= ======== ======= =======
SEE NOTES TO FINANCIAL STATEMENTS. F-6 76 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 1. ORGANIZATION AND NATURE OF BUSINESS NETGEAR, Inc. (the "Company"), an indirect, majority-owned subsidiary of Nortel Networks Corporation, was incorporated in Delaware in January 1996 and focuses on addressing the specific networking needs of users in the small business and home markets. Nortel Networks Corporation is a Canadian corporation whose common stock is publicly traded on the New York and Toronto stock exchanges, and together with its subsidiaries is referred to herein as "Nortel Networks." From its inception through August 31, 1998, the Company was a wholly owned subsidiary of Bay Networks, Inc., which was acquired by Nortel Networks on August 31, 1998 in a merger that was accounted for using the purchase method. In connection with the merger, Nortel Networks acquired substantially all of the assets and liabilities of Bay Networks, Inc., which included ownership of NETGEAR, and changed the name of "Bay Networks, Inc." to "Nortel Networks NA Inc" in April 1999. As a result of this ownership change, the financial statements reflect the effect of the purchase accounting adjustments that relate to NETGEAR in accordance with the Staff Accounting Bulletin No. 54 of the Securities and Exchange Commission. The financial statements of NETGEAR for periods prior to September 1, 1998 are referred to herein as the Predecessor Company financial statements. The aggregate purchase price allocated to NETGEAR as of August 31, 1998 was $6.8 million, based on the estimated fair value of the net assets of NETGEAR at that date. The allocation of the purchase price was to tangible assets of $23.1 million, assumed liabilities of $18.0 million and goodwill of $1.7 million. The goodwill is being amortized over five years. The Company was a wholly owned subsidiary of Nortel Networks until March 10, 2000. On March 10, 2000, the Company sold Series B preferred stock (representing approximately 11% of the Company) to a third-party investor. The Company also signed several agreements with Nortel Networks to facilitate its transition to become an independent Company (see Note 9). The term "Parent" refers to Bay Networks, Inc. for periods through August 31, 1998 and Nortel Networks for periods subsequent to August 31, 1998. The accompanying financial statements reflect the carved-out operations and financial position of the Company and the Predecessor Company as if they had been stand-alone entities for all periods presented. The financial statements include certain corporate costs of the Parent that were allocated to NETGEAR using procedures deemed appropriate for the nature of the expenses involved (see Note 9). The procedures used various allocation bases such as net assets, headcount, square footage and direct effort expended. Although management is unable to determine the actual costs that would have been incurred if the services performed by the Parent had been purchased from independent third parties, management considers the allocation methodology described to be reasonable. The financial position, results of operations and cash flows of the Company may differ from those that would have been achieved had the Company operated independently of the Parent. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Inventories -- Inventories consist primarily of finished goods and are stated at the lower of cost (first-in, first-out basis) or market. Property, Plant and Equipment -- Property, plant and equipment are stated at cost. Provision for depreciation is calculated based on a straight-line basis over their expected useful lives. The expected useful lives range from two to five years. F-7 77 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Long-Lived Assets -- The Company evaluates long-lived assets for impairment using an undiscounted cash flow method whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Revenue Recognition -- The Company sells its products to both distributors and resellers. For domestic wholesale distributors, the Company defers revenue upon shipment to the wholesale distributors, and revenue is generally recognized upon subsequent resale by them. Sales made directly to domestic resellers are recognized upon shipment. For international sales, revenue is deferred upon shipment and generally recognized upon receipt of payment by the Company which is when title transfers. Provisions are made at the time the related revenue is recognized for estimating product returns, price protection and warranty. Warranties -- The Company's products are generally warranted for one to five years. Estimated future costs of repair, replacement, or customer accommodations are reflected in other accrued liabilities and long-term warranty obligations in the accompanying financial statements. Estimated warranty costs, based on historical experience by product, are accrued and recognized at the time the product revenue is recognized. Research and Development -- Research and development expenditures are charged to operations as incurred. Software Development Costs -- Certain of the Company's products include software. The Company considers technological feasibility to have been established upon completion of a working prototype after which the Company's suppliers complete debugging, systems integration and testing. Accordingly, no software development costs have been capitalized. Advertising Costs -- Advertising costs are expensed to operations as incurred. Advertising costs were $4,660,000 for 1997, $3,678,000 for the period from January 1 through August 31, 1998, $2,486,000 for the period from September 1 through December 31, 1998, $9,130,000 for the year ended December 31, 1999 and $7,187,000 for the period ended June 30, 2000. Foreign Currency Transactions -- Certain of the Company's sales and accounts receivable are denominated in foreign currency. Foreign currency transaction losses, net, were $498,000 for 1997, $25,000 for the period from January 1 through August 31, 1998, $152,000 for the period from September 1 through December 31, 1998, $55,000 for the year ended December 31, 1999 and $63,000 for the period ended June 30, 2000. Income Taxes -- The taxable loss of the Company for the period from inception to December 31, 1997 and each of the two years ended December 31, 1999, was included in the consolidated income tax returns of Bay Networks, Inc. for periods through August 31, 1998, and of Nortel Networks, for periods after August 31, 1998. The Company is not reimbursed for the benefits realized by the Parent for utilization of the Company's tax losses. Therefore, no asset is recognized for such benefits in the Company's financial statements. For reporting purposes, the Company has used the asset and liability method in accounting for income taxes, prescribed in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Stock Based Compensation -- The Company's employees received options under stock option plans of the Parent until March 2000 and now participate in the Company's plans. The Parent and the Company account for their employee stock option plans in accordance with the provisions of Accounting Principles F-8 78 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Board Opinion No. 25, Accounting for Stock Issued to Employees and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation. Net Income (Loss) per Share -- Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, a warrant and common stock options using the treasury stock method) were exercised or converted into common stock. Pro Forma Net Income (Loss) per Share -- Pro forma basic and diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period and the weighted average number of common shares resulting from the automatic conversion of outstanding shares of convertible preferred stock, which will occur upon the closing of the initial public offering contemplated by the Prospectus. Unaudited Pro Forma Information -- The unaudited pro forma information in the accompanying balance sheets assumes the conversion of the outstanding shares of convertible preferred stock into 33,794,900 shares of common stock resulting from the completion of an initial public offering as if it had actually occurred on June 30, 2000. Common shares issued resulting from such an initial public offering and its related estimated net proceeds are excluded from such pro forma information. Interim Financial Information -- The interim financial information for the six months ended June 30, 1999 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the six months ended June 30, 2000 are not necessarily indicative of results to be expected for the year ending December 31, 2000. Comprehensive Income (Loss) -- In accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, the Company reports by major components and as a single total, the change in its net assets during the period from nonowner sources. Comprehensive income (loss) for the years ended December 31, 1997, 1998 and 1999 and for the six months ended June 30, 1999 and 2000 was equal to net income (loss). Concentration of Credit Risk -- Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and accounts receivable. Management deposits all its cash with a single financial institution. Management periodically performs credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. The following schedule depicts significant customer balances as a percentage of total accounts receivable as of December 31:
JUNE 30, CUSTOMER 1997 1998 1999 2000 -------- ---- ---- ---- -------- A..................................................... 24% 42% 42% 40% B..................................................... 21% 23% 19% 20% C..................................................... -- 11% 11% 11% D..................................................... 12% -- -- --
F-9 79 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Concentration of Suppliers -- Substantially all of the Company's products are manufactured by two third-party contract manufacturers. This concentration exposes the Company to the risk of manufacturing delays and the possibility of lost sales. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain Significant Risks and Uncertainties -- The Company operates in the networking industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position, results of operation or cash flows: advances and trends in technology underlying network products; overall demand for products offered by the Company; successful and timely completion of product development efforts; competitive pressures in the form of new products or price reductions on current products; certain strategic relationships or customer relationships; development of sales channels; changes in key suppliers and third-party manufacturers; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risk associated with changes in domestic and international economic and/or political conditions or regulations; and the Company's ability to attract, train and retain employees necessary to support its growth. Recently Issued Accounting Standards -- In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. The Company will be required to implement FIN 44 beginning July 1, 2000. The Company is currently evaluating FIN 44 and does not expect the pronouncement to have a material effect on its financial position, results of operations or cash flows. In December 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 summarizes certain of the SEC's views in applying GAAP to revenue recognition in financial statements. The Company is required to adopt SAB 101 in the fourth quarter of 2000. Although the Company believes its revenue recognition policies are in accordance with GAAP, the Company is currently assessing SAB 101 and has not yet determined its impact, if any, on the Company's financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133, as amended, will be effective for the Company's fiscal year beginning January 1, 2001. Although the Company has not fully assessed the implications of SFAS No. 133, management does not believe adoption of this statement will have a material impact on the Company's financial position, results of operations or cash flows. F-10 80 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 3. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, --------------- JUNE 30, 1998 1999 2000 ----- ------ -------- (IN THOUSANDS) Machinery................................................. $ 189 $ 207 $ 243 Computer equipment........................................ 433 550 711 Software.................................................. 274 321 385 ----- ------ ------ 896 1,078 1,339 Accumulated depreciation.................................. (352) (710) (896) ----- ------ ------ $ 544 $ 368 $ 443 ===== ====== ======
4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of:
DECEMBER 31, ---------------- JUNE 30, 1998 1999 2000 ------ ------ -------- (IN THOUSANDS) Accrued sales and marketing.............................. $1,087 $3,736 $4,089 Accrued expenses and others.............................. 385 605 1,437 Accrued warranty......................................... 189 456 558 ------ ------ ------ $1,661 $4,797 $6,084 ====== ====== ======
5. COMMITMENTS The Company leases its domestic and international facilities under operating leases expiring through 2001. The Company's primary facility is leased from the Parent (see Note 9). Facilities expense was $694,000, $833,000, $505,000, $1,829,000 and $922,000, in 1997, the period from January 1, 1998 to August 31, 1998, the period from September 1, 1998 to December 31, 1998, 1999 and the six months ended June 30, 2000, respectively. Future minimum rent payments are $101,000 for fiscal 2001. The Company has signed various employment agreements with key executives pursuant to which if their employment is terminated without cause, the employee is entitled to receive the base salary (and commission or bonus, as applicable) for 52 weeks (for the CEO) or 26 weeks (for other key executives), and will continue to have stock options vest for a one year period following termination. 6. STOCKHOLDERS' EQUITY Recapitalization and Stock Split On March 10, 2000, the Company changed its capital structure. The Board approved a 15,000-for-1 stock split of the outstanding shares of common stock. The 15 million post-split common shares, held by the Parent, were converted to the same number of Series A convertible preferred stock. F-11 81 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 On August 29, 2000, the Board of Directors adopted a two-for-one stock split, subject to stockholders' approval, on the then outstanding shares, warrant and options. The Company's stockholders approved this resolution on , 2000. All historical share and per share data has been restated to retroactively reflect the above stock splits. Convertible Preferred Stock Significant terms of the convertible preferred stock are as follows: - Each share of Series A and Series B preferred stock is convertible, at the option of the holder, into such number of common stock as determined by dividing $3.95 by the respective conversion price. The Series A and Series B conversion price was set at $3.95 per share. In addition, each share of preferred stock will automatically be converted into common stock upon the closing of a public offering of common stock with gross proceeds of at least $25,000,000 to the Company at a valuation of at least $300,000,000. - Each share has the right to vote equal to the number of shares of common stock into which it is convertible. - In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A and Series B preferred stock shall receive, prior to any distribution to holders of common stock, $3.95 per share for Series A and Series B preferred stock, plus any declared but unpaid dividends. Any remaining assets will be distributed among the holders of Series A and Series B preferred stock and common stock, pro rata, based on the number of shares of common stock held by each stockholder on an as-converted basis. Common Stock Warrant In connection with the sale of the Series B preferred stock, the Company granted a third-party investor a warrant to purchase up to 3,000,000 shares of common stock at $5.00 per share. The warrant terminates on May 15, 2001 and is contingently exercisable within 45 days following the first of the following events prior to March 31, 2001: (i) closing of an initial public offering resulting in gross proceeds of at least $25,000,000 at a valuation of no less than $300,000,000 or (ii) merger of the Company with another corporation in which the Company is not the surviving corporation for total consideration greater than $300,000,000. The estimated fair value of the warrant was recorded when it was probable that the contingency related to the exercise of the warrant would be resolved. The fair value of $2,601,000 was estimated using the Black-Scholes option pricing model with the following assumptions: no dividends, risk-free rate of 6.4%, volatility of 71% and contractual life of one year. F-12 82 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Common Stock Reserved for Future Issuance At June 30, 2000, the Company has reserved the following shares of common stock for issuance in connection with: Conversion of convertible preferred stock................ 33,794,900 Warrant issued and outstanding........................... 3,000,000 Options issued and outstanding........................... 4,036,058 Options available under stock option plan................ 1,963,942 ---------- 42,794,900 ==========
Parent Stock Option Plans Until March 2000, certain employees of the Company received grants of nonqualifying stock options under Parent stock option plans. The stock options were granted at the market price on the date of grant and expire on the tenth anniversary date. The stock options granted generally vest over three years. Subsequent to the initial public offering contemplated by this Prospectus, if Nortel Networks' ownership of the Company falls below 50%, the stock options vested under Parent's 1986 Stock Option Plan are expected to be exercised immediately. Stock options vested under the 1994 Stock Option Plan are expected to be exercised within three months of the initial public offering. Any unvested stock options will terminate immediately upon Nortel Networks' ownership of the Company falling below 50%. Additional information with respect to stock options under the Parent plans is as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------- -------------- Outstanding, January 1, 1997................................ 496,052 $ 7.04 Granted (weighted average fair value of $3.23).............. 197,986 9.09 Exercised................................................... (13,200) 7.89 -------- ------ Outstanding, December 31, 1997 (327,303 exercisable)........ 680,838 7.62 Granted (weighted average fair value of $4.47).............. 204,454 12.36 Exercised................................................... (40,128) 7.55 Canceled.................................................... (1,696) 8.71 -------- ------ Outstanding, December 31, 1998 (436,294 exercisable)........ 843,468 8.77 Granted (weighted average fair value of $9.19).............. 30,000 21.76 Exercised................................................... (296,912) 7.87 Canceled.................................................... (750) 10.84 -------- ------ Outstanding, December 31, 1999 (312,414 exercisable)........ 575,806 9.91 Granted (weighted average fair value of $29.78)............. 5,600 65.49 Exercised................................................... (141,152) 6.36 Canceled.................................................... (450) 10.84 -------- ------ Outstanding, June 30, 2000 (218,969 exercisable)............ 439,804 $11.76 ======== ======
F-13 83 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Additional information regarding options outstanding as of June 30, 2000 is as follows:
OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE --------------- ----------- -------- ------------ ----------- -------- $2.21 - $6.71 45,936 $ 5.56 6.10 33,025 $ 5.49 $6.72 - $7.91 15,618 6.86 6.74 7,891 6.93 $8.13 69,066 8.13 6.33 67,626 8.13 $ 8.28 - $10.00 98,530 9.87 6.79 53,216 9.81 $10.15 - $13.34 53,595 11.70 7.65 23,284 11.79 $13.41 117,165 13.41 8.14 27,449 13.41 $13.54 - $58.97 35,894 22.17 8.49 6,478 15.69 $70.44 4,000 70.44 9.74 -- -- ------- ------ ---- ------- ------ 439,804 $11.76 7.27 218,969 $ 9.37 ======= ====== ==== ======= ======
Company Stock Option Plan In April 2000, the Company adopted the 2000 Stock Option Plan (the "Plan"). Under the Plan, the Company may grant stock options to purchase up to 6,000,000 shares of common stock of the Company to employees, officers, directors and consultants at prices not less than the fair market value at the date of grant for incentive and nonstatutory stock options as determined by the Board of Directors. These options generally expire ten years from the date of grant and vest with respect to 25% of the shares after 12 months of service and the remaining 75% in equal monthly installments over the next 36 months of service. At June 30, 2000, 1,963,942 shares were available for future grant under the Plan. Option activity under the Plan is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE OPTIONS PER SHARE --------- --------- Granted (weighted average fair value of $1.81).............. 4,036,058 $3.95 Canceled.................................................... -- -- Exercised................................................... -- -- --------- ----- Outstanding, June 30, 2000 (zero exercisable)............... 4,036,058 $3.95 ========= =====
Additional information regarding options outstanding under the Plan as of June 30, 2000 is as follows:
OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE PRICE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE - -------------- ----------- -------- ------------ ----------- -------- $3.95 4,036,058 $3.95 9.76 -- $-- ========= ===== == ===
F-14 84 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 As discussed in Note 2, the Parent and the Company apply APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. As the Company has granted its stock options with exercise prices equal to the estimated fair value of the related common stock, no compensation has been recognized in the financial statements for its stock-based compensation plans. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income (loss) had the Company adopted the fair value method since inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Parent's and the Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1998 1999 2000 ---- ---- ---- ---- Parent plan: Risk-free interest rate............................... 5.0% 4.8% 6.2% 6.0% Expected dividends.................................... 0.67% 0.51% 0.22% 0.16% Expected volatility................................... 31% 42% 56% 63% Expected life in years................................ 6 5 4 4 Company plan: Risk-free interest rate............................... -- -- -- 6.8% Expected dividends.................................... -- -- -- none Expected volatility................................... -- -- -- 71% Expected life in years................................ -- -- -- 4
The calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards had been amortized to expense over the vesting period of the awards, pro forma net loss and net loss per share would appear as follows (in thousands, except per share data):
PERIOD FROM PERIOD FROM YEAR JANUARY 1, SEPTEMBER 1, YEAR SIX MONTHS ENDED 1998 TO 1998 TO ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1998 1998 1999 2000 ------------ ----------- ------------ ------------ ---------- Net income (loss) As reported........................ $(6,185) $(4,550) $(2,693) $(6,544) $ 1,043 Pro forma.......................... (6,656) (5,014) (2,925) (7,231) (80) Net income (loss) per basic share As reported........................ (0.206) (0.152) (0.090) (0.218) 0.090 Pro forma.......................... (0.222) (0.167) (0.098) (0.241) (0.007) Net income (loss) per diluted share As reported........................ (0.206) (0.152) (0.090) (0.218) 0.032 Pro forma.......................... (0.222) (0.167) (0.098) (0.241) (0.002)
F-15 85 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 7. NET INCOME (LOSS) PER SHARE For the years ended December 31, 1997, 1998 and 1999, all of the outstanding common stock of the Company was owned by the Parent, and basic and diluted net loss per share amounts were computed by dividing the net loss for the period by 30,000,000 common shares outstanding. The following table presents information necessary to calculate basic and diluted net income per common and common equivalent share for the six months ended June 30, 2000: Weighted average shares outstanding -- basic................ 11,538,462 Convertible preferred stock................................. 20,796,862 Outstanding options......................................... 262,337 ----------- Weighted average shares and equivalents -- diluted.......... 32,597,661 =========== Net income for basic and diluted earnings per share computation............................................... $ 1,043,000 =========== Net income per share -- basic............................... $ 0.09 =========== Net income per share -- diluted............................. $ 0.03 ===========
For the period ended June 30, 2000, the Company had security outstanding which could potentially dilute basic net income per share in the future, but were excluded in the computation of diluted net income per share as their effect would have been antidilutive. Such outstanding security consists of a warrant to purchase 3,000,000 shares of common stock. 8. INCOME TAXES The operating results of the Company were included in the consolidated income tax returns of the Parent. The methodology for allocating tax expense (benefit) with the Parent is set forth in Note 2. The provision for income taxes consists of the following (in thousands):
PERIOD FROM PERIOD FROM JANUARY 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1998 1998 1999 2000 ------------ ----------- ------------ ------------ ---------- Current: Federal.................... $ -- $ -- $ -- $ -- $1,307 State...................... -- -- -- -- 372 ---- ---- ---- ---- ------ -- -- -- -- 1,679 ---- ---- ---- ---- ------ Deferred: Federal.................... -- -- -- -- (756) State...................... -- -- -- -- (216) ---- ---- ---- ---- ------ -- -- -- -- (972) ---- ---- ---- ---- ------ Provision for income taxes... $ -- $ -- $ -- $ -- $ 707 ==== ==== ==== ==== ======
F-16 86 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 The Company's deferred income tax assets are comprised of the following (in thousands):
DECEMBER 31, ------------------ JUNE 30, 1998 1999 2000 ------- ------- ---------- Net deferred tax assets: Accruals deductible in different periods........... $ 994 $ 1,977 $ 2,501 Deferred revenue................................... 1,411 2,164 2,497 Goodwill amortization and non-current accruals..... (589) (331) (216) ------- ------- ------- 1,816 3,810 4,782 Valuation allowance -- current and non-current....... (1,816) (3,810) (3,810) ------- ------- ------- Total........................................... $ -- $ -- $ 972 ======= ======= =======
Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's valuation allowance reduces the carrying amount of the net deferred tax assets to the amount that the Company believes is more likely than not of realizing. The Company's effective tax rate differs from the federal statutory tax rate as follows:
PREDECESSOR COMPANY -------------------------- PERIOD FROM PERIOD FROM JANUARY 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1998 1998 1999 2000 ------------ ----------- ------------ ------------ ---------- Federal statutory tax rate........... (35.0)% (35.0)% (35.0)% (35.0)% 35.0% State income tax..................... (6.0) (6.0) (6.0) (6.0) 6.0 Tax operating losses utilized by Parent............................. 24.4 26.0 26.0 19.2 -- Other................................ -- 0.2 0.2 -- (0.6) Valuation allowance.................. 16.6 14.8 14.8 21.8 -- ----- ----- ----- ----- ---- Effective tax rate................... --% --% --% --% 40.4% ===== ===== ===== ===== ====
9. RELATED PARTY TRANSACTIONS -- PARENT The Company's costs and expenses include allocations from Nortel Networks for centralized legal, accounting, treasury, real estate, information technology, distribution, customer service, sales, marketing, engineering, and other Parent corporate services and infrastructure costs. These allocations have been determined on bases that the Parent and NETGEAR considered to be reasonable reflections of the utilization of services provided or the benefit received by NETGEAR. The allocation methods include net assets, headcount, square footage and direct effort expended. In addition, the Company has derived certain revenue and purchased certain products from Nortel Networks during the period. As discussed in Note 1 and Note 6, the Company changed its capital structure on March 10, 2000. For purposes of governing certain of the ongoing relationships between NETGEAR and Nortel Networks at and after March 10, 2000, and to provide for an orderly transition, NETGEAR and Nortel Networks entered into various agreements. A brief description of each of the agreements follows. F-17 87 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Contribution Agreement Nortel Networks transferred to the Company its rights in and to the NETGEAR and GearGuy trademarks and certain technical trade secrets, its interest in executory contracts with distributors and suppliers of the Company's products, equipment, personal property and fixtures used by employees and contractors dedicated to the Company's business and the records relating to the Company's business. Transition Services Agreement Nortel Networks agreed to provide administrative, financial, management and other services for a period of six months ending September 10, 2000. Additionally, Nortel Networks will provide property and casualty insurance for as long as it maintains a 50% or greater ownership interest in NETGEAR. In the opinion of management, fees associated with this agreement were made on a reasonable and consistent basis; however, they are not necessarily indicative of, and it is not practical for management to determine the level of, expenses which might have been incurred had NETGEAR been operating as a separate stand-alone company. Intellectual Property License Agreement The Company received a perpetual, non-exclusive, royalty-free license to continue to use Nortel Networks' world-wide intellectual property rights underlying the Company's products, other than those rights transferred pursuant to the contribution agreement, for use in the production, distribution and sale of the Company's products. Loaned Employee Agreement Nortel Networks agreed in March 2000 to provide the Company with the services of 16 persons employed by Nortel Networks in exchange for fees, based upon allocation of its current costs associated with such personnel, including all of the international sales and marketing personnel currently providing services to the Company. Inter-company Balance Prior to March 10, 2000, the inter-company balance due to Nortel Networks was considered a contribution to the capital of NETGEAR. Subsequent to March 10, 2000, NETGEAR will reimburse Nortel Networks for services described above. The following table presents inter-company transactions and balances between NETGEAR and Nortel Networks subsequent to March 10, 2000 (in thousands): Balance at March 11, 2000................................... $ -- Allocation of corporate services............................ 1,206 Sales and marketing......................................... 2,173 Inventory purchases......................................... 835 Intercompany sales.......................................... (67) Other....................................................... 234 Payroll expenditures........................................ 880 Trade receivable collected by Parent........................ (549) ------ Balance at June 30, 2000.................................... $4,712 ====== Average balance during the period........................... $2,356 ======
F-18 88 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Revenue and products purchased from the Parent, allocated costs and other intercompany transactions included in the accompanying statements of operations are as follows (in thousands):
PREDECESSOR COMPANY -------------------------- PERIOD FROM PERIOD FROM JANUARY 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED JUNE 30, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, --------------- 1997 1998 1998 1999 1999 2000 ------------ ----------- ------------ ------------ ------ ------ Revenue......................... $(22) $(48) $(58) $ (184) $ (57) $ (270) Cost of revenue................. -- -- 968 3,465 1,426 1,546 Research and development........ 198 177 107 350 176 115 Sales and marketing............. 736 907 581 1,676 823 3,667 General and administrative...... 736 910 548 2,224 1,105 984
10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS The Company operates primarily in one industry segment: the development, marketing and sale of networking products for the small office and home markets. NETGEAR's headquarters and most of its operations are located in the United States. The Company also conducts sales, marketing and customer service activities through several small offices in Europe and Asia. Geographic revenue information is based on the location of the reseller or distributor. Geographic Information Revenue consists of (in thousands):
PREDECESSOR COMPANY ------------------------- PERIOD PERIOD FROM FROM YEAR JANUARY 1, SEPTEMBER 1, YEAR SIX MONTHS ENDED 1998 TO 1998 TO ENDED ENDED JUNE 30, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, ----------------- 1997 1998 1998 1999 1999 2000 ------------ ---------- ------------ ------------ ------- ------- United States........ $12,498 $18,821 $17,278 $ 73,406 $30,298 $55,283 Europe............... 4,733 5,900 3,365 20,666 8,125 18,069 Asia Pacific(1)...... 1,835 1,992 1,702 7,661 2,943 6,078 Japan................ 6,887 5,649 2,343 8,530 4,463 3,709 Rest of the world.... 188 439 411 1,593 770 597 ------- ------- ------- -------- ------- ------- $26,141 $32,801 $25,099 $111,856 $46,599 $83,736 ======= ======= ======= ======== ======= =======
- ------------ (1) Excluding Japan. F-19 89 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 Long-lived assets consist of (in thousands):
DECEMBER 31, ------------ JUNE 30, 1998 1999 2000 ---- ---- -------- United States............................................... $525 $337 $381 Asia Pacific................................................ 8 12 8 Europe...................................................... 11 19 54 ---- ---- ---- $544 $368 $443 ==== ==== ====
Significant Customers (as a Percentage of Revenue)
PREDECESSOR COMPANY ------------------------- PERIOD FROM PERIOD JANUARY FROM 1, SEPTEMBER 1, SIX MONTHS YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED JUNE 30, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, -------------- CUSTOMER 1997 1998 1998 1999 1999 2000 - -------- ------------ ---------- ------------ ------------ ---- ---- A 25% 31% 37% 34% 34% 32% B 13% 20% 21% 18% 15% 20% C 14% 11% -- -- 10% 11% D 11% -- -- -- -- -- .... E....... 11% -- -- -- -- -- ....
11. EMPLOYEE BENEFIT PLAN Until March 2000, the Parent offered participation in a 401(k) retirement savings plan to the employees of the Company. Under the Plan, employees could defer up to 15% of their compensation to a tax-deferred savings account, up to the maximum allowable IRS deduction, and the Parent matched one half of each dollar contributed up to the first 5% of compensation, limited to a maximum of $1,500. The Parent charged the Company expenses of $82,000 for 1997, $99,000 for the period from January 1 through August 31, 1998, $61,000 for the period from September 1 through December 31, 1998, $42,000 for the year ended December 31, 1999, and $16,000 for the three months ended March 31, 2000. In April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees could contribute up to 15% of salary subject to the legal maximum. The Company contributes an amount equal to 50% of the first 5% of the employees' contribution. The maximum Company contribution is $1,500 per year. The Company expensed $20,000 related to the NETGEAR 401(k) Plan for the three months ended June 30, 2000. 12. SUBSEQUENT EVENTS On August 29, 2000, the Board of Directors approved, subject to stockholders' approval, the following: - An amendment to the Certificate of Incorporation to (i) increase the authorized number of shares of common stock by 40,000,000 shares to 60,000,000 shares, (ii) increase the authorized number of shares of preferred stock by 16,897,452 shares to 33,794,904 shares, (iii) effect a two-for-one stock split (see Note 6). - The new 2000 Stock Plan, which becomes effective upon the closing of the initial public offering, provides for: (a) a total of 2,000,000 shares of common stock reserved for grant or issuance (b) an F-20 90 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1997, PERIOD FROM JANUARY 1, 1998 TO AUGUST 31, 1998, PERIOD FROM SEPTEMBER 1, 1998 TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999 AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 2000 automatic annual increase in the number of shares reserved for issuance under the plan each year by a number of shares equal to the lesser of (i) 2,000,000 shares, (ii) 2% of the then outstanding shares of common stock or (iii) a lesser amount determined by the Board. - The 2000 Employee Stock Purchase Plan for which the Board reserved 500,000 shares of common stock with an automatic annual increase in the number of shares reserved for issuance under the plan each year by a number of shares equal to the lesser of (i) 1,000,000 shares, (ii) 0.5% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. - The amendment and restatement of the Company's Certificate of Incorporation, immediately following the Public Offering, to (i) increase the authorized capital stock of the Company to 200,000,000 shares of common stock, (ii) authorize 5,000,000 shares of Preferred Stock. * * * * * F-21 91 EDGAR description of inside back cover: Gear Guy in Gearland logo: Gear Guy is a cartoon drawing of a full body profile of a gentleman with glasses and dress in blue that is holding an oversized gear under his arm. Gearland is a landscape of large gears. Caption: Our suite of branded, easy-to-use, reliable and technologically advanced networking products enable small businesses and homes to share Internet access, peripherals, digital content and applications among multiple personal computers and other network enabled devices. Our family of products includes the key components for a small business or home network: routers, cable modems, network interfaces, hubs, switches and network disk and printer servers. 92 [NETGEAR LOGO] 93 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses to be paid by the Registrant, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ------------ SEC registration fee........................................ $ NASD filing fee Nasdaq National Market listing fee.......... * Printing and engraving...................................... * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue sky fees and expenses (including legal fees)........... * Transfer agent and registrar fees........................... * Miscellaneous............................................... * -- Total.................................................. $* ==
- ------------ * To be completed by amendment. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to officers, directors and other corporate agents in terms sufficiently broad to permit this indemnification under certain circumstances and subject to certain limitations. The registrant's certificate of incorporation and bylaws provide that the registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the registrant intends to enter into separate indemnification agreements with its directors, officers and certain employees which would require the registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. The registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreement to be entered into between the registrant and its officers and directors may be sufficiently broad to permit indemnification of the registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification by the underwriters of the registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The registrant has sold and issued the following securities since September 7, 1997: (a) On August 29, 2000, we issued an aggregate of 702,000 options to purchase our common stock at an exercise price of 6.34 per share to certain employees. (b) On July 18, 2000, we issued an aggregate of 492,000 options to purchase our common stock at an exercise price of $4.27 per share to certain employees. II-1 94 (c) On April 5, 2000, we issued an aggregate of 4,036,058 options to purchase our common stock at an exercise price of $3.95 per share to certain employees. (d) On March 10, 2000, we issued and sold an aggregate of 3,794,900 Series B preferred stock to Pequot Private Equity Fund II, L.P. for an aggregate purchase price of $15.0 million. The Series B Preferred Stock is convertible into an equal number of shares of common stock, subject to future adjustments for dilution. (e) On March 10, 2000 we granted a fully vested warrant to purchase an aggregate of 3,000,000 shares of our common stock to Pequot Private Equity Fund II, L.P. for an aggregate exercise price of $15.0 million. The issuance of securities describe in item 15(a) through 15(e) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in these transactions. The sale of these securities were made without general solicitation or advertising. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of registrant. 3.2** Form of Amended and Restated Certificate of Incorporation of registrant. 3.3** Form of Certificate of registrant to be filed upon the closing of the offering made under the registration statement. 3.4** Bylaws of the registrant. 3.5** Bylaws of registrant to be filed upon the closing of the offering made under the registration statement. 4.1** Series B Convertible Participating Preferred Stock Purchase Agreement. 4.2** Warrant to Purchase Common Stock of registrant. 4.3** Investor Rights Agreement. 4.4** Stockholders' Voting Agreement. 4.5** Amendment and Waiver of Right. 5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C. 10.1** Form of Indemnification Agreement for directors and officers. 10.2 2000 Stock Option Plan and forms of agreements thereunder. 10.3** New 2000 Stock Plan and forms of agreements thereunder to be effective upon the closing of the offering made under the registration statement. 10.4** 2000 Employee Stock Purchase Plan to be effective upon the closing of the offering made under the registration statement. 10.5** Employment Agreement between registrant and Patrick C.S. Lo. 10.6** Employment Agreement between registrant and Stephen J. Dix. 10.7** Employment Agreement between registrant and Richard A. Fabiano. 10.8** Employment Agreement between registrant and Mark G. Merrill. 10.9** Employment Agreement between registrant and Arthur J. Smith. 10.10** Employment Agreement between registrant and Robert E. Collins. 10.11** Manufacturing agreement between registrant and Delta Networks. 10.12** Manufacturing agreement between registrant and Lite-On Communications. 10.13+ Master Product Purchasing, Testing and Order Fulfillment Agreement between registrant and Celestica Asia, Inc.
II-2 95
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 10.14** Transition Services Agreement between registrant and Nortel Networks NA Inc. 10.15 Contribution Agreement between registrant and Nortel Networks NA Inc. 10.16** Intellectual Property License Agreement. 10.17** Sublease Agreement between registrant and Nortel Networks. 10.18+ Distribution Agreement between registrant and Ingram Micro. 10.19+ Distribution Agreement between registrant and Tech Data. 21.1** List of subsidiaries. 23.1* Consent of Deloitte & Touche LLP, Independent Auditors. 23.2* Independent Auditors' Report on Schedule. 23.3* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4 of the Registration Statement). 27.1** Financial Data Schedule (available in EDGAR format only).
- ------------ * To be filed by amendment. ** Previously filed. + Confidential treatment requested. (b) Financial Statement Schedule. (1) Schedule II Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against these 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 a director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether the indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of this issue. The undersigned registrant hereby undertakes that: 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. 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 these securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 96 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, County of Santa Clara, State of California, on the 3rd day of October, 2000. NETGEAR, Inc. By: /s/ PATRICK LO ------------------------------------ Patrick Lo (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Patrick Lo and Robert Collins, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ PATRICK LO President, Chief Executive October 3, 2000 - ----------------------------------------------------- Officer and Director Patrick Lo (Principal Executive Officer) * Vice President and Chief October 3, 2000 - ----------------------------------------------------- Financial Officer Robert Collins (Principal Financial and Accounting Officer) * Director October 3, 2000 - ----------------------------------------------------- Michael Ressner * Director October 3, 2000 - ----------------------------------------------------- Albert DeLorenzi * Director October 3, 2000 - ----------------------------------------------------- Susan King
II-4 97
SIGNATURE TITLE DATE --------- ----- ---- * Director October 3, 2000 - ----------------------------------------------------- Michael Dadoun * Director October 3, 2000 - ----------------------------------------------------- Jerry Poch * Director October 3, 2000 - ----------------------------------------------------- Jim McNiel *By: /s/ PATRICK LO ---------------------------------------------- Patrick Lo Attorney-in-fact
II-5 98 NETGEAR, INC. (AN INDIRECT, MAJORITY-OWNED SUBSIDIARY OF NORTEL NETWORKS, INC.) SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO DEDUCTIONS -- BEGINNING COSTS AND WRITE-OFFS BALANCE AT OF PERIOD EXPENSES OF ACCOUNTS END OF PERIOD ---------- ---------- ------------- ------------- ALLOWANCE OF DOUBTFUL ACCOUNTS: December 31, 1999........................... $1,275,236 475,417 $ (89,678) $1,660,975 December 31, 1998........................... 263,319 1,011,917 -- 1,275,236 December 31, 1997........................... 17,500 245,819 -- 263,319 ACCRUED WARRANTY: December 31, 1999........................... $ 378,498 $1,698,239 $(1,164,831) $ 911,906 December 31, 1998........................... 110,000 831,870 (563,372) 378,498 December 31, 1997........................... 22,080 300,567 (212,647) 110,000
II-6 99 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE - -------- ------------------------------------------------------------ 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of registrant. 3.2** Form of Amended and Restated Certificate of Incorporation of registrant. 3.3** Form of Certificate of registrant to be filed upon the closing of the offering made under the registration statement. 3.4** Bylaws of the registrant. 3.5** Bylaws of registrant to be filed upon the closing of the offering made under the registration statement. 4.1** Series B Convertible Participating Preferred Stock Purchase Agreement. 4.2** Warrant to Purchase Common Stock of registrant. 4.3** Investor Rights Agreement. 4.4** Stockholders' Voting Agreement. 4.5** Amendment and Waiver of Right. 5.1* Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C. 10.1** Form of Indemnification Agreement for directors and officers. 10.2 2000 Stock Option Plan and forms of agreements thereunder. 10.3** New 2000 Stock Plan and forms of agreements thereunder to be effective upon the closing of the offering made under the registration statement. 10.4** 2000 Employee Stock Purchase Plan to be effective upon the closing of the offering made under the registration statement. 10.5** Employment Agreement between registrant and Patrick C.S. Lo. 10.6** Employment Agreement between registrant and Stephen J. Dix. 10.7** Employment Agreement between registrant and Richard A. Fabiano. 10.8** Employment Agreement between registrant and Mark G. Merrill. 10.9** Employment Agreement between registrant and Arthur J. Smith. 10.10** Employment Agreement between registrant and Robert E. Collins. 10.11** Manufacturing agreement between registrant and Delta Networks. 10.12** Manufacturing agreement between registrant and Lite-On Communications. 10.13+ Master Product Purchasing, Testing and Order Fulfillment Agreement between registrant and Celestica Asia, Inc. 10.14** Transition Services Agreement between registrant and Nortel Networks NA Inc. 10.15 Contribution Agreement between registrant and Nortel Networks NA Inc. 10.16** Intellectual Property License Agreement. 10.17** Sublease Agreement between registrant and Nortel Networks. 10.18+ Distribution Agreement between registrant and Ingram Micro. 10.19+ Distribution Agreement between registrant and Tech Data. 21.1** List of subsidiaries. 23.1* Consent of Deloitte & Touche LLP, Independent Auditors. 23.2* Independent Auditors' Report on Schedule. 23.3* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4 of the Registration Statement). 27.1** Financial Data Schedule (available in EDGAR format only).
- ------------ * To be filed by amendment. ** Previously filed. + Confidential treatment requested. EX-10.2 2 f65217a1ex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 NETGEAR, INC. 2000 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The Netgear, Inc. 2000 Stock Option Plan (the "PLAN") is hereby established effective as of April 6, 2000. 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract and retain persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means NETGEAR, Inc., a Delaware corporation, or any successor corporation thereto. 1 2 (e) "CONSULTANT" means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on either the exemption from registration provided by Rule 701 under the Securities Act or, if the Company is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, registration on a Form S-8 Registration Statement under the Securities Act. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion. 2 3 (ii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (l) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (n) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock Option" and a form of "Stock Option Agreement" incorporated therein by reference, or such other form or forms as the Board may approve from time to time. (p) "OPTIONEE" means a person who has been granted one or more Options. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (u) "SECTION 162(m)" means Section 162(m) of the Code. 3 4 (v) "SECURITIES ACT" means the Securities Act of 1933, as amended. (w) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. An Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (x) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (z) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. 4 5 3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.3 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel or renew any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, 5 6 without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law. 3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.5 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 3.6 INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be three million (3,000,000). Any further increase in the number of shares of stock that may be issued under the Plan shall be approved by the board. If an outstanding Option for any reason expires or is terminated or canceled or if shares of Stock are acquired upon the 6 7 exercise of an Option subject to a Company repurchase option and are repurchased by the Company at the Optionee's exercise price, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan, to the Section 162(m) Grant Limit described in Section 5.4 below and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. Eligible persons may be granted more than one (1) Option. 5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. 5.3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such options which exceed such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part 7 8 by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 5.4 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in Section 4.2, at any such time as a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than five hundred thousand (500,000) shares of Stock (the "SECTION 162(m) GRANT LIMIT"). An Option which is canceled in the same fiscal year of the Company in which it was granted shall continue to be counted against the Section 162(m) Grant Limit for such period 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1 EXERCISE PRICE. The exercise price for each Option shall be established in the discretion of the Board; provided, however, that (a) the exercise price per share for an Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (b) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company, and (d) with the exception of an Option granted to an officer, Director or Consultant, no Option shall become exercisable at a rate less than twenty percent (20%) per year over a 8 9 period of five (5) years from the effective date of grant of such Option, subject to the Optionee's continued Service. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions. 6.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by delivery of a properly executed notice together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided that the Optionee is an Employee and in the Company's sole discretion at the time the Option is exercised, by delivery of the Optionee's promissory note in a form approved by the Company for the aggregate exercise price, provided that, if the Company is incorporated in the State of Delaware, the Optionee shall pay in cash that portion of the aggregate exercise price not less than the par value of the shares being acquired, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by approval of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (ii) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. 9 10 (iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board in its discretion at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 6.6 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after an 10 11 Optionee's termination of Service only during the applicable time period determined in accordance with this Section 6.6 and thereafter shall terminate: (i) DISABILITY. If the Optionee's Service with the Participating Company Group terminates because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION DATE"). (ii) DEATH. If the Optionee's Service with the Participating Company Group terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months (or such longer period of time as determined by the Board, in its discretion) after the Optionee's termination of Service. (iii) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee at any time prior to the expiration of three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is prevented by the provisions of Section 10 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 11 12 6.7 TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Board, in its discretion, and set forth in the Option Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, described in Section 260.140.41 of Title 10 of the California Code of Regulations, Rule 701 under the Securities Act and the General Instructions to Form S-8 Registration Statement under the Securities Act. 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1 OPTION AGREEMENT. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of Option Agreement approved by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any standard form of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets 12 13 of the Company were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. In the event the Acquiring Corporation elects not to assume or substitute for outstanding Options in connection with a Change in Control, any unexercisable or unvested portions of outstanding Options and any shares acquired upon the exercise thereof held by Optionees whose Service has not terminated prior to such date shall be immediately exercisable and vested in full as of the date ten (10) days prior to the date of the Change in Control. The exercise or vesting of any Option and any shares acquired upon the exercise thereof that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Change in Control. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. 9. PROVISION OF INFORMATION. At least annually, copies of the Company's balance sheet and income statement for the just completed fiscal year shall be made available to each Optionee and purchaser of shares of Stock upon the exercise of an Option. The Company shall not be required to provide such information to key employees whose duties in connection with the Company assure them access to equivalent information. 10. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a 13 14 registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. No termination or amendment of the Plan shall affect any then outstanding Option unless expressly provided by the Board. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 14 15 PLAN HISTORY April 6, 2000 Board adopts the Plan, with an initial reserve of 3,000,000 shares April 6, 2000 Stockholders approve the Plan. 16 NETGEAR, INC. NOTICE OF GRANT OF STOCK OPTION ________________________ (the "OPTIONEE") has been granted an option (the "OPTION") to purchase certain shares of Stock of NETGEAR, Inc. pursuant to the NETGEAR, Inc. 2000 Stock Option Plan (the "PLAN"), as follows: DATE OF OPTION GRANT: _____________________ NUMBER OF OPTION SHARES: _____________________ EXERCISE PRICE: $ _________ per share OPTION EXPIRATION DATE: The date ten (10) years after the Date of Option Grant. TAX STATUS OF OPTION: _______ Stock Option. (Enter "Incentive" or "Nonstatutory." If blank, this Option will be a Nonstatutory Stock Option.) VESTED SHARES: Except as otherwise provided in the Stock Option Agreement, the number of Vested Shares (disregarding any resulting fractional share) as of any date is determined by multiplying the Number of Option Shares by the "VESTED PERCENTAGE" determined as of such date as follows: (i) On the date occuring one (1) after the Date of Option Grant (the "First Anniversary"), the Vested Percentage shall be 25% provided that the Optionee's Service has not terminated prior to such date. (ii) The Vested Percentage shall be increased by 2.083% on the last day of each month following the First Anniversary, provided that the Optionee's Service has not terminated prior to such date, so that Vested Percentage shall be 100% on and as of the fourth anniversary of the Date of Option Grant. By their signatures below, the Company and the Optionee agree that the Option is governed by this Notice and by the provisions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document. The Optionee acknowledges receipt of a copy of the Plan and the Stock Option Agreement, represents that the Optionee has read and is familiar with their provisions, and hereby accepts the Option subject to all of their terms and conditions. Netgear, Inc. Optionee By: -------------------------------- ------------------------------------ Signature Its: ------------------------------- ------------------------------------ Date Address: --------------------------- ------------------------------------ Address ATTACHMENTS: 2000 Stock Option Plan, as amended through the Date of Option Grant Stock Option Agreement 17 NETGEAR, INC. STOCK OPTION AGREEMENT NETGEAR, Inc. has granted to the individual (the "OPTIONEE") named in the Notice of Grant of Stock Option (the "NOTICE") to which this Stock Option Agreement (the "OPTION AGREEMENT") is attached an option (the "OPTION") to purchase certain shares of Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all respects be subject to the terms and conditions of the NetGear, Inc. 2000 Stock Option Plan (the "PLAN"), as amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Optionee: (a) represents that the Optionee has read and is familiar with the terms and conditions of the Notice, the Plan, and this Option Agreement, including the Effect of Termination of Service set forth in Section 7 and the Right of First Refusal set forth in Section 11, (b) accepts the Option subject to all of the terms and conditions of the Notice, the Plan and this Option Agreement, (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Notice, the Plan or this Option Agreement, and (d) acknowledges receipt of a copy of the Notice, the Plan and this Option Agreement. 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Notice or the Plan. 1.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX CONSEQUENCES. 2.1 TAX STATUS OF OPTION. This Option is intended to have the tax status designated in the Notice. (a) INCENTIVE STOCK OPTION. If the Notice so designates, this Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE TO OPTIONEE: If the Option is exercised more than three (3) months after the date on which you cease to be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) 1 18 (b) NONSTATUTORY STOCK OPTION. If the Notice so designates, this Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 2.2 ISO FAIR MARKET VALUE LIMITATION. If the Notice designates this Option as an Incentive Stock Option, then to the extent that the Option (together with all Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. (NOTE TO OPTIONEE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Date of Option Grant and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the number of Vested Shares less the number of shares previously acquired upon exercise of the Option, subject to the Company's repurchase rights set forth in Section 11. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 2 19 4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price. 4.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(b), or (iv) by any combination of the foregoing. (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (ii) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the delivery of a properly executed notice together with irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 3 20 4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating Company Group have been satisfied by the Optionee. 4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 4 21 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group terminates because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group terminates because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee at any time prior to the expiration of three (3) months (or such other longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 5 22 7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 8. CHANGE IN CONTROL. In the event of a Change in Control, the Acquiring Corporation may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 6 23 10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. RIGHT OF FIRST REFUSAL. 11.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 11.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any shares acquired upon exercise of the Option (the "TRANSFER SHARES") to any person or entity, including, without limitation, any stockholder of a Participating Company, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 11 (the "RIGHT OF FIRST REFUSAL"). 11.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 11.3 BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 11, and the Optionee shall have no right to transfer the Transfer Shares without first complying with the procedure 7 24 described in this Section 11. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 11.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 11.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 11.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 11. 11.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 11 providing for the Right of First Refusal with 8 25 respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 11 are met. 11.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration shall remain subject to the Right of First Refusal unless the provisions of Section 11.9 below result in a termination of the Right of First Refusal. 11.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 11.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Change in Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 12. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Right of First Refusal with the same force and effect as the shares subject to the Right of First Refusal immediately before such event. 13. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, if the Notice designates this Option as an Incentive Stock Option, the Optionee shall (a) promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and (b) provide the Company with a description of the circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless 9 26 otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 14. LEGENDS. The Company may at any time place legends referencing the Right of First Refusal and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 14.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 14.2 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 14.3 If the Notice designates this Option as an Incentive Stock Option: "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO THE LATER OF TWO YEARS AFTER THE DATE OF OPTION GRANT OR ONE YEAR AFTER THE DATE OF EXERCISE. SHOULD THE REGISTERED HOLDER ELECT TO 10 27 TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE." 15. LOCK-UP AGREEMENT. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering; provided, however, that such period of time shall not exceed one hundred eighty (180) days from the effective date of the registration statement to be filed in connection with such public offering. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. 16. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 17. MISCELLANEOUS PROVISIONS. 17.1 BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 17.2 TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an Incentive Stock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 11 28 17.3 NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 17.4 INTEGRATED AGREEMENT. The Notice, this Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes any prior agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17.5 APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. 17.6 COUNTERPARTS. The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12 29 (TM) Incentive Stock Option Optionee: --------------------------- (TM) Nonstatutory Stock Option Date: ------------------------ STOCK OPTION EXERCISE NOTICE NETGEAR, Inc. Attention: Chief Financial Officer - ---------------------------------- - ---------------------------------- Ladies and Gentlemen: 1. OPTION. I was granted an option (the "OPTION") to purchase shares of the common stock (the "SHARES") of NetGear, Inc. (the "COMPANY") pursuant to the Company's 2000 Stock Option Plan (the "PLAN"), my Notice of Grant of Stock Option (the "NOTICE") and my Stock Option Agreement (the "OPTION AGREEMENT") as follows: Grant Number: ------------------- Date of Option Grant: ------------------- Number of Option Shares: ------------------- Exercise Price per Share: $ ------------------ 2. COMPLIANCE WITH PLAN. I hereby certify to the Company that I have complied with all of the provisions of the Plan and the Option Agreement, including without limitation the provisions related to the cancellation and recission of Options set forth in Section 6.8 of the Plan. I understand and acknowledge that if I have not complied with the Plan or the Option Agreement, I may be required to pay to the Company an amount equal to any gain I realize on exercise of the Option in accordance with the Plan. 3. EXERCISE OF OPTION. I hereby elect to exercise the Option to purchase the following number of Shares, all of which are Vested Shares in accordance with the Notice and the Option Agreement: Total Shares Purchased: ----------- Total Exercise Price (Total Shares X Price per Share) $ ---------- 1 30 4. PAYMENTS. I enclose payment in full of the total exercise price for the Shares in the following form(s), as authorized by my Option Agreement: (TM) Cash: $ ------------------------- (TM) Check: $ ------------------------- (TM) Tender of Company Stock: Contact Plan Administrator 5. TAX WITHHOLDING. I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign tax withholding obligations of the Company, if any, in connection with the Option. 6. OPTIONEE INFORMATION. My address is: --------------------------------------------------- --------------------------------------------------- My Social Security Number is: ------------------------------------ 7. NOTICE OF DISQUALIFYING DISPOSITION. If the Option is an Incentive Stock Option, I agree that I will promptly notify the Chief Financial Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two (2) years of the Date of Option Grant. 8. BINDING EFFECT. I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of the Option Agreement, including the Right of First Refusal set forth therein, to all of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon the my heirs, executors, administrators, successors and assigns. 9. TRANSFER. I understand and acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), and that consequently the Shares must be held indefinitely unless they are subsequently registered under the Securities Act, an exemption from such registration is available, or they are sold in accordance with Rule 144 or Rule 701 under the Securities Act. I further understand and acknowledge that the Company is under no obligation to register the Shares. I understand that the certificate or certificates evidencing the Shares will be imprinted with legends which prohibit the transfer of the Shares unless they are registered or such registration is not required in the opinion of legal counsel satisfactory to the Company. I am aware that Rule 144 under the Securities Act, which permits limited public resale of securities acquired in a nonpublic offering, is not currently available with respect to the Shares and, in any event, is available only if certain conditions are satisfied. I understand that any sale of the Shares that might be made in reliance upon Rule 144 may only be made in limited amounts in accordance with the terms and conditions of such rule and that a copy of Rule 144 will be delivered to me upon request. 2 31 I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement, copies of which I have received and carefully read and understand. Very truly yours, ------------------------------------ (Signature) Receipt of the above is hereby acknowledged. NETGEAR, Inc. By: -------------------------------- Title: ----------------------------- Dated: ----------------------------- 3 EX-10.13 3 f65217a1ex10-13.txt EXHIBIT 10.13 1 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 10.13 MASTER PRODUCT PURCHASING, TESTING AND ORDER FULFILLMENT AGREEMENT Effective Date: November 23, 1999 Term: 1 year (with possible renewal periods) This Master Product Purchasing, Testing and Order Fulfillment Agreement ("Agreement") is entered into between Netgear, Inc., a Delaware corporation ("Netgear"), and Celestica Asia, Inc., a Delaware corporation, on behalf of itself and its subsidiaries and Affiliates ("Celestica") and is made as of the Effective Date for the Term. Subject to the terms and conditions set forth in this Agreement, the parties have caused this Agreement to be executed by their duly authorized representatives on the date(s) shown below. The parties may execute this Agreement in two (2) or more counterparts (no one of which need contain the signatures of all parties), each of which will be an original and all of which together will constitute one and the same instrument. NETGEAR, INC. CELESTICA ASIA, INC. Signature /s/ PATRICK LO Signature /s/ ROBERT BEHLMAN -------------------------- -------------------------- Printed PATRICK LO Printed ROBERT BEHLMAN -------------------------- -------------------------- Title V.P. Title PRESIDENT, CELESTICA ASIA -------------------------- -------------------------- Date 11-23-99 Date 11-16-99 -------------------------- -------------------------- 4401 Great America Parkway 2222 Qume Drive P.O. Box 51815 San Jose, Ca. 95131 Santa Clara, CA 95052 2 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. In consideration of their mutual representations, promises and obligations, Netgear and Celestica agree as follows: 1. SCOPE OF THE AGREEMENT This Agreement sets forth the terms and conditions pursuant to which Celestica shall provide Netgear full turnkey production and fulfillment services (the "Services") as listed below in a timely, competent and cost effective manner at several different locations around the world, all as more fully described in the Statement of Work attached hereto as Exhibit 1: - planning and purchasing management - inventory management - product testing and inspection - product fulfillment and logistics - returns processing - supplier performance management - quality program and management This Agreement contains those terms that shall pertain to all of Celestica's locations. Celestica will initially conduct the majority of the Services in Kowloon, Hong Kong and San Jose, California. The parties may agree in the future if necessary to enter into subordinate agreements which contain specific terms unique to a site ("Site Agreement"), such as a list of products configured at the site, support teams, and the specific reporting requirements relevant to the site. Each such Site Agreement is hereby incorporated by reference into this Agreement. The terms of this Agreement shall take precedence over those of the Site Agreement unless specifically provided otherwise in the Site Agreement; the terms of the Site Agreement shall take precedence over the terms of any Build Plan, acknowledgment, invoice or other document. 2. DEFINITIONS The following words and expressions shall have the meanings set forth below: "Affiliate" means, with respect to a party hereto, a corporation that directly or indirectly controls, is controlled by, or is under common control with, that party. "Build Plan" means the build plan provided by Netgear to Celestica for each model of Product substantially in the form set forth as Exhibit 4 hereto, which specifies the quantity of Product to be purchased and the part number. "Celestica's Systems" means all software and systems used by Celestica in the performance of this Agreement, excluding any software or systems provided to Celestica by Netgear. "Confidential Information" means a party's proprietary, confidential or trade secret information. "Customer" means a customer purchasing Netgear Products. "Materials" shall mean any components and other materials comprising or comprised in Products. "Netgear Inventory Location" means the physical location (identified by Celestica) where Products will be staged prior to shipment to Customers. "Netgear Proprietary Information" means any information, technology, processes, or other proprietary property, including copyrights, trade secrets, know-how, mask work rights, moral rights patents and/or patent applications in any form or medium, developed or acquired by Netgear or its licensors from the Production Effort. 3 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. "Order" shall mean any order for Products placed by a Customer in accordance with the temps of this Agreement. "Prices" shall mean the prices for Products and/or Services and/or non-recurring expenditure (including without limitation, tooling and fixtures and other agreed items) agreed between the parties from time to time. "Products" shall mean the items listed in Exhibit 2 and described in the relevant Specification. "Specification" means Product technical information and related services and shall at minimum consist of the bill of materials, test procedures, quality goals, assembly documentation, circuit board art work, Gerber files, assembly and fabrication drawings, schematics, other design documents, business plan, and Services, as specified. The Specification for each Product shall be provided by Netgear and shall be timely reviewed by Celestica and agreed to by both parties. 3. PRODUCTION EFFORT, MATERIALS PROCUREMENT, INSPECTION AND TEST OF THE PRODUCTS, AND PRODUCT CHANGES 3.1. PRODUCTION EFFORT Celestica shall be responsible for the procurement, test and inspection of the Products (collectively, the "Production Effort") and shall ensure that each Product conforms to the Specification applicable to such Product at the time of manufacture. Celestica shall perform the Production Effort in accordance with this Agreement. 3.2. PRODUCT PURCHASING Celestica is solely responsible for performing purchasing services which shall include: placing and expediting purchase orders with OEMs and other suppliers, accepting shipments, managing quality issues, achieving cycle time reductions, measuring and communicating supplier performance, canceling and rescheduling product shipments in support of schedule changes, and other supplier management services that the Parties agree are relevant and appropriate. Netgear hereby authorizes Celestica to purchase Products and Netgear specified integrated circuits (I.C.'s) as necessary to fulfill Netgear forecasts. Any OEM or other source of supply shall be jointly qualified and managed by Celestica, subject to Netgear's prior written approval and consistent with the quality requirements set forth in the relevant Product Specification. Netgear's approval shall normally be provided within fourteen (14) days and, in any event, shall not be unreasonably withheld or delayed. The Parties acknowledge that in some instances only the component of a specified supplier may be used in a Product. Netgear or a designated third parry may perform inspections ("Source Inspection") of business systems and processes of a supplier or subcontractor facility whenever Netgear decides it is necessary. The Source Inspection shall be conducted during normal business hours and with prior notice to Celestica and may require participation by Celestica. 3.3. SCOPE OF TEST AND INSPECTION Celestica shall manage the execution of the test and inspection process for each Product, which includes testing Products, test capacity planning, and performing preventative maintenance on the test equipment. Celestica warrants that it will perform each and every test and inspection in conformance to the process and for the quantities identified in the relevant Specification. All Products delivered to Netgear and/or its Customers shall have passed all applicable tests and inspection in such Specification. 4 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. At the commencement of production of any Product, Netgear will qualify each piece of test equipment and each test process for such Product. No such equipment or process shall be changed or modified without the prior written consent of Netgear. Netgear shall provide certain Functional Test ("FT") equipment and test set ups, including test scripts, loop back connectors, and cables. Celestica will develop inspection capacity plans with every new Forecast (as defined below). Celestica shall consider upside volume percentage, preventative maintenance time, new product additions and holding of appropriate spare parts as part of its inspection capacity plan. 3.4. TEST EQUIPMENT MAINTENANCE COSTS Celestica agrees to be responsible for and to pay for all costs of maintaining all inspection equipment and related materials and shall perform preventative maintenance, which shall include, without limitation, repair and replacement of worn loopback connectors, cables, and backplanes or any other failing components due to normal wear. Notwithstanding the above, Netgear shall pay to upgrade or replace test equipment or fixtures which are rendered outdated because of Product design changes or changes in test requirements. 3.5. TEST RECORDS FOR PRODUCTS Celestica shall maintain adequate authenticated inspection and test documents for Products and shall make such documents available to Netgear upon request for a period of one year after the delivery of the last Product purchased, unless otherwise directed by Netgear. 3.6. CHANGES TO A PRODUCT Either party may propose in writing a change to the design, manufacture, or test procedure of any Product. The other party shall respond in writing within five business days to any such proposal. Where necessary and appropriate, Netgear shall initiate either an engineering change order ("ECO") or a temporary change to the Specification ("Deviation"). Celestica shall develop a list of the process steps, an estimate of the time necessary to complete the change, the hourly rate to complete the work, any excess or obsolete Materials (list and cost), and the increase or decrease, if any, in the price of the Products affected. Upon receipt of Celestica's response, Netgear shall determine if it wants to go forward with the change. If Netgear does want the change, the parties shall negotiate any open issues and set the implementation date. If either Netgear or Celestica identifies a change that must be implemented on a Product for reasons of safety ("Safety Change"), the parties shall cooperate so as to effect such Safety Change as soon as possible after discovery. Once such a Safety Change is discovered, no affected Products shall be manufactured or shipped until such Safety Change has been implemented. The parties shall cooperate in the implementation of such Safety Change on any Products shipped prior to discovery of the hazard. If a Safety Change is required due to Celestica's manufacturing process, then Celestica shall pay all costs associated with such change, otherwise, Netgear shall pay the costs associated with the Safety Change. 4. BUSINESS MANAGEMENT PROCEDURES 4.1. METHODOLOGY The parties intend to plan for and make corporate-wide business decisions as described in this Section 4, "Business Management Procedures". To manage the technical and business changes, Netgear and Celestica shall: 5 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. (a) Assign, and in most cases dedicate, business management teams whose goal is to provide consistent and efficient responses to program requirements. (b) Conduct quarterly business reviews for each business management team. (c) Create a process to communicate about and resolve issues promptly and to drive continuous improvement of the day-to-day operation. (d) Comply with reporting requirements as outlined in this Agreement. (e) Meet annually at the executive level to exchange business strategies with the specific purpose of working to ensure that each party's business goals can be met. 4.2. PRODUCT QUALITY GOAL Celestica agrees to adopt the quality assurance procedures and perform the quality control tests (collectively the "QA Procedures") described in Exhibit 1 ("Statement of Work"). The QA Procedures may be amended by mutual agreement of the parties from time to time, to ensure that all Products conform to the Specifications. 4.3. QUARTERLY REVIEWS Celestica and Netgear shall, in conjunction with each other, conduct quarterly operations reviews of the business processes and procedures of both Celestica and Netgear with the intent to improve overall supply chain performance. The review shall include, at a minimum, performance measurements of quality, delivery, customer satisfaction, costs, capacity, innovations and Price reductions for Products. Line capacity, test capacity, and staff allocation, and the plan to meet future requirements in these areas, shall be reviewed. The quarterly reviews shall be held in person at a Netgear's facility and Celestica agrees to comply at its own cost. 4.4. TARGET COST REDUCTION Celestica agrees to participate in periodic cost reviews with the intent to reduce the costs of the Services provided hereunder to an amount at or below the cost identified by Netgear. Such reviews shall be held in person at a Netgear's facility and Celestica agrees to comply at its own cost. 4.5. LOCATION OF CELESTICA'S OPERATIONS Celestica shall initially perform the Services for all Products from its facility in Kowloon, Hong Kong. Celestica shall transfer Products for North and South American Order Fulfillment to its San Jose, California facility. Products for all other Orders will be fulfilled from Celestica's Kowloon, Hong Kong facility or such other facilities as the parties may agree upon from time to time. Any deviation from this policy must be authorized by Netgear in writing. 4.6. RESOURCES AND PRODUCTION SUPPORT Throughout the life cycle of each Product, Celestica shall provide production capacity, yield information, corporate resources, necessary administrative processes, and adequate, qualified, timely staffing for each Product's introduction and the Production Effort in accordance with the terms of this Agreement. Celestica shall provide separate functional resources in support of new Products and mature Products. 6 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 5. BUILD PLANS The parties acknowledge that they will continue to develop new procedures to increase schedule flexibility, reduce lead times, and improve forecasting. The parties shall incorporate such terms as an amendment to this Agreement or to the Site Agreements, if any, upon completion. Until such time, the parties shall manage the delivery of Products under the provisions of this Article 5. 5.1. THE BUILD PLAN Netgear shall issue to Celestica on a monthly basis a Build Plan for each model of Product covering a minimum of two months in advance of the desired ship date. Since current OEM supplier lead times are 60 days, each Build Plan issued by Netgear will be authorization for Celestica to issue purchase orders to OEM suppliers to cover the 60 day manufacturing lead time for products. The quantity of Products and the scheduled delivery dates for the Products purchased by Celestica will satisfy Netgear's projected requirements for the products as contained in the Build Plan. The Build Plan may be issued in writing, by mail or facsimile, or by electronic means as the parties may from time to time agree. Netgear shall have no obligation to purchase any Products from Celestica if the products were purchased in excess of the 60 day manufacturing lead time except as specified on such Build Plans placed in accordance with the terms of this Agreement. Celestica will notify Netgear of acceptance of a Build Plan within two business days of receipt of the Build Plan. Each Build Plan issued shall be governed by the terms of this Agreement as modified by the applicable Site Agreement (if any) to the extent of any conflict between the terms. The parties hereby expressly object to any additional or different terms contained in any Build Plan or acknowledgment other than as authorized by this Agreement and agree that such additional or different terms shall be of no effect. Celestica agrees to accept a Build Plan for each model of Product and to sustain the ability to procure and inspect Products and fulfill Orders for each model of Product for a minimum of one year. After one year, if Celestica desires to not maintain its ability to perform these services for a particular model of Product, Celestica will provide Netgear with written notification 180 days prior to the date Build Plans will no longer be accepted. Upon Netgear's request, Celestica shall ship to Netgear all documentation about the procurement, inspection and test of the Product. Documentation shall include any bills of material generated by Celestica, process instructions, test procedures and all other relevant documents. 5.2. FORECASTS OF PRODUCT REQUIREMENTS Netgear shall deliver to Celestica with its initial Build Plan for any model of a Product, a non-binding, rolling, forecast covering a period of four months beyond the Build Plan ("Forecast") which Celestica will use to communicate forecasted requirements to OEMs and product suppliers. Each Forecast shall be a good faith estimate of the anticipated requirements for the Products) listed for the periods indicated. 5.3. RESCHEDULE OR CHANGES TO BUILD PLAN Netgear may make changes to the scheduled shipment of products in the Build Plan. Mix changes are acceptable but must be mutually agreed upon within 30 calendar days. If such a change represents an acceleration or increase, Celestica shall make all reasonable commercial efforts to meet the request, subject to material and capacity availability. Based on the requested change, Celestica shall provide an "excess and on order" inventory report on the third day after change to Build Plan. If Netgear reduces or reschedules a requirement in the Build Plan prior to the scheduled delivery date, Celestica shall take all commercially reasonable steps to anticipate and identify all potential liability of Netgear for Materials or Products on order and minimize charges to Netgear which result from the change to the Build Plan. Provided that, and to the extent that Celestica complies with its obligations in the preceding sentence, and provided further that the aggregate out-of-pocket costs incurred by Celestica do not exceed the total purchase price of the Products impacted by the change, Netgear agrees to pay the out-of-pocket costs incurred by Celestica for cancellation of Materials or Products, and for proprietary materials which could not be returned or used in other 7 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. products and at other sites of Celestica and for any Materials on order which could not be canceled. Notwithstanding the foregoing, Celestica agrees that Netgear may reduce or reschedule any product forecast beyond the Build Plan without cost or liability to Netgear. 5.4. EXCESS INVENTORY CARRYING COSTS If Netgear cancels or reschedules the Build Plan and as a result Celestica has excess material inventory ("Excess Inventory") that is not fully consumed [*] Netgear agrees to either purchase the Excess Inventory, [*] calculated in U.S. dollars at the annual rate of the United States prime lending rate plus [*]%. Excess Inventory shall be calculated as the result of [*]. Netgear is obligated to purchase inventory [*]. 6. PRICES 6.1 PRICES FOR PRODUCTS The price for each Product shall be as set forth on the price list attached hereto as Exhibit 3 (the "Price List"). Celestica and Netgear agree that the price generally includes all Materials cost and Celestica's service fee. Celestica's service fee generally includes all overheads, allocations and two months inventory carrying costs with the exception of supplier inbound freight, customer outbound freight (Japanese customers), Celestica interplant freight, and duties. Celestica agrees to provide a breakdown of actual cost for each Product in final form on or before Monday of week ten in each quarter to meet Netgear's standards setting calendar requirements. 6.2 PRODUCT PRICE CHANGES The prices of a Product may change over the term of this Agreement but only by written agreement of the parties. If the parties agree to change the price of a Product, the new price and the effective date shall be set forth in the new or amended Price List within five days of the agreement to change. In its sole discretion, Netgear may buy down Celestica's existing inventory and work in process ("WIP") and any open Orders by issuing a purchase order equal to the difference between the existing standard price and the new lower price. Product prices are to be reviewed on a quarterly basis by both parties. Differences between the price paid by Netgear and the price paid by Celestica to the OEM suppliers will be charged to or reimbursed to Netgear on a quarterly basis. Additionally, the Celestica service fee will be reviewed and adjusted as agreed to by both parties on a quarterly basis. 6.3. CURRENCY EXCHANGE RATE All prices shall be in US$ CONFIDENTIAL INFORMATION Page 7 8 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 6.4. COMPONENT SALES AND COMPONENT PROCUREMENT FEE. Netgear negotiates costs directly with manufacturers of semiconductor components. These component costs are frequently less than the costs for the same component if purchased by an OEM supplier from the same manufacturer. Celestica will purchase components based upon receipt of a monthly Build Plan from Netgear, which will contain quantity requirements covering the lead time of each component part. Celestica will sell these component parts to the OEM suppliers authorized by Netgear. The component parts will be sold to the OEM suppliers at a price authorized by Netgear. Any and all profit or loss on the sale of these component parts will be remitted to Netgear. Celestica's component procurement fee will be [*]% of the component cost paid by Celestica on their purchase order with the component manufacturer. Payment of the component procurement fee is made net [*] days from the date of shipment of the components to the authorized OEM supplier. Celestica will provide notification of component shipments to OEM suppliers and to Netgear on the date of shipment. 6.5. MANAGEMENT OF COMPONENT PRICE REDUCTIONS Not applicable 7. ORDER FULFILLMENT AND PAYMENT 7.1. ORDER FULFILLMENT AND RETURNS Netgear's call centers in the U.S. will handle all of Netgear's Order processing functions. Celestica will be responsible for fulfilling all Orders including the preparation of all shipping documents and coordination with a common carrier. Immediately prior to preparation of a Customer invoice, Celestica will conduct a ship transaction between the Celestica system and the Netgear system (the "SunSystem") and generate an invoice to Netgear for the same product. 7.2. PAYMENT Payment shall be made based upon a purchase order receipt transaction performed in Netgear's SunSystem to transfer products into a Netgear Inventory Location. Payment shall be made net 30 days [*] from Celestica, provided, however, that payment shall not constitute acceptance of nonconforming products. All amounts shall be calculated in US Dollars. Netgear shall invoice Celestica upon return of products to Celestica and receipt into Celestica's Systems. All amounts properly due shall be paid within 30 days [*] from Netgear. Payment shall not constitute acceptance of nonconforming products. All amounts shall be calculated in US Dollars. Netgear may, with the approval of Celestica, choose to issue a debit memo against existing accounts payable with Celestica rather than issuing an invoice for accounts receivable. 7.3. SHIPMENT SUCCESS REQUIREMENTS Netgear requires that all shipments be made on the scheduled shipment day or up to three days before the scheduled shipment day: Celestica shall make every shipment on time; however, if Celestica fails to deliver Product on time due to reasons which are within its reasonable control, Celestica shall pay to Netgear the amount of the difference between normal shipping expense and expedited shipping expense. If delays are not attributable to Celestica as set forth above, then Netgear shall pay the difference between normal shipping expense and expedited shipping expense. CONFIDENTIAL INFORMATION Page 8 9 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 7.4. TAXES AND DUTIES Netgear will pay as a separate item on an invoice any tax lawfully imposed on the sale of the Products or on the provision of Services to Netgear or will provide Celestica with a certificate of exemption acceptable to the appropriate taxing authority. Celestica agrees to provide reasonable assistance without charge in any proceeding for the refund or abatement of any such taxes Netgear is required to pay. Without limiting the generality of the foregoing, Netgear shall have no obligation to pay taxes based upon Celestica's net income. 7.5. TITLE AND RISK OF LOSS AND SHIPMENT Title to the Products will pass to Netgear upon delivery to the Netgear Inventory Location. Prior to title passing, Celestica shall bear risk of all loss, damage or theft. Shipping instructions shall be specified in the Build Plan and Netgear will designate default shipping instructions. Celestica will provide proof of shipment upon request and will provide reasonable assistance to Celestica at no charge in any claim it may make against a carrier or insurer for misdelivery, loss or damage to Products. 8. INVENTORY MANAGEMENT Products will be received into the Netgear Inventory Location using purchase order receipts on Netgear's SunSystem. Title will pass, and Netgear will take financial ownership, and will be invoiced, only for Products received into the Netgear Inventory Location on SunSystem purchase orders. Products returned from Netgear Customers will be initially received into the Netgear Inventory Location using the Sales Order Return transaction in SunSystem. Celestica will have the responsibility to inspect, test, repackage or return Products to suppliers based upon disposition of the return. Sixty days of carrying costs associated with all Netgear Products held by Celestica are included in the standard pricing contained in Section 6.1. All financial obligations associated with product purchases or returns between Celestica and its suppliers are the sole responsibility of Celestica. 9. TERM AND TERMINATION 9.1 TERM This Agreement will commence on the Effective Date and continue for a period of one year. Unless terminated earlier pursuant to the terms of this Agreement, this Agreement will automatically renew for successive one-year periods upon expiration of the term of this Agreement. 9.2 TERMINATION A party shall be in default under this Agreement if it: (a) ceases conducting business in the normal course, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, or becomes subject to any proceeding under any statute of any governing authority relating to insolvency or the protection of rights of creditors; or (b) fails to perform any material obligation required to be performed by it under this Agreement for a period of 30 days after receipt of written notice by the other party of such failure. CONFIDENTIAL INFORMATION Page 9 10 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 In such event, the non-defaulting party shall have the right to terminate this Agreement immediately by giving written notice to the other. 9.3. EFFECT OF EXPIRATION OR TERMINATION Upon expiration or any termination of this Agreement by either party: (a) Netgear shall pay all undisputed amounts or charges owed to Celestica as provided in this Agreement, provided that Netgear shall have the right to set-off any such amounts or charges owed to Celestica against any amounts owing to Netgear by Celestica pursuant to this Agreement. If the aggregate amount owing by Netgear to Celestica is less than the aggregate amounts owing by Celestica to Netgear, Celestica shall pay such net amount owing to Netgear promptly and in full within forty-five days of the date which is the earliest of expiration or termination, as the case may be. (b) Celestica shall complete all partially completed Products and deliver such Products as provided above in accordance with the terms of this Agreement which would have otherwise applied to such Production Effort or Services, as applicable. Provided Netgear has made all payments required pursuant to paragraph (a) above, Celestica shall deliver within three (3) weeks of the later of the date of expiration or termination or such payment, if required, to Netgear all finished and partially-finished Products and Materials relating thereto in exchange for payment by Netgear of the full cost for Products, direct cost for work-in-process and Material, to the locations designated by Netgear. (c) The provisions of this Agreement relating to Confidential and Proprietary Information (Section 10), Intellectual Property Rights (Section 11) except the license granted to Celestica in Section 11.3, Warranties (Section 12), Indemnification (Section 13) and Section 14.12, shall remain in effect beyond any expiration or termination. (d) Celestica shall return all Netgear Proprietary Information, and under Netgear's supervision, destroy or erase all copies of such Netgear Proprietary Information in the possession of Celestica or any of its Affiliates or their respective employees, consultants, agents or representatives, including copies on paper or other hard copy and copies on computer or other storage media. 9.4. DUTY TO FULFILL Notwithstanding any termination or expiration of this Agreement, Celestica agrees to procure, inspect and fulfill all Orders placed prior to the date of expiration or termination in accordance with the terms of this Agreement if such Orders have not previously been cancelled. 10. CONFIDENTIAL AND PROPRIETARY INFORMATION 10.1 PROTECTION OF INFORMATION During the term of this Agreement, the parties anticipate that each shall disclose to the other in connection with this Agreement certain of its Confidential Information. The recipient shall protect the disclosed Confidential Information by using the same degree of care to prevent the unauthorized use, dissemination, or publication of the Confidential Information as the recipient uses to protect its own confidential information of alike nature, but no less than a reasonable degree of care. Recipient's duty to protect the Confidential Information disclosed under this Agreement shall expire three years from the expiration or termination of this Agreement, except that source code shall be protected hereunder indefinitely. Except as permitted by this Agreement, the recipient shall disclose no part of such Confidential Information to anyone except to those of its employees or contractors who have (i) a need to know the same to accomplish the purposes of this Agreement, (ii) signed an Agreement under which they shall keep confidential such Confidential Information (iii) before receiving access to the Confidential Information, acknowledged its confidential, proprietary and trade secret nature, (iv) agreed to use such Confidential Information only for the purposes of performing recipient's obligations under this Agreement. The terms of this Agreement may also be disclosed to directors, officers, employees, attorneys, accountants, contractors, banks or actual or potential Page 10 11 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 financing sources of recipient, but only if and to the extent such persons need to know the information for the performance of their duties and are subject to confidentiality agreements or fiduciary duties of confidentiality to recipient and agree to use such information only for such duties. This Agreement imposes no restriction upon the recipient with respect to disclosure or use of information: (a) that was in the recipient's possession before receipt from the discloses; (b) that is or becomes (prior to such disclosure or use) a matter of public knowledge through no fault of the recipient; (c) that is received by the recipient from a third party without a duty of confidentiality; (d) that is disclosed by the discloser to a third party without a duty of confidentiality on the third party; (e) is independently developed by the recipient; (e) to the extent disclosed in accordance with the order or requirement of a court, administrative agency, or other governmental body (provided, however, that the receiver shall provide prompt notice thereof to enable the discloser to seek a protective order or otherwise prevent such disclosure); or (f) that is disclosed by the recipient with the discloser's prior written approval; or (g) as required by the federal securities law and rules and regulations thereunder: 10.2 PUBLICITY All press releases and printed material using the name, logo or other identifying characteristics of a party shall be subject to prior approval of the other party. 10.3 PROTECTION OF CELESTICA INFORMATION Each party agrees that the price of components negotiated by it and provided to the other party shall be deemed to be Confidential Information of that party. Each party agrees not to discuss the origins of such information with any third party. Each party agrees not to use such information to solicit a discount from the disclosing supplier, from any of the supplier's competitors or from any other supplier for use by the recipient other than for the purposes of performing its obligations under this Agreement. Each party acknowledges that unauthorized disclosure of such information may irreparably damage the discloser's relationship with its suppliers and that any benefit accruing to the recipient shall belong to Netgear and/or the disclosing party. 10.4 INJUNCTIVE RELIEF Each party acknowledges that damage from improper disclosure of Confidential Information is irreparable and that it would be extremely impracticable to measure the resulting damages. Accordingly, in addition to any other rights and remedies that a party may have, the injured party is entitled to equitable review, including preliminary and permanent injunction, and the other party expressly waives the defense that a remedy in damages will be adequate. 10.5 RETURN OF CONFIDENTIAL INFORMATION If this Agreement is terminated, and upon request of the discloser, the recipient shall promptly return all Confidential Information received from the discloser, together with all copies, or if requested by the discloser, certify that all such Confidential Information has been destroyed. 11. INTELLECTUAL PROPERTY RIGHTS OF THE PARTIES 11.1 RESERVATION OF PROPRIETARY RIGHTS Netgear reserves all proprietary rights in the Products and in all associated original works, documentation, computer programs, discoveries, inventions, patents, know-how, techniques, designs, engineering details and other data developed by Netgear or Celestica, either singly or jointly, as a result of work performed under this Agreement. Celestica agrees to reproduce any appropriate copyright notice for Netgear on all Products manufactured under this Agreement. Netgear further reserves all right, title and interest in prototype layouts, post-layout simulation results, post-layout specifications, test tapes and test fixtures developed or produced pursuant to this Agreement. The foregoing reservations shall not, however, apply to proprietary rights, original works, computer programs, Page 11 12 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 discoveries, inventions, patents, know-how, techniques, designs, engineering details and other data developed solely by Celestica as a result of work performed under this Agreement that (i) does not relate to (x) the Products or the Specification, or (y) to Netgear actual or demonstrably anticipated research or development, (ii) does not result from work performed by Celestica solely for Netgear, or (iii) relates generally to manufacturing methods and processes. In each such case, the foregoing shall be the sole property of Celestica. 11.2 LICENSE TO MANUFACTURE Netgear hereby grants to Celestica a non-exclusive license to use the Specifications, including all software programs contained therein and all related proprietary data and know-how necessary to perform the Services pursuant to this Agreement. This license is non-transferable, may be used only in connection with the performance of the Services for Netgear under this Agreement, and shall expire on the date on which Celestica's obligations to perform the Services terminates under this Agreement. 11.3. TOOLING: OWNERSHIP AND LICENSE Netgear acknowledges that Celestica shall retain title to the internal tooling developed by Celestica in connection with this Agreement, and Celestica acknowledges that Netgear shall have the right to use such tooling in the event of a material default by Celestica as defined elsewhere in this Agreement only in order to fulfill Celestica's obligations hereunder prior to such default. Celestica agrees that each Product created is for Netgear's exclusive use and further agrees that Celestica has no right to sell or otherwise transfer any interest in a Product to any party unless Netgear has provided permission in writing prior to any such sale or transfer. 11.4. CAPITAL ASSETS In order to perform the Production Effort as stipulated in Article 3, Celestica may have to use certain capital equipment specified by Netgear. If Celestica can use the equipment for current or future applications other than for Netgear assemblies, this equipment shall be the property of Celestica and shall be funded as such. If the capital equipment cannot be used by other non-Netgear applications, such equipment shall be solely the properly of Netgear and shall have Netgear asset tags affixed to the equipment. Such property shall be funded by Netgear. Maintenance of all equipment shall be per Article 3 above. Celestica shall maintain inventory of all capital assets, regardless of ownership, and shall provide inventory records to Netgear on demand. Inventory records should include, but not be limited to, date of acquisition, description of asset, serial number, and location. 12. WARRANTIES 12.1. FREE FROM DEFECTS Celestica warrants that except for refurbished products, the Products shall be new and unused at the time of delivery to the Netgear Inventory Location. 12.2. TITLE, INFRINGEMENT Celestica warrants that: (a) it has and shall pass to Netgear good title to the Products free and clear of all liens and encumbrances; (b) no claim or action is pending or threatened against Celestica or, to Celestica's knowledge, against any licensor or supplier of Celestica that would adversely affect the ability of Celestica to procure and deliver the Products or the right of Netgear or any Customer of Netgear to use the Products for their intended use, and (c) it has all rights and powers necessary to perform its obligations under this Agreement. Page 12 13 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 12.3. SERVICES Celestica warrants that all Services performed under this Agreement will be performed in a competent, professional manner and in accordance with the Statement of Work and the applicable Specifications under this Agreement. 12.4. REMEDIES FOR PRODUCTS UNDER WARRANTY Not applicable. 12.5. LATENT DEFECTS Not applicable. 12.6. YEAR 2000 WARRANTY Subject to the provisions of this Section below, Celestica further covenants and represents that Celestica Systems shall (a) process date and time related data without causing any processing interruptions, abnormal terminations, or changes in performance characteristics, and (b) shall process and manipulate all date and time related functions correctly. Without limiting the generality of the foregoing, the Celestica Systems shall: (a) Correctly handle date and time related data before, during and after January 1, 2000, including accepting date and time input, providing date and time output, and performing ongoing operations on dates and times and portions of dates and times including calculating, comparing and sequencing of dates and times (in both forward and backward operations spanning century boundaries); (b) Correctly handle leap year calculations, including, identification of leap years, interval calculations (in both forward and backward operations spanning century boundaries), day-in-year calculations, day-of-the-week calculations, and week-of-the-year calculations); (c) Correctly handle all two digit date and time related input in a manner that resolves ambiguity as to century in a disclosed, defined and predetermined manner; and (d) Correctly store, retrieve and provide output of all date and time data in a manner that is unambiguous as to century. Celestica shall promptly correct any failure of the Celestica Systems to conform to the above warranty. 12.7. LIMITATIONS THIS CLAUSE 12.7 SETS OUT THE SUPPLIER'S SOLE OBLIGATION AND LIABILITY, AND NETGEAR'S EXCLUSIVE REMEDIES, FOR CLAIMS BASED ON DEFECTS IN OR FAILURE OF ANY PRODUCT OR SERVICE OR THE SUBJECT MATTER OF ANY SERVICE AND REPLACES ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE PROVIDED ALWAYS THAT THE SUPPLIER DOES NOT EXCLUDE OR LIMIT ITS LIABILITY FOR DEATH OR PERSONAL INJURY RESULTING FROM ITS NEGLIGENCE NOR LIABILITY FOR BREACH OF ANY TERM IMPLIED BY STATUTE TO THE EXTENT THAT SUCH LIABILITIES CANNOT BY LAW BE LIMITED OR EXCLUDED. Page 13 14 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 13. INDEMNIFICATION 13.1. INDEMNIFICATION BY NETGEAR Netgear will, at its expense and at Celestica's request, defend any claim or action brought against Celestica by a third party (i) to the extent that it is based on a claim that any Specification provided under this Agreement infringes or violates any patent, copyright, trademark, trade secret or other proprietary right of the third party or (ii) to the extent caused by any grossly negligent act or omission or willful misconduct of Netgear; and Netgear will indemnify and hold Celestica harmless from and against any costs and liability reasonably incurred by Celestica that are attributable to that claim, subject to compliance with the notice provisions below. Netgear shall have no liability if the alleged infringement is the result of Celestica's modification or alteration of the Specification; or Netgear's compliance with Celestica's specifications, designs, or processes; or if Celestica had actual notice that use of such Specification or its incorporation into a product would cause such infringement; provided, however, that if Celestica has such actual notice and promptly informs Netgear of such actual notice, Celestica shall not be liable for failure to deliver Products hereunder, but only to the extent that such failure is a result of such actual notice. 13.2. INDEMNIFICATION BY CELESTICA Celestica will, at its expense and at Netgear's request, defend any claim or action brought against Netgear by a third party to the extent caused by any negligent act or omission or willful misconduct of Celestica or its Affiliates; and Celestica will indemnify and hold Netgear harmless from and against any costs and liability reasonably incurred by Netgear that are attributable to that claim, subject to compliance with the notice provisions below. 13.3. PROCEDURE FOR INDEMNIFICATION If any claim or action shall be brought or asserted against an indemnified party as provided above (the "Indemnified Party") in respect of which indemnity may be sought from an indemnifying party under such Sections (the "Indemnifying Party") the Indemnified Party shall promptly notify the Indemnifying Party who shall assume the defense thereof and the payment of all expenses; except that any delay or failure to so notify the Indemnifying Party shall only relieve the Indemnifying Party of its obligations hereunder to the extent, if at all, that it is prejudiced by reason of such delay or failure. The Indemnified Party shall have the right to employ separate counsel in any such claim or action and participate in the defense thereof, but the fee and expenses of such counsel shall be at the expense of the Indemnified Party, unless (i) the employment thereof shall have been specifically directed and required by the Indemnifying Party or (ii) the Indemnifying Party shall have elected not to assume the defense and employ counsel. Without the consent of the Indemnified Party, the Indemnifying Party shall have no right to settle or compromise on any non-monetary matter. 13.4. LIMITATION OF LIABILITY TO THE MAXIMUM EXTENT PERMITTED BY LAW, UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, TORT, CONTRACT, OR OTHERWISE, SHALL NETGEAR BE LIABLE TO SUPPLIER OR ANY OTHER PERSON FOR ANY INDIRECT (INCLUDING BUT NOT LIMITED TO LOST PROFITS), SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF NETGEAR SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PERSON. TO THE MAXIMUM EXTENT PERMITTED BY LAW, UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, TORT, CONTRACT, OR OTHERWISE, SHALL SUPPLIER BE LIABLE TO NETGEAR OR Page 14 15 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 ANY OTHER PERSON FOR ANY INDIRECT (INCLUDING BUT NOT LIMITED TO LOST PROFITS), SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF SUPPLIER SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PERSON. 14. GENERAL PROVISIONS 14.1. ACCESS TO FACILITIES Netgear shall have the right to review and audit Celestica's facilities, operations, purchase orders, agreements, and procedures at any reasonable time with reasonable notice for purposes of determining compliance with the requirements of this Agreement. From time to time Netgear's Customers will request the right to review Celestica's facilities and operations for the purpose of qualification. Celestica agrees to permit such Customer surveys with five to ten working days notice, provided Celestica does not consider such Customer of Netgear to be a competitor of Celestica or one of Celestica's customers. 14.2. FORCE MAJEURE "Force Majeure" shall include all acts or events beyond the control of a party, including but not limited to acts of God, government restrictions, continuing domestic or international problems such as wars or insurrections, strikes, fires, floods, work stoppages, and embargoes, which prevent totally or partially the fulfillment of the obligations of either party. A party affected by an event of Force Majeure shall be released without any liability on its part from the performance of its obligations (other than an obligation to pay money) under this Agreement and the applicable Site Agreement, if any, but only to the extent and only for the period that its performance of such obligations is prevented by circumstances of Force Majeure and provided that such party shall have given prompt notice to the other party. Such notice shall include a description of the nature of the event of Force Majeure, its cause, and its possible consequences. The party claiming circumstances of Force Majeure shall promptly notify the other party of the conclusion of the event. The period of Force Majeure shall be deemed to commence on the date that the event of Force Majeure first occurs. Regardless of the excuse of Force Majeure, if either party is not able to perform within ninety (90) days after such event, the other party may terminate the Agreement. Termination of this Agreement shall not affect the obligations of either party which exist as of the date of termination. During the period that the performance by one of the parties of its obligations under this Agreement or a Site Agreement has been suspended by an event of Force Majeure, the other party may likewise suspend the performance of all or part of its obligations under this Agreement. 14.3. COUNTRY OF ORIGIN In the event that Netgear requires information concerning component origin due to government contract requirements or other U.S. reporting requirements, Netgear will provide Celestica with a written outline of the specific information requirements, which Products such requirements apply to, and the reason or legal basis for the requirement. Upon receipt of such information, Celestica will use commercially reasonable efforts to support Netgear's requirements. 14.4. NOTICES All notices shall be sent by certified mail, postage prepaid, by personal delivery, courier service, or by facsimile or other form of recorded communication to the parties at their respective addresses set forth below. Any notices given 15 16 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 shall be deemed to have been received as follows: if sent by facsimile or other form of recorded communication, when transmitted; if sent by certified mail, on the date of delivery as shown on the return receipt; and if by courier service, on the date delivered. Either party may change its notice address by written notice to the other. If to Celestica: If to Netgear: Celestica Asia, Inc.North America Inc. Netgear, Inc. 2222 Qume Drive 4401 Great America Parkway San Jose, Ca. 95131 Santa Clara, CA 95052-8185 Attention: Director of Operations Attention: VP of Materials With a copy to CFO at the same address 14.5. EXPORTS AND CUSTOMS Each party agrees that it will not knowingly (i) export or re-export, directly or indirectly, any technical data (as defined by the U.S. Export Administration Regulations), including software received from the other under this Agreement or (ii) export or re-export, directly or indirectly, any direct product of such technical data, including software, to any destination to which such export or re-export is restricted or prohibited by U.S. or applicable non-U.S. law without obtaining prior authorization from the U.S. Department of Commerce and/or other competent government authorities to the extent required by those laws. This clause shall survive termination or cancellation of this Agreement. Celestica shall certify quarterly to Netgear the correct country of origin of each Product determined in accordance with the rules of origin set out in the applicable laws and treaties. Celestica shall notify Netgear at least sixty (60) days in advance of any change in the origin of a Product. Celestica shall maintain supporting documentation sufficient to meet the requirements of any audit of the origin information by Netgear or by any governmental entity. Celestica shall obtain from each of its suppliers the appropriate certificate of origin of Materials and shall provide to Netgear, on the last day of each calendar quarter, a report identifying which suppliers of Materials have, and which suppliers have not, certified the country of origin for all Materials supplied by it to Celestica for manufacture of the Products. All Products must be marked with their country of origin. The degree of permanence of the origin marking on the Product shall be sufficient to ensure that, in any reasonably foreseeable circumstance, the marking shall remain on the Product throughout its expected life. Both the Product's immediate packaging and the outermost containers shall also be marked to indicate the country of origin. Celestica shall be solely responsible for all fines, penalties, costs and seizures resulting from inadequate marking, packaging of labeling. Unless otherwise set forth in this Agreement, Celestica shall take all administrative actions required to produce customs invoices and country of origin documents for all shipments crossing international borders which comply with all laws, treaties and regulations of both the exporting country and the importing country. If a Product includes Materials having different countries of origin, the different countries of origin must be identified on the customs invoices, along with the related quantities/serial numbers of such Materials. Celestica shall be solely responsible for all fines, penalties and costs resulting from a customs invoice not being so compliant. Celestica shall perform all administrative actions required to determine the eligibility of each Product for preferential treatment under the rules of any applicable trade treaties/agreements and, if eligible, provide the necessary documentation and obtain such preferential treatment. Celestica shall use it's best efforts to minimize any penalties and costs resulting from any such documents subsequently determined to be invalid, shall maintain all documentation to support the eligibility and shall respond in a timely manner to verification questionnaires or reviews. 16 17 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 14.6. AMENDMENT, MODIFICATION OR WAIVER The provisions of this Agreement may be amended or waived only by an instrument in writing signed by the authorized representatives of each party, except as otherwise expressly provided in this Agreement. 14.7. DISASTER RECOVERY PLAN Celestica agrees to develop and maintain a disaster recovery plan to be put into effect in the event that it becomes unable to fulfill Orders for any reason for a period of more than 15 calendar days. The disaster recovery plan shall be submitted by Celestica to Netgear for review within 15 days of the Effective Date of this Agreement, and shall be reviewed yearly thereafter. Celestica agrees that the disaster recovery plan must enable Celestica to continue to fulfill Orders in accordance with the time schedules required under this Agreement. 14.8. MANUFACTURING PROCESS INSTRUCTIONS In the event of a disaster or material default by Celestica under this Agreement, at no cost and within three business days, Celestica shall make available to Netgear all process instructions such that Netgear may, at its discretion, have the Products produced by third parties. 14.9. INDEPENDENT CONTRACTOR This Agreement shall not constitute Celestica the agent or legal representative of Netgear for any purpose and Celestica shall not hold itself out as an agent of Netgear other than as expressly provided in this Agreement. This Agreement creates no relationship of joint venturers, partners, associates, employment or principal and agent between the parties, and both parties are acting as independent contractors. Neither party shall have the right to exercise any control or direction over the operations, activities, employees or agents of the other party in connection with this Agreement. Celestica is not granted any right or authority to, and shall not attempt to, assume or create any obligation or responsibility for or on behalf of Netgear: Celestica shall not have any authority to bind Netgear to any contract, whether of employment or otherwise, and Celestica shall bear all of its own expenses for its operations, including, without limitation, the compensation of its employees and sales people and the maintenance of its offices, service, warehouse and transportation facilities. Celestica shall be solely responsible for its own employees and sales people and for their omissions, acts and the things done by them. Netgear expressly disclaims any liability for any commitments on behalf of Netgear made by Celestica. 14.10. CELESTICA RESPONSIBLE FOR ITS SUBCONTRACTORS The acknowledgment by Netgear of any subcontractor of Celestica shall in no way be construed to relieve Celestica of any of its duties, responsibilities and obligations to Netgear under this Agreement. 14.11. NO ASSIGNMENT Neither this Agreement nor any right or obligation under it shall be assigned or delegated by Celestica or by Netgear, voluntarily or by operation of law, without the prior written consent of the other party, which consent may not be unreasonably withheld. Any attempted assignment shall be deemed voidable. An attempted assignment shall be deemed to occur in the event of a sale or transfer of substantially all of the assets of, or a majority interest in, the voting shares to, or the merger or consolidation with or into, any other entity . CONFIDENTIAL INFORMATION Page 17 18 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 14.12. APPLICABLE LAW All issues and questions concerning the construction, validity, enforcement, interpretation and performance of this Agreement, the rights and obligations arising hereunder and any purchase made hereunder shall be governed by the laws of the State of California and the federal laws of the United States applicable therein, without reference to the UNCITRAL Conventions on Contracts for the International Sale of Goods and without giving effect to any choice of law or conflict of law, rules or provisions (whether of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than California. The parties hereto submit to and consent to the nonexclusive jurisdiction of the courts located in the State of California. 14.13. RIGHTS CUMULATIVE Except as otherwise expressly provided in this Agreement or in any Site Agreement, all rights and remedies conferred by this Agreement, by any other instrument, or by law are cumulative and may be exercised singularly or concurrently. 14.14. SEVERABILITY If any one or more of the provisions of this Agreement for any reason shall be held to be invalid, illegal, or unenforceable in any respect by any law or regulation of any government or by any court, such provision shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never existed, except in those instances where removal or elimination of such provision would result in a failure of consideration under this Agreement. 14.15. ENTIRE AGREEMENT This Agreement and each Site Agreement, including all Exhibits, constitutes the entire Agreement between the parties pertaining to the subject matter of this Agreement. This Agreement supersedes all prior agreements and understandings between the parties, written or oral, with respect to such subject matter. No representations or statements of any kind made by any representative of Netgear which are not stated in this Agreement shall be binding on Netgear. No course of dealing or course of performance shall be relevant to explain or supplement any term expressed in this contract. CONFIDENTIAL INFORMATION Page 18 19 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. New Celestica AgmtV25 20 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- EXHIBIT 1: STATEMENT OF WORK The following Statement of Work (SOW) is for the Netgear Operations. Netgear enters into this contract with Celestica with the understanding that Celestica will commit the proper mixture of resources and display the attributes of continuous improvement, initiative, innovation, accountability, responsibility, and integrity in support of Netgear business goals. All functions described in this statement of work will be performed at a level of good manufacturing practices with the goal of being "best in class". All functions performed by Celestica will be subject to Audit by Celestica's own Quality System and internal corrective action procedures. There are nine (9) KEY AREAS OF THIS SOW. Each Key Area contains detailed information about Netgear's requirements. The Key Areas are: o Business Management Procedures & Reporting o Information Systems Integration o Planning and Purchasing Management o Inventory Management o Product Testing and Inspection o Product Fulfillment and Logistics o Returns Processing o Supplier Performance Management o Supplier Product Quality Program and Management KEY AREAS IN DETAIL: BUSINESS MANAGEMENT PROCEDURES & REPORTING - We intend to mutually plan for and make corporate-wide business decisions. To manage the technical and business changes, Netgear and Celestica shall: o Provide dedicated Program Management personnel whose goal is to provide consistent and efficient responses to program requirements. o Possess a strong support organization which can be drawn upon in support of Netgear business needs on a worldwide basis. o Provide Netgear Functional Organizational Chart. o Provide Job Descriptions, Roles and Responsibilities for all Netgear Program personnel. o Conduct quarterly business reviews for each business management team. o Create a process to communicate about and resolve issues promptly and to drive continuous improvement of the day-to-day operations. o Provide general reporting which supports Netgear's Operations Goals: - - Warranty Return Rate @ < .5% CY98, <.2% CY99 - Product return activity reports - Returned product test yield reports - Defects per Million on returned product - Pareto of Defects on returned product Warranty and non-warranty receipts activity - - Incoming Inspection Test DOA Units @ < 1% CY1999, < .5 % CY2000 - Incoming Defects per Million by Product - Incoming Defects per Million by Supplier - Pareto of Defects by Product by Supplier - - Purchase order receipt reports by supplier by product - On time receipts by supplier by product - Product lead-time reports. - - Shipping Errors @ < 1% CY1999, < .5 % CY2000 CONFIDENTIAL INFORMATION Page 1 21 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- - - Value of shipments at standard cost reports. - - Shipment activity reports. - - On Time Shipment @ 98% (Actual Ship Date Vs Scheduled Ship Date). - - Order Fulfillment Lead-time @ 95% 5 Days ARO (After Receipt of Order). - - Inventory Variance @ $500 per $Million. - - Inventory Turns @ 12. - Separate Turns calculations for IC inventory and Product inventories. - On hand Inventory by item by location. - Inventory aging reports by item to track slow moving and excess inventory. BUSINESS MANAGEMENT PROCEDURES & REPORTING (CONTINUED) o Provide additional reporting required determining root cause for management action in support of Operations Goals. This additional reporting may include activity levels, cost per activity, productivity, cycletime, process quality, accuracy, or any other measurement determined to be a key measurement by Netgear management. o Reports will require information sorted by customer, supplier, product, inventory location, or activity, as applicable. o Produce reports which enable Supplier to benchmark performance to Good Manufacturing Practice (GMP), Best -in-Class, and World-Class Manufacturing (WCM). o Prepare and participate in Quarterly performance review. o Produce both hard and soft (electronic) files of reports. INFORMATION SYSTEMS INTEGRATION - Netgear will provide the database platform for the control of Sales and Inventory. This database will be installed at Netgear, with access provided to the supplier at the supplier's location(s). The supplier will be required to: o Maintain the data integrity of all transactions associated with the receipt, storage, transfer, issue, and shipment of materials and products. o The supplier will work with Netgear to ensure proper separation of duties, password access over system functionality, etc. in order to comply with proper internal controls and financial audit requirements. o The supplier will provide on-going systems support for the Netgear database as required. CONFIDENTIAL INFORMATION Page 2 22 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- PLANNING AND PURCHASING, MANAGEMENT - Planning and Purchasing Management is defined as the management of all controlled activities associated with the requirements planning and purchase of Netgear material and product. Requirements are: o Maintain inventory levels per Netgear forecasts by use of material requirements planning (MRP) and order action (purchase orders) while achieving 12 inventory turns. o Issue Purchase Orders to Netgear suppliers within 5 business days of receipt of Build Plan. o Product or item due dates on purchase orders issued will reflect the actual requested and confirmed delivery date for the product or item ordered on the purchase order. o Provide purchase order history reports detailing purchase order number, purchase order date, product, supplier name, due date, quantity ordered, unit price, and extended value. o Provide hard copy of all purchase orders issued to Netgear suppliers to Netgear within 10 business days of issue to Netgear suppliers. If at any time a change order is issued to an existing purchase order, a hard copy of the changed purchase order will be provided to Netgear within 10 business days of issue to Netgear suppliers. o Provide open purchase order reports to Netgear on a weekly basis. The content of the open purchase order report will contain the purchase order number, purchase order date, product, supplier name, due date, quantity ordered, unit price, and extended value. o Provide purchase order receipts report to Netgear on a weekly basis. The content of the purchase order receipts report will contain the product ordered, supplier name, purchase order number, issue date of purchase order, due date, date received, receipt quantity, unit price, and extended value of quantity received. o Engage in daily communications with suppliers if necessary to manage on time delivery of products or items ordered. Expedite or reschedule orders as required to satisfy fluctuations in demand for Netgear products and to achieve inventory plans. o Measure on time delivery performance of suppliers. o Measure actual lead-time performance of suppliers. o On a daily basis, provide accurate reporting of product availability against product demand (available-to-promise report) to include the following information: - - Total quantity on hand by product by location. - - Total quantity of booked orders by product by location. - - Total quantity of products "drop-shipped" (in-transit to a location but not received against an open purchase order) by product by destination location. - - Total quantity of products in inventory but in-transit between locations (received off purchase orders into inventory and shipped from one location to another) by product by destination location. - - Net product available versus total demand (total on hand versus total ordered) by product by location. - - A "remarks" section for each product or item where information concerning delivery schedules and any relevant actions being taken to satisfy product demand are noted. o Report on a daily basis the status of all inbound materials in-transit to inventory locations. Report will detail product, quantity shipped, supplier invoice number, forwarding information, and estimated arrival date at destination. o Schedule production of bundled products or conversion of products from one version to another version on a daily basis to satisfy product demand. o Provide activity reports on a monthly basis to Netgear for use in monthly forecast creation and master product planning purposes. CONFIDENTIAL INFORMATION Page 3 23 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- INVENTORY MANAGEMENT - Inventory Management is defined as the management of all controlled activities associated with the receipt, storage, security, transfer, accuracy, and shipment of Netgear material and product. The requirements for Inventory Management apply to materials and products controlled by Celestica in Celestica's SAP Inventory System and Netgear's SunSystem Inventory System. Requirements are: o First - In, First - Out (FIFO) process control. o Lot tracking process for material purge / stop shipment requirements. o Bar-Code / Auto - Identification processes. o Bin storage and ESD (Electro-Static Discharge) protection for handling and storage of LC.'s. o Assume financial responsibility for loss of product or materials owned by Netgear in Netgear's SunSystems inventory locations due to shrinkage, pilferage, transaction error, physical inventory adjustment, or any damage to Netgear product caused by Celestica personnel. o Perform all inventory transactions in both Celestica's SAP and Netgear's SunSystems databases. o Develop procedures to control and ensure that inventory transactions on Celestica's SAP and Netgear's SunSystem are performed in the proper sequence for inventory reconciliation between the two systems. o Establish procedures to ensure inventory transactions performed by Celestica personnel in both Celestica's SAP and Netgear's SunSystems reflect actual material or product movements. Ensure source documents are used to perform inventory transactions. Examples of such source documentation are inventory transfer documents, inventory issue documents, inventory receipt documents, material travelers, inventory receipt documents, inventory shipment documents, delivery receipts, cargo receipts, bills of lading, etc., in support of inventory transactions performed on either SAP or SunSystems databases. Maintain records of all source documents used for inventory transactions in a manner that facilitates internal or external audit requirements. o Provide support from qualified personnel to audit compliance to financial period end for proper revenue recognition. o Maintain inventory accuracy through management of cycle-count program, including ABC count criteria and count frequency. o Perform Physical Inventories as directed for both SAP and SunSystems. Provide proper oversight and audit of physical inventories to comply with reporting requirements from internal or external auditors. o Inventory accuracy to be maintained at $500 per $Million. o Perform incoming quality control (IQC) on all products. o Establish and maintain controlled inventory locations to segregate materials and products by condition, type, status, or other attributes as agreed. Examples are: - - By condition: Maintain separate inventory locations for goods returned from customers, whether returned as unsold products (stock rotations) or defective product (warranty returns) until product is dispositioned. - - By Type: Raw materials such as integrated circuits, power supplies, packaging material, etc. should be maintained in separate inventory locations from completed products (finished goods). - - By status: Establish and maintain separate inventory locations for materials and products undergoing incoming inspection. o On a weekly basis, provide to Netgear inventory reports detailing quantity on hand by product, unit cost, extended value, by location. Reports may also detail inventory aging to identify slow moving or excess inventory for disposition. o On a monthly basis, provide inventory reports to Netgear to support monthly forecast creation, master product planning, and standard cost setting processes. CONFIDENTIAL INFORMATION Page 4 24 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- PRODUCT TESTING AND INSPECTION - Celestica shall manage the testing and inspection of all products received from Netgear suppliers. Product testing will be performed in conformance to Netgear specification. Product inspection will be performed to standards and practices as contained in Celestica's quality control procedures. Requirements are: o Perform required tests on all products received in conformance to Netgear approved process and specification. o Perform preventative maintenance on all test equipment as required. o Ensure test equipment calibration between Celestica equipment and supplier equipment per specification. o Ensure correct revisions of all test programs are used in the test process for all products. o Manage the formal release process through Celestica document control procedures for the release or change to test equipment and test programs. o Initiate required actions with suppliers when test equipment or test results indicate nonconformance to specification. o Maintain adequate authenticated documents on preventative maintenance and calibration of all test equipment. o Celestica shall not place into service and test equipment or program until written approval of the test equipment or program has been received from Netgear. o Maintain and submit to Netgear on a monthly basis the list of all test equipment, detailing Netgear owned or Celestica owned, with adequate description of equipment. o For all Netgear owned equipment, Celestica will ensure such equipment is properly identified per Netgear fixed asset requirements. o Celestica shall maintain adequate authenticated inspection procedures covering but not limited to the following processes: - - Documented inspection procedures - - Sampling plans - - Use of defect codes - - Workmanship standards - - Cosmetic standards - - International standards - - First article approvals - - Ship-to-Stock program - - Training and certification of inspection personnel o Provide product functional test and inspection yields and pareto of defects report to Netgear on a monthly basis. o Maintain adequate authenticated inspection and test documents. CONFIDENTIAL INFORMATION Page 5 25 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- PRODUCT FULFILLMENT AND LOGISTICS - Fulfillment is defined as the process of assembling, picking, packaging, inspecting, and shipping Netgear products to Netgear customers. Logistics is defined as the management of inbound and outbound transportation, customs, material classifications in compliance with international import and export regulations, and compliance to export controls. Requirements are: o Ship the same day on Netgear customer orders received by Noon. o Order consolidation process (multiple orders, same destination) o Provide partial shipments of orders, as needed. o Pick, pack, and ship orders to Netgear customers in less than case pack quantities if required. o Ensure all shipments are audited for accuracy prior to delivery to transportation providers. Shipment audits must be performed by authorized Quality Control personnel. o Follow customer routing for all outbound customer shipments. Ship using customer's shipping account numbers. o Manage carrier dispatching, airline flight or ocean booking activity. o Handle international customs documentation, including the preparation of Shipper's Letter of Instructions, Cargo Receipts, Bills of Lading, Commercial Invoices, Certificates of Origin, etc. as required by the customs agencies of the origin and destination countries. o Handle all documentation as required for shipments tendered on Letter of Credit, Sight Draft, etc. o In support of resolution of delivery disputes between Netgear and Netgear customers, investigate disputed claims and provide proof of delivery documentation or other information to Netgear as required to resolve such disputes. o Provide documentation to Netgear in support of all shipments on a daily basis. Maintain shipment activity logs and all source documentation required by internal or external auditors in compliance with proper revenue recognition requirements. o Prepare and submit to Netgear Shipment accuracy reports on a monthly basis. o Prepare and submit to Netgear On Time Shipment reports on a monthly basis. o Prepare and submit to Netgear Order Fulfillment Lead-time reports on a monthly basis. o Traffic and Customs expertise for cost control, import and export compliance (record retention, ECCN, H.T.S.U.S. classification, etc.) o Manage mode selection (Airfreight or Seafreight) and enforce Netgear routing instructions. o Demonstrate proper control of all negotiable documents required for inbound customs clearance. o Negotiate freight costs with transportation providers as required. o Perform Landed Cost Analysis for use in determining accurate product unit price adjustments in support of changes in terms of sale with Suppliers. CONFIDENTIAL INFORMATION Page 6 26 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- RETURNS PROCESSING - Returns processing is defined as the management of the receipt, verification, inspection, testing, disposition, re-packaging, and reporting of product returns from Netgear customers. Netgear issues two basic types of authorizations to it's customers: Warranty return authorizations for defective products and Stock Rotation returns for unsold slow moving products from customer inventory. Celestica will maintain proper separation of warranty and stock rotation products throughout the following functions: o Physically receive shipments of returned products from Netgear customers. o Verify returned products are received in good physical condition, noting any and all shipping damage on commercial documents (cargo receipts, bills of lading, delivery receipts, etc.) prior to signing delivery documents. o Upon acceptance, verify valid return material authorization (RMA) exists for returned products. o Report any unauthorized returns to Netgear on date of receipt. o Verify returned goods received match product and quantity authorized on Netgear return material authorization. o Verify o Report any discrepancy between product and quantity received and product and quantity authorized on date of receipt. o Complete Netgear Returned Material Receipt Report (RMRR) and fax to Netgear on date of receipt. o Prepare and submit to Netgear a daily return material receipts report, detailing the customer name, RMA number, product and quantity, and value on the date of receipt. If no receipt activity occurs on any given day, the return receipts report will still be sent, noting "No Receipts". o In support of resolution of delivery disputes on returned products between Netgear and Netgear customers, investigate disputed claims and provide proof of delivery documentation or other information to Netgear as required to resolve such disputes. o Perform incoming inspection on all returned products per agreed processes. o Perform functional test on all warranty defective product returns. o Provide returned product functional test and inspection yields and pareto of defects report to Netgear on a monthly basis. o Maintain separate inventory locations for product receipt, work in process test, inspection or test failure products, inspection or test accepted products, and refurbished products per agreed process. o Establish procedures to ensure inventory transactions performed within or between established returned product inventory locations by Celestica personnel in Netgear's SunSystems reflect actual material or product movements. Ensure source documents are used to perform inventory transactions. Examples of such source documentation are inventory transfer documents, inventory issue documents, inventory receipt documents, material travelers, inventory receipt documents, inventory shipment documents, delivery receipts, cargo receipts, bills of lading, etc., in support of inventory transactions performed on Netgear's SunSystems database. Maintain records of all source documents used for inventory transactions in a manner that facilitates internal or external audit requirements. o Arrange for timely disposition and return to original manufacturer all inspection or test failure products which are still under manufacturer's warranty. o Refurbish products per agreed process as directed by Netgear. CONFIDENTIAL INFORMATION Page 7 27 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- SUPPLIER PERFORMANCE MANAGEMENT-- Celestica will provide dedicated management personnel to Netgear in support of the Supplier Performance Management requirements below. LOGISTICS o Ensure Suppliers provide Advice of Shipment notifications on date of shipment to Celestica and Netgear personnel for all supplier shipments of product and materials. o Measure and report monthly on number of shipments advised Vs. number of shipments. o Ensure Suppliers provide forwarding information and adequately authentic documentation that will meet import/export customs requirements, ensure smooth customs clearances, and assure proper accounts payable aging. o Measure and report monthly on number of conforming shipments Vs. number of shipments. o Resolve any issues with Suppliers that delay or could potentially delay the receipt of Netgear products into Celestica's Distribution Centers. o Monitor and report on each Supplier's ability to manage shipment scheduling to meet expected levels of service and transit times. Initiate corrective actions as required with suppliers to ensure predictable levels of service for all transportation modes. o Ensure Suppliers conform to good practice in consolidating shipments to minimize cost. DELIVERY o Engage in daily communications with suppliers if necessary to manage on time delivery of products or items ordered. Expedite or reschedule orders as required to satisfy fluctuations in demand for Netgear products and to achieve inventory plans. o Measure and report monthly the on time delivery performance of suppliers. o Measure and report monthly the actual lead-time performance of suppliers. o Measure and report monthly the accuracy of Suppliers commitments (Actual Vs. Advised) o Report monthly purchase order receipts by supplier by product. QUALITY o Measure and report monthly Incoming Defects per Million by Product o Measure and report monthly Incoming Defects per Million by Supplier o Measure and report monthly Pareto of Defects by Product by Supplier o Measure and report monthly Supplier Corrective Actions issued. o Measure and report monthly Supplier Corrective Action Aging Report o Measure and report monthly Supplier Ship-to-Stock Status by product. o Measure and report monthly Cost of Quality by Supplier. CONFIDENTIAL INFORMATION Page 8 28 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- SUPPLIER PRODUCT QUALITY PROGRAM AND MANAGEMENT - Celestica agrees to adopt the product quality assurance requirements, perform quality control tests, and provide the quality control functions described below. Celestica will provide dedicated Quality management personnel to Netgear in support of the quality assurance program requirements. When deemed appropriate and by mutual consent, additional resources can be drawn upon from Celestica's Corporate Quality Organization in support of Netgear business needs on a worldwide basis. Celestica's Product Quality Management Program will use adequately authenticated methods to mange Product Quality Assurance, Document Control, and Supplier Quality Engineering efforts. Celestica's Product Quality Management Program will encompass, but not be limited to, the attributes of the Product Quality Program Requirements as follows. PRODUCT QUALITY ASSURANCE O QUALITY PLANNING - - Internal Procedure - - Workmanship Standards - - Customer Requirements - - International Standards - - First Article Approval - - Process Release - - New Product Introduction / Process Verification Test Approval - - Quality Stamp/Lot Label Control - - Quality Training Program o CUSTOMER QUALITY IMPROVEMENT - - Customer Interface - - Closed Loop Corrective Action (CLCA) Feedback: Problem Discovery / Root Cause Investigation / Determine Corrective Action / Implement Corrective Action / Verify Effectiveness of Corrective Action / Closure Requirements / Management Reporting - - Material Review Board - - Statistical Process Control - - Cost of Quality Metrics and Reporting - - Material Traceability o AUDIT AND DATA ANALYSIS - - ISO System Audit - - Process Audit - - Product Audit - - Material Audit - - ESD Audit - - Data Analysis and Reporting DOCUMENT CONTROL o Document Center o Document Transfer procedures o Specification Library o ECO Management o Quality Manual CONFIDENTIAL INFORMATION Page 9 29 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. STATEMENT OF WORK BETWEEN CELESTICA AND NETGEAR, INC. - -------------------------------------------------------------------------------- SUPPLIER QUALITY ENGINEERING o Supplier Engineering - Supplier Survey - - Supplier Qualification / Disqualification - - Supplier Audits - - New Product Readiness - - Component Approval - - Approved Vendor List (AVL) Management - - AVL Change Approval - - Supplier Rating - - Supplier Performance Management and Reporting - - Supplier Closed Loop Corrective Action Process - - Suppler Certification Process and Criteria o INCOMING QUALITY CONTROL - - Inspection Procedures - - Qualified Personnel - - First Article Approval - - Tooling Approval: Conditional, first shots, texturing. - - Functional Test Process - - Test Equipment and Test Programs Qualification, Calibration, Preventative Maintenance - - Equipment Lock-Out Controls - - Mechanical, Cosmetic, and Workmanship Standards - - Source Inspections - - Statistical AQL Sampling Plans - - Use of Defect Codes - - Ship-to-Stock Qualification, Measurement, and Reporting o SUPPLIER PERFORMANCE REPORTING - - Incoming Defects per Million (DPM) by product, by supplier - - Pareto of Defects - - On Time Delivery - - Supplier Corrective Action Status Report: Quantity of Corrective Actions issued, status of open actions, age of corrective actions, duration until closure. - - Cost of Quality by Supplier. - - Warranty return rate by supplier, by product. - - Returned product Defects per Million by Supplier, by product. - - Returned product Dead On Arrival (DOA) rate, by supplier, by product. - - Returned product pareto of defects by supplier, by product. CONFIDENTIAL INFORMATION Page 10 30 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2: LIST OF PRODUCTS
PRODUCT PRODUCT DESCRIPTION - ------- ------------------- DB104AU DUAL SPEED STARTER KIT DB104CC DUAL SPEED STARTER KIT DB104FR DUAL SPEED STARTER KIT DBI04GE DUAL SPEED STARTER KIT DBI04GR DUAL SPEED STARTER KIT DBI04JP DUAL SPEED STARTER KIT DBI04NA DUAL SPEED STARTER KIT DB104UK DUAL SPEED STARTER KIT DS104AU 4 PORT DUAL SPEED 10/100 HUB DS104FR 4 PORT DUAL SPEED 10/100 HUB DS104GE 4 PORT DUAL SPEED 10/100 HUB DS104GR 4 PORT DUAL SPEED 10/100 HUB DS104JP 4 PORT DUAL SPEED 10/100 HUB DS104NA 4 PORT DUAL SPEED 10/100 HUB DS104UK 4 PORT DUAL SPEED 10/100 HUB DS106AU 6 PORT SLIM DUAL SPEED HUB DS106FR 6 PORT SLIM DUAL SPEED HUB DS106GE 6 PORT SLIM DUAL SPEED HUB DS106GR 6 PORT SLIM DUAL SPEED HUB DS106JP 6 PORT SLIM DUAL SPEED HUB DS106NA 6 PORT SLIM DUAL SPEED HUB DS106UK 6 PORT SLIM DUAL SPEED HUB DS108AU 8 PT SLIM 10/100 HUB AU MOQ 12 DS108FR 8PT SLIM 10/100 HUB EU MOQ 12 DS108GE 8PT SLIM 10/100 HUB EU MOQ 12 DS108GR 8PT SLIM 10/100 HUB EU MOQ 12 DS108JP 8PT SLIM 10/100 HUB JP MOQ 12 DS108NA 8PT SLIM 10/100 HUB NA MOQ 12 DS108UK 8 PT SLIM 10/100 HUB UK MOQ 12 DS116AU 16 PORT SLIM DUAL SPEED HUB DS116FR 16 PORT SLIM DUAL SPEED HUB DS116GE 16 PORT SLIM DUAL SPEED HUB DS116GR 16 PORT SLIM DUAL SPEED HUB DS116JP 16 PORT SLIM DUAL SPEED HUB DS116NA 16 PORT SLIM DUAL SPEED HUB DS116UK 16 PORT SLIM DUAL SPEED HUB DS309AU 9PT DUAL SPEED HUB W/UPLINK DS309FR 9PT DUAL SPEED HUB W/UPLINK DS309GE 9PT DUAL SPEED HUB W/UPLINK DS309GR 9PT DUAL SPEED HUB W/UPLINK DS309JP 9PT DUAL SPEED HUB W/UPLINK DS309NA 9PT DUAL SPEED HUB W/UPLINK DS309UK 9PT DUAL SPEED HUB W/UPLINK DS508AU 8 PT D-SPD STACK HUB MOQ 6 DS508GE 8PT D-SPD STACK HUB MOQ 6 DS508JP 8PT D-SPD STACK HUB MOQ 6 DS508NA 8PT D-SPD STACK HUB MOQ 6 DS508UK 8 PT D-SPD STACK HUB MOQ 6 DS516AU 16 PT D-SPD STACK HUB MOQ 6 DS516GE 16 PT D-SPD STACK HUB MOQ 6 DS516JP 16 PT D-SPD STACK HUB MOQ 6 DS516NA 16 PT D-SPD STACK HUB MOQ 6 DS516UK 16 PT D-SPD STACK HUB MOQ 6 DS524AU 24 PT D-SPD STACK HUB MOQ 6 DS524GE 24 PT D-SPD STACK HUB MOQ 6 DS524JP 24 PT D-SPD STACK HUB MOQ 6 DS524NA 24 PT D-SPD STACK HUB MOQ 6 DS524UK 24 PT D-SPD STACK HUB MOQ 6 EA101C USB ETHERNET ADAPTER EA20110 10-PK 10MBPS ISA CARD MOQ 1 EA20150 50-PACK 10MBPS ISA CARD EA201C 10 MBPS ISA CARD MOQ 40 EA201CFR 10 MBPS ISA CARD MOQ 40 EA201CGR 10 MBPS ISA CARD MOQ 40 EB104AU NETWORK STARTER KIT ISA EB104FR NETWORK STARTER KIT ISA EB104GE NETWORK STARTER KIT ISA
Page 1 of 5 31 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2: LIST OF PRODUCTS
PRODUCT PRODUCT DESCRIPTION - ------- ------------------- EB104NA NETWORK STARTER KIT ISA EB104UK NETWORK STARTER KIT ISA EN104AU 4 PT 10BASE-T HUB AU MOQ 10 EN104GE 4 PT 10BASE-T HUB EU MOQ 10 EN104JP 4 PT 10BASE-T HUB JP MOQ 10 EN104NA 4 PT 10BASE-T HUB NA MOQ 10 EN104TPAU 4 PT 10BASE-T HUB AU MOQ 10 EN104TPGE 4 PT 10BASE-T HUB EU MOQ 10 EN104TPGR 4 PT 10BASE-T HUB GERMAN EN104TPJP 4 PT 10BASE-T HUB JP MOQ 10 EN104TPNA 4 PT 10BASE-T HUB NA MOQ 10 EN104TPUK 4 PT 108ASE-T HUB UK MOQ 10 EN104UK 4 PT 10BASE-T HUB UK MOQ 10 EN106TPAU 6 PT 10BASE-T HUB AU MOQ 12 EN106TPGE 6 PT 10BASE-T HUB EU MOQ 12 EN106TPJP 6 PT 10BASE-T HUB JP MOQ 12 EN106TPNA 6 PT 10BASE-T HUB NA MOQ 12 EN106TPUK 6 PT 108ASE-T HUB UK MOQ 12 EN108AU 8PT 10B-T HUB AUI BNC MOQ 10 EN108GE 8PT 10B-T HUB AUI BNC MOQ 10 EN108JP 8PT 10B-T HUB AUI BNC MOQ 10 EN108NA 8PT 10B-T HUB NA MOQ 10 EN108TPAU 8 PT 10BASE-T HUB AU MOQ 10 EN108TPGE 8 PT 10BASE-T HUB EU MOQ 10 EN108TPJP 8 PT 10BASE-T HUB JP MOQ 10 EN108TPNA 8 PT 10BASE-T HUB NA MOQ 10 EN108TPUK 8 PT 10BASE-T HUB UK MOQ 10 EN108UK 8 PT 10BASE-T HUB UK MOQ 10 EN116AU 16PT 10BASE-T HUB AU MOQ 10 EN116GE 16PT 10BASE-T HUB EU MOQ 10 EN116JP 16 PT 10BASE-T HUB JP MOQ 10 EN116NA 16PT 10BASE-T HUB NA MOQ 10 EN116UK 16 PT 10BASE-T HUB UK MOQ 10 EN308AU 8PT 10BASE-T HUB AUS MOQ 10 EN308GE 8 PT 10BASE-T HUB EU MOQ 10 EN308JP 8 PT 10BASE-T HUB JP MOQ 10 EN308NA 8PT 10BASE-T HUB NA MOQ 10 EN308TCAU 8PT 10BASE-T HUB EN308TCFR 8PT 10BASE-T HUB EN308TCGE 8PT 10BASE-T HUB EN308TCGR 8PT 10BASE-T HUB EN308TCJP 8PT 10BASE-T HUB EN308TCNA 8PT 10BASE-T HUB EN308TCUK 8PT 10BASE-T HUB EN308UK 8 PT 10BASE-T HUB UK MOQ 10 EN516AU 16 PT 10BASE-T HUB AU MOQ 5 EN516GE 16 PT 10BASE-T HUB EU MOQ 5 EN516JP 16 PT 10BASE-T HUB JP MOQ 5 EN516NA 16 PT 10BASE-T HUB NA MOQ 5 EN516UK 16 PT 10BASE-T HUB UK MOQ 5 EN524AU 24 PT 10BASE-T HUB AU MOQ 6 EN524GE 24PT 10BASE-T HUB EU MOQ 6 EN524JP 24 PT 10BASE-T HUB JP MOQ 6 EN524NA 24 PT 10BASE-T HUB NA MOQ 6 EN524UK 24 PT 10BASE-T HUB UK MOQ 6 FA31010 10-PK 10/100 PCI ADPTR MOQ 1 FA31050 50-PK 10/100 PCI ADPTR MOQ 1 FA310CFR 10/100 PCI ADPTR&CBL-FRENCH FA310CGR 10/100 PCI ADPTR&CBL-GERMAN FA310JP 10/100 PCI ADAPTER MOQ 40 FA310TX 10/100 PCI ADAPTER MOQ 40 FA310TXC 10/100 PCI ADPTR&CBL MOQ 40 FA310TXGR 10/100 PCI ADAPTER GERMAN FA410C 10/100 PCMCIA CARD MOQ 40 FA410CFR 10/100 PCMCIA CARD MOQ 40 FA410CJP 10/100 PCMCIA CARD MOQ 40 FA510C 10/100 CARDBUS ADAPTER
Page 2 of 5 32 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2: LIST OF PRODUCTS
PRODUCT PRODUCT DESCRIPTION - ------- ------------------- FB104AU 4 PORT FE-NET STARTER KIT AU FB104FR 4 PT FE STARTER KIT FRENCH FB104GE 4 PORT FE-NET STARTER KIT GE FB104NA 4 PORT FE-NET STARTER KIT NA FB104NA-6 SIX PACK FE-NET STARTER KIT FB104UK 4 PORT FE-NET STARTER KIT UK FB108AU 8 PORT FE-NET STARTER KIT AU FB108GE 8 PORT FE-NET STARTER KIT GE FB108NA 8 PORT FE-NET STARTER KIT NA FB108UK 8 PORT FE-NET STARTER KIT UK FE104AU 4 PT FAST E-NET HUB AU MOQ 8 FE104GE 4 PT FAST E-NET HUB EU MOQ 8 FE104JP 4 PT FAST E-NET HUB JP MOQ 8 FE104NA 4 PT FAST E-NET HUB NA MOQ 8 FE104UK 4 PT FAST E-NET HUB UK MOQ 8 FE108AU 8 PT FAST E-NET HUB AU MOQ 8 FE108GE 8 PT FAST E-NET HUB EU MOQ 8 FE108JP 8 PT FAST E-NET HUB JP MOQ 8 FE108NA 8 PT FAST E-NET HUB NA MOQ 8 FE108UK 8 PT FAST E-NET HUB UK MOQ 8 FE116AU 16 PT 100BASE-TX FE HUB FE116GE 16 PT 100BASE-TX FE HUB FE116JP 16 PT 100BASE-TX FE HUB FE116NA 16 PT 100BASE-TX FE HUB FE116UK 16 PT 100BASE-TX FE HUB FE508AU 8PT FE STACK HUB AU MOQ 5 FE508DIS DISPLAY MODEL FE508 FE508GE 8PT FE STACK HUB EU MOQ 5 FE508JP 8PT FE STACK HUB JP MOQ 5 FE508NA 8PT FE STACK HUB NA MOQ 5 FE508UK 8PT FE STACK HUB UK MOQ 5 FE516AU 16PT FE STACK HUB AU MOQ 5 FE516DIS DISPLAY MODEL FE516 FE516GE 16PT FE STACK HUB EU MOQ 5 FE516JP 16PT FE STACK HUB JP MOQ 5 FE516NA 16PT FE STACK HUB NA MOQ 5 FE516UK 16PT FE STACK HUB UK MOQ 5 FS102AU 2 PT FAST E-NET SW AU MOQ 10 FS102GE 2 PT FAST E-NET SW EU MOQ 10 FS102JP 2 PT FAST E-NET SW JP MOQ 10 FS102NA 2 PT FAST E-NET SW NA MOQ 10 FS102UK 2 PT FAST E-NET SW UK MOQ 10 FS104AU 4 PT FAST E-NET SW AU MOQ 10 FS104GE 4 PT FAST E-NET SW EU MOQ 10 FS104JP 4 PT FAST E-NET SW JP MOQ 10 FS104NA 4 PT FAST E-NET SW NA MOQ 10 FS104UK 4 PT FAST E-NET SW UK MOQ 10 FS105AU 5 PT FAST E-NET SWITCH AU FS105GE 5 PT FAST E-NET SWITCH GE FS105JP 5 PT FAST E-NET SWITCH JP FS105NA 5 PT FAST E-NET SWITCH NA FS105UK 5 PT FAST E-NET SWITCH UK FS108AU 8 PORT 10/100 SWITCH,EXT PWR FS108GE 8 PORT 10/100 SWITCH,EXT PWR FS108JP 8 PORT 10/100 SWITCH,EXT PWR FS108NA 8 PORT 10/100 SWITCH,EXT PWR FS108UK 8 PORT 10/100 SWITCH,EXT PWR FS308AU 8 PORT 10/100 SWITCH,INT PWR FS308GE 8 PORT 10/100 SWITCH,INT PWR FS308JP 8 PORT 10/100 SWITCH,INT PWR FS308NA 8 PORT 10/100 SWITCH,INT PWR FS308UK 8 PORT 10/100 SWITCH,INT PWR FS508AU 8 PT FAST E-NET SWH AU MOQ 5 FS508GE 8 PT FAST E-NET SW EU MOQ 5 FS508JP 8 PT FAST E-NET SW JP MOQ 5 FS508NA 8 PT FAST E-NET SW NA MOQ 5 FS508UK 8 PT FAST E-NET SW UK MOQ 5
Page 3 of 5 33 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2: LIST OF PRODUCTS
PRODUCT PRODUCT DESCRIPTION - ------- ------------------- FS509AU 9 PORT SWITCH W/GBIT UPLINK FS509GE 9 PORT SWITCH W/GBIT UPLINK FS509JP 9 PORT SWITCH W/GBIT UPLINK FS509NA 9 PORT SWITCH W/GBIT UPLINK FS509UK 9 PORT SWITCH W/GBIT UPLINK FS516AU 16 PT FAST E-NET SW AU MOQ 6 FS516GE 16 PT FAST E-NET SW EU MOQ 6 FS516JP 16 PT FAST E-NET SW JP MOQ 6 FS516NA 16 PT FAST E-NET SW NA MOQ 6 FS516UK 16 PT FAST ENET SW UK MOQ 6 FS518AU 18PT FAST E-NET SW NA MOQ 5 FS518GE 18PT FAST E-NET SW NA MOQ 5 FS518JP 18PT FAST E-NET SW NA MOQ 5 FS518NA 18PT FAST E-NET SW NA MOQ 5 FS518UK 18PT FAST E-NET SW NA MOQ 5 FS524AU 24 PT FAST E-NET SW AU MOQ 6 FS524GE 24 PT FAST E-NET SW AU MOQ 6 FS524JP 24 PT FAST E-NET SW AU MOQ 6 FS524NA 24 PT FAST E-NET SW AU MOQ 6 FS524UK 24 PT FAST E-NET SW AU MOQ 6 FS562AU 8 PORT FIBER SWITCH FS562GE 8 PORT FIBER SWITCH FS562JP 8 PORT FIBER SWITCH FS562NA 8 PORT FIBER SWITCH FS562UK 8 PORT FIBER SWITCH FS566AU 12 PORT FIBER SWITCH FS566GE 12 PORT FIBER SWITCH FS566JP 12 PORT FIBER SWITCH FS566NA 12 PORT FIBER SWITCH FS566UK 12 PORT FIBER SWITCH GA620 1GBPS PCI FIBER CARD GA620JP 1GBPS PCI FIBER CARD GS504AU GIGABIT FIBERSWT 4PT GS504GE GIGABIT FIBERSWT 4PT GS504JP GIGABIT FIBERSWT 4PT GS504NA GIGABIT FIBERSWT 4PT GS504UK GIGABIT FIBERSWT 4PT LCP100 CABLE MODEM ND508AU NETWORK DISK DRIVE 8GB ND508GE NETWORK DISK DRIVE 8GB ND508NA NETWORK DISK DRIVE SGB ND508UK NETWORK DISK DRIVE 8GB ND520AU NETWORK DISK DRIVE 20GB ND520GE NETWORK DISK DRIVE 20GB ND520NA NETWORK DISK DRIVE 20GB ND520UK NETWORK DISK DRIVE 20GB PA101 10M USB PHONELINE ADAPTER PA301 10M PCI PHONELINE ADAPTER PE102NA PHONELINE ETHERNET BRIDGE PR356NA 56K ANALOG PHONELINE ROUTER PS104AU PRINT SERVER WITH 4 PT HUB PS104GE PRINT SERVER WITH 4 PT HUB PS104JP PRINT SERVER WITH 4 PT HUB PS104NA PRINT SERVER WITH 4 PT HUB PS104UK PRINT SERVER WITH 4 PT HUB PS105AU PRINT SERVER WITH 5 PT HUB PS105FR PRINT SERVER WITH 5 PT HUB PS105GE PRINT SERVER WITH 5 PT HUB PS105GR PRINT SERVER WITH 5 PT HUB PS105JP PRINT SERVER WITH 5 PT HUB PS105NA PRINT SERVER WITH 5 PT HUB PS105UK PRINT SERVER WITH 5 PT HUB PS110AU 10/100 MBPS PRINT SERVER PS110FR 10/100 MBPS PRINT SERVER PS110GE 10/100 MBPS PRINT SERVER PS110GR 10/100 MBPS PRINT SERVER PS110JP 10/100 MBPS PRINT SERVER
Page 4 of 5 34 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2: LIST OF PRODUCTS
PRODUCT PRODUCT DESCRIPTION - ------- ------------------- PS111NA 10/100 MBPS PRINT SERVER PS111UK 10/100 MBPS PRINT SERVER RH340NA ROUTER HUB RH348GE ROUTER HUB RH348JP ROUTER HUB RH348NA ROUTER HUB RH348UK ROUTER HUB RM356AU 56K MODEM/ROUTER W/4PT HUB RM356GE 56K MODEM/ROUTER W/4PT HUB RM356JP 56K MODEM/ROUTER W/4PT HUB RM356NA 56K MODEM/ROUTER W/4PT HUB RM356UK 56K MODEM/ROUTER W/4PT HUB RT210AU ISDN ROUTER AU MOQ 1 RT210GE ISDN ROUTER EUROPE MOQ 1 RT210JP ISDN ROUTER JP MOQ 1 RT210UK ISDN ROUTER UK MOQ 1 RT311NA ETHERNET ROUTER NA RT328AU ISDN ROUTER AU MOQ 5 RT328GE ISDN ROUTER EUROPE MOQ 5 RT328KO ISDN ROUTER KOREA MOQ 5 RT328NA ISDN ROUTER NA MOQ 5 RT328UK ISDN ROUTER UK MOQ 5 RT338NA ISDN 10/100 ROUTER NA SB104 PARTIAL SB104 W/HUB ONLY SB104AU NTWRK STARTER KIT AU MOQ 5 SB104FR NTWRK STARTER KIT FRENCH SBI04GE NTWRK STARTER KIT EU MOQ 5 SB104GR NTWRK STARTER KIT GERMAN SB104NA NTWRK STARTER KIT NA MOQ 5 SB104NAR PARTIAL SB104 W/2 NIC CARDS SB104UK NTWRK STARTER KIT UK MOQ 5 SW108AU 8PT 10B-T E-NET SW AU MOQ 10 SW108GE 8PT 10B-T E-NET SW EU MOQ 10 SW108JP 8PT 10B-T E-NET SW JP MOQ 10 SW108NA 8PT 10B-T E-NET SW NA MOQ 10 SW108UK 8PT 10B-T E-NET SW UK MOQ 10 SW502AU 2PT 10/100 E-NET SW AU MOQ 5 SW502GE 2PT 10/100 E-NET SW EU MOQ 5 SW502JP 2PT 10/100 E-NET SW JP MOQ 5 SW502NA 2PT 10/100 E-NET SW NA MOQ 5 SW502NAD DEMO 2PT 10/100 E-NET SW NA SW502UK 2PT 10/100 E-NET SW UK MOQ 5 SW507AU 7PT 10/100 E-NET SW AU MOQ 5 SW507GE 7PT 10/100 E-NET SW EU MOQ 5 SW507JP 7PT 10/100 E-NET SW JP MOQ 5 SW507NA 7PT 10/100 E-NET SW NA MOQ 5 SW507NAD DEMO 7PT 10/100MBPS ENET SW SW507UK 7PT 10/100 E-NET SW UK MOQ 5 SW510AU 10PT 10/100 E-NET SW AU MOQ 5 SW510GE 10PT 10/100 E-NET SW EU MOQ 5 SW510JP 10PT 10/100 E-NET SW JP MOQ 5 SW510NA 10PT 10/100 E-NET SW NA MOQ 5 SW510NAD DEMO 10PT 10/100 E-NET SW SW510UK 10PT 10/100 E-NET SW UK MOQ 5 SW518AU 18PT 10/100 E-NET SW AU MOQ 5 SW518GE 18PT 10/100 E-NET SW EU MOQ 5 SW518JP 18JP 10/100 E-NET SW JP MOQ 5 SW518NA 18PT 10/100 E-NET SW NA MOQ 5 SW518UK 18PT 10/100 E-NET SW UK MOQ 5 XM128GE ISDN DIGITAL MODEM EU MOQ 5 XM128JP ISDN DIGITAL MODEM AUSTRALIA XM128KO ISDN DIGITAL MODEM KO MOQ 5 XM128NA ISDN DIGITAL MODEM NA MOQ 5 XM128SE ISDN DIGITAL MODEM SE MOQ 5 XM128UK ISDN DIGITAL MODEM UK MOQ 5
Page 5 of 5 35 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 1 of 13 36 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 2 of 13 37 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 3 of 13 38 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 4 of 13 39 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 5 of 13 40 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 6 of 13 41 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 7 of 13 42 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 8 of 13 43 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 9 of 13 44 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 10 of 13 45 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 11 of 13 46 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 12 of 13 47 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 PRODUCT PRICE LIST [*] Page 13 Of 13 48 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR Cost ASP Sep Oct Nov Dec Jan Feb Mar Apr DB104 ASP $ 156000 135200 135200 135200 135200 135200 135200 135200 DB104 INV $ 103 104 396005 261871 127737 117419 107101 107101 107101 107101 - --------------------------------------------------------------------------------------------------------------------------------- DB104NA DELTA Beg Inv 8278 3838 2538 1238 1138 1038 1038 1038 DB104NA DELTA Build Plan -2940 0 0 1200 1200 1300 1300 1300 DB104NA DELTA Demand 1500 1300 1300 1300 1300 1300 1300 1300 DB104NA DELTA End Inv 3838 2538 1238 1138 1038 1038 1038 1038 - --------------------------------------------------------------------------------------------------------------------------------- DS104 ASP $ 328500 328500 328500 328500 328500 328500 328500 328500 DS104 INV $ 70 73 784055 470405 156755 331005 331005 331005 331005 331005 - --------------------------------------------------------------------------------------------------------------------------------- DS104NA DELTA Beg Inv 9 11249 6749 2249 4749 4749 4749 4749 DS104NA DELTA Build Plan 15740 0 0 7000 4500 4500 4500 4500 DS104NA DELTA Demand 4500 4500 4500 4500 4500 4500 4500 4500 DS104NA DELTA End Inv 11249 6749 2249 4749 4749 4749 4749 4749 - --------------------------------------------------------------------------------------------------------------------------------- DS106 ASP $ 93600 83200 83200 93600 93600 93600 93600 93600 DS106 INV $ 74 104 -46865 12271 71407 78799 86191 93583 100975 108367 - --------------------------------------------------------------------------------------------------------------------------------- DS106NA DELTA Beg Inv 105 -634 166 966 1066 1166 1266 1366 DS106NA DELTA Build Plan 161 1600 1600 1000 1000 1000 1000 1000 DS106NA DELTA Demand 900 800 800 900 900 900 900 900 DS106NA DELTA End Inv -634 166 966 1066 1166 1266 1366 1466 - --------------------------------------------------------------------------------------------------------------------------------- DS108 ASP $ 665000 665000 665000 598500 598500 598500 598500 598500 DS108 INV $ 101 133 -8651 -310421 192529 444004 444004 444004 444004 444004 - --------------------------------------------------------------------------------------------------------------------------------- DS108NA DELTA Beg Inv 279 -86 -3086 1914 4414 4414 4414 4414 DS108NA DELTA Build Plan 4635 2000 10000 7000 4500 4500 4500 4500 DS108NA DELTA Demand 5000 5000 5000 4500 4500 4500 4500 4500 DS108NA DELTA End Inv -86 -3086 1914 4414 4414 4414 4414 4414 - --------------------------------------------------------------------------------------------------------------------------------- DS116 ASP $ 0 0 0 0 0 0 0 0 DS116 INV $ 128 0 231228 179844 115614 115614 115614 115614 115614 115614 - --------------------------------------------------------------------------------------------------------------------------------- DS116NA DELTA Beg Inv 330 1800 1400 900 900 900 900 900 DS116NA DELTA Build Plan 2270 0 0 500 500 500 500 500 DS116NA DELTA Demand 800 400 500 500 500 500 500 500 DS116NA DELTA End Inv 1800 1400 900 900 900 900 900 900 - --------------------------------------------------------------------------------------------------------------------------------- DS309 ASP $ 55500 64750 64750 74000 74000 74000 83250 83250 DS309 INV $ 122 185 69173 57016 75252 69173 63095 57016 44859 32702 - --------------------------------------------------------------------------------------------------------------------------------- DS309NA LITE-ON Beg Inv 869 569 469 619 569 519 469 369 DS309NA LITE-ON Build Plan 0 250 500 350 350 350 350 350 DS309NA LITE-ON Demand 300 350 350 400 400 400 450 450 DS309NA LITE-ON End Inv 569 469 619 569 519 469 369 269 - --------------------------------------------------------------------------------------------------------------------------------- DS508 ASP $ 80150 91600 91600 91600 80150 80150 80150 68700 DS508 INV $ 161 229 -43868 -76006 -76006 52546 60580 60580 60580 60580 - --------------------------------------------------------------------------------------------------------------------------------- DS508NA DELTA Beg Inv 6 -273 -473 -473 327 377 377 377 DS508NA DELTA Build Plan 71 200 400 1200 400 350 350 300 DS508NA DELTA Demand 350 400 400 400 350 350 350 300 DS508NA DELTA End Inv -273 -473 -473 327 377 377 377 377 - --------------------------------------------------------------------------------------------------------------------------------- DS516 ASP $ 310500 310500 310500 310500 310500 310500 310500 310500 DS516 INV $ 223 345 377561 288461 310736 221636 221636 221636 221636 221636 - --------------------------------------------------------------------------------------------------------------------------------- DS516NA DELTA Beg Inv 929 1695 1295 1395 995 995 995 995 DS516NA DELTA Build Plan 1666 500 1000 500 900 900 900 900 DS516NA DELTA Demand 900 900 900 900 900 900 900 900 DS516NA DELTA End Inv 1695 1295 1395 995 995 995 995 995 - --------------------------------------------------------------------------------------------------------------------------------- DS524 ASP $ 403000 403000 403000 403000 403000 403000 403000 403000 DS524 INV $ 284 403 336860 194845 194845 280054 280054 280054 280054 280054 - --------------------------------------------------------------------------------------------------------------------------------- DS524NA DELTA Beg Inv 4 1186 686 686 986 986 986 986 DS524NA DELTA Build Plan 2182 500 1000 1300 1000 1000 1000 1000 DS524NA DELTA Demand 1000 1000 1000 1000 1000 1000 1000 1000 DS524NA DELTA End Inv 1186 686 686 986 986 986 986 986 - ---------------------------------------------------------------------------------------------------------------------------------
Page 1 of 9 49 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR COST ASP Sep Oct Nov Dec Jan Feb Mar Apr EA101C ASP$ 70000 70000 70000 70000 70000 70000 70000 70000 EA101C INV$ 25 35 151867 226057 176597 127137 77677 52947 52947 52947 - ------------------------------------------------------------------------------------------------------------------------------- EA101C LITE-ON BEG INV 6141 6141 9141 7141 5141 3141 2141 2141 EA101C LITE-ON BUILD PLAN 2000 5000 0 0 0 1000 2000 2000 EA101C LITE-ON DEMAND 2000 2000 2000 2000 2000 2000 2000 2000 EA101C LITE-ON END INV 6141 9141 7141 5141 3141 2141 2141 2141 - ------------------------------------------------------------------------------------------------------------------------------- EA201-10 ASP$ 15360 12800 12800 12800 12800 12800 12800 12800 EA201-10 INV$ 65 128 57893 51344 44795 38246 31697 25148 18599 12050 - ------------------------------------------------------------------------------------------------------------------------------- EA201-10 DLINK BEG INV 604 884 784 684 584 484 384 284 EA201-10 DLINK BUILD PLAN 400 0 0 0 0 0 0 0 EA201-10 DLINK DEMAND 120 100 100 100 100 100 100 100 EA201-10 DLINK END INV 884 784 684 584 484 384 284 184 - ------------------------------------------------------------------------------------------------------------------------------- EA201C ASP$ 56000 56000 56000 56000 56000 56000 56000 56000 EA201C INV% 9 14 34034 16074 29544 38524 38524 38524 38524 38524 - ------------------------------------------------------------------------------------------------------------------------------- EA201C DLINK BEG INV 2290 3790 1790 3290 4290 4290 4290 4290 EA201C DLINK BUILD PLAN 5500 2000 2000 5500 5000 4000 4000 4000 EA201C DLINK DEMAND 4000 4000 4000 4000 4000 4000 4000 4000 EA201C DLINK END INV 3790 1790 3290 4290 4290 4290 4290 4290 - ------------------------------------------------------------------------------------------------------------------------------- EB104 ASP$ 40500 13500 13500 13500 13500 13500 13500 13500 EB104 INV$ 38 45 19045 7618 -3809 11427 11427 11427 11427 11427 - ------------------------------------------------------------------------------------------------------------------------------- EB104NA DELTA BEG INV 900 500 200 -100 300 300 300 300 EB104NA DELTA BUILD PLAN 500 0 0 700 300 300 300 300 EB104NA DELTA DEMAND 900 300 300 300 300 300 300 300 EB104NA DELTA END INV 500 200 -100 300 300 300 300 300 - ------------------------------------------------------------------------------------------------------------------------------- EN104 ASP$ 45600 49400 53200 57000 57000 57000 57000 57000 EN104 INV$ 26 38 54571 85315 113497 75067 36637 36637 36637 36637 - ------------------------------------------------------------------------------------------------------------------------------- EB104NA DELTA BEG INV 830 2130 3330 4430 2930 1430 1430 1430 EB104NA DELTA BUILD PLAN 2500 2500 2500 0 0 1500 1500 1500 EB104NA DELTA DEMAND 1200 1300 1400 1500 1500 1500 1500 1500 EB104NA DELTA END INV 2130 3330 4430 2930 1430 1430 1430 1430 - ------------------------------------------------------------------------------------------------------------------------------- EN104TP ASP$ 336000 252000 252000 252000 252000 252000 252000 252000 EN104TP INV$ 20 28 78238 39158 -78082 136858 156398 175938 175938 175938 - ------------------------------------------------------------------------------------------------------------------------------- EN104TPNA DELTA BEG INV 4 4004 2004 -3996 7004 8004 9004 9004 EN104TPNA DELTA BUILD PLAN 16000 7000 3000 2000 10000 10000 9000 9000 EN104TPNA DELTA DEMAND 12000 9000 9000 9000 9000 9000 9000 9000 EN104TPNA DELTA END INV 4004 2004 -3996 7004 8004 9004 9004 9004 - ------------------------------------------------------------------------------------------------------------------------------- EN106TP ASP$ 40800 34000 34000 34000 34000 34000 34000 34000 EN106TP INV$ 25 34 19761 32096 32096 24695 24695 24695 24695 24695 - ------------------------------------------------------------------------------------------------------------------------------- EN106TPNA DELTA BEG INV 1 801 1301 1301 1001 1001 1001 1001 EN106TPNA DELTA BUILD PLAN 2000 1500 1000 700 1000 1000 1000 1000 EN106TPNA DELTA DEMAND 1200 1000 1000 1000 1000 1000 1000 1000 EN106TPNA DELTA END INV 801 1301 1301 1001 1001 1001 1001 1001 - ------------------------------------------------------------------------------------------------------------------------------- EN108 ASP$ 46800 46800 52000 52000 52000 52000 52000 52000 EN108 INV$ 39 52 16408 29985 39682 39682 39682 39682 39682 39682 - ------------------------------------------------------------------------------------------------------------------------------- EN108NA DELTA BEG INV 423 423 773 1023 1023 1023 1023 1023 EN108NA DELTA BUILD PLAN 900 1250 1250 1000 1000 1000 1000 1000 EN108NA DELTA DEMAND 900 900 1000 1000 1000 1000 1000 1000 EN108NA DELTA END INV 423 773 1023 1023 1023 1023 1023 1023 - ------------------------------------------------------------------------------------------------------------------------------- EN108TP ASP$ 220000 220000 220000 220000 220000 220000 220000 220000 EN108TP INV$ 29 40 -29430 -73575 -58860 132435 132435 132435 132435 132435 - ------------------------------------------------------------------------------------------------------------------------------- EN108TPNA DELTA BEG INV 1000 -1000 -2500 -2000 4500 4500 4500 4500 EN108TPNA DELTA BUILD PLAN 3500 4000 6000 12000 5500 5500 5500 5500 EN108TPNA DELTA DEMAND 5500 5500 5500 5500 5500 5500 5500 5500 EN108TPNA DELTA END INV -1000 -2500 -2000 4500 4500 4500 4500 4500 - -------------------------------------------------------------------------------------------------------------------------------
Page 2 of 9 50 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR Cost ASP Sep Oct Nov Dec Jan Feb Mar Apr EN116 ASP $ 51600 51600 51600 51600 51600 51600 51600 51600 EN116 INV $ 59 86 19223 84605 49007 37141 37141 37141 37141 37141 - ---------------------------------------------------------------------------------------------------- EN116NA DELTA BEG INV 924 324 1426 826 626 626 626 626 EN116NA DELTA BUILD PLAN 0 1702 0 400 600 600 600 600 EN116NA DELTA DEMAND 600 600 600 600 600 600 600 600 EN116NA DELTA END INV 324 1426 826 626 626 626 626 626 - ---------------------------------------------------------------------------------------------------- EN308 ASP $ 52500 37500 37500 0 0 0 0 0 EN308 INV $ 50 75 -21481 4436 -20484 -20484 -20484 -20484 -20484 -20484 - ---------------------------------------------------------------------------------------------------- EN308NA DLINK BEG INV 269 -431 89 -411 -411 -411 -411 -411 EN308NA DLINK BUILD PLAN 0 1020 0 0 0 0 0 0 EN308NA DLINK DEMAND 700 500 500 0 0 0 0 0 EN308NA DLINK END INV -431 89 -411 -411 -411 -411 -411 -411 - ---------------------------------------------------------------------------------------------------- EN308TC ASP $ 10350 17250 17250 34500 41400 55200 55200 55200 EN308TC INV $ 44 69 122650 111552 100455 78260 51626 33870 33870 33870 - ---------------------------------------------------------------------------------------------------- EN308TCNA DELTA BEG INV 2913 2763 2513 2263 1763 1163 763 763 EN308TCNA DELTA BUILD PLAN 0 0 0 0 0 400 800 800 EN308TCNA DELTA DEMAND 150 250 250 500 600 800 800 800 EN308TCNA DELTA END INV 2763 2513 2263 1763 1163 763 763 763 - ---------------------------------------------------------------------------------------------------- EN516 ASP $ 55200 46000 46000 46000 46000 46000 46000 46000 EN516 INV $ 88 92 59426 15666 -28094 41922 41922 41922 41922 41922 - ---------------------------------------------------------------------------------------------------- EN516NA DELTA BEG INV 1279 679 179 -321 479 479 479 479 EN516NA DELTA BUILD PLAN 0 0 0 1300 500 500 500 500 EN516NA DELTA DEMAND 600 500 500 500 500 500 500 500 EN516NA DELTA END INV 679 179 -321 479 479 479 479 479 - ---------------------------------------------------------------------------------------------------- EN524 ASP $ 106250 87500 87500 87500 87500 87500 87500 87500 EN524 INV $ 95 125 -1810 -11334 -20858 74382 74382 74382 74382 74382 - ---------------------------------------------------------------------------------------------------- EN524NA DELTA BEG INV 31 -19 -119 -219 781 781 781 781 EN524NA DELTA BUILD PLAN 800 600 600 1700 700 700 700 700 EN524NA DELTA DEMAND 850 700 700 700 700 700 700 700 EN524NA DELTA END INV -19 -119 -219 781 781 781 781 781 - ---------------------------------------------------------------------------------------------------- FA31010 ASP $ 142800 142800 142800 151200 151200 151200 159600 159600 FA31010 INV $ 120 168 212219 110363 248168 140321 152304 164287 170278 176270 - ---------------------------------------------------------------------------------------------------- FA31010 LITE-ON BEG INV 2021 1771 921 2071 1171 1271 1371 1421 FA31010 LITE-ON BUILD PLAN 600 0 2000 0 1000 1000 1000 1000 FA31010 LITE-ON DEMAND 850 850 850 900 900 900 950 950 FA31010 LITE-ON END INV 1771 921 2071 1171 1271 1371 1421 1471 - ---------------------------------------------------------------------------------------------------- FA31050 see Sec.02 ASP $ 117450 117450 117450 117450 117450 117450 117450 117450 FA31050 INV $ 642 783 94267 254847 158499 62151 62151 62151 62151 62151 - ---------------------------------------------------------------------------------------------------- FA31050 LITE-ON BEG INV 297 147 397 247 97 97 97 97 FA31050 LITE-ON BUILD PLAN 0 400 0 0 150 150 150 150 FA31050 LITE-ON DEMAND 150 150 150 150 150 150 150 150 FA31050 LITE-ON END INV 147 397 247 97 97 97 97 97 - ---------------------------------------------------------------------------------------------------- FA310 SINGLE ASP $ 800000 800000 900000 900000 900000 900000 900000 900000 FA310 SINGLE INV $ 15 20 117608 42708 417208 641908 641908 641908 641908 641908 - ---------------------------------------------------------------------------------------------------- FA310TX LITE-ON BEG INV 24451 7851 2851 27851 42851 42851 42851 42851 FA310TX LITE-ON BUILD PLAN 23400 35000 70000 60000 45000 45000 45000 45000 FA310TX LITE-ON DEMAND 40000 40000 45000 45000 45000 45000 45000 45000 FA310TX LITE-ON END INV 7851 2851 27851 42851 42851 42851 42851 42851 - ---------------------------------------------------------------------------------------------------- FA310 TXC ASP $ 66000 66000 66000 66000 66000 66000 66000 66000 FA310 TXC INV $ 15 22 26155 -18785 -41255 33645 48625 48625 48625 48625 - ---------------------------------------------------------------------------------------------------- FA310TXC LITE-ON BEG INV 1246 1746 -1254 -2754 2246 3246 3246 3246 FA310TXC LITE-ON BUILD PLAN 3500 0 1500 8000 4000 3000 3000 3000 FA310TXC LITE-ON DEMAND 3000 3000 3000 3000 3000 3000 3000 3000 FA310TXC LITE-ON END INV 1746 -1254 -2754 2246 3246 3246 3246 3246 - ----------------------------------------------------------------------------------------------------
Page 3 of 9 51 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR Cost ASP Sep Oct Nov Dec Jan Feb Mar Apr FA312 ASP $ 0 0 0 0 0 0 0 0 FA312 INV $ 0 0 0 0 0 0 0 0 0 0 ____________________________________________________________________________________________________________________________________ FA312 LITE-ON Beg Inv 0 0 0 0 0 10000 10000 10000 FA312 LITE-ON Build Plan 0 0 0 0 10000 10000 10000 10000 FA312 LITE-ON Demand 0 0 0 0 0 10000 10000 10000 FA312 LITE-ON End Inv 0 0 0 0 10000 10000 10000 10000 ____________________________________________________________________________________________________________________________________ FA410C ASP $ 432000 450000 450000 450000 450000 450000 450000 450000 FA410C INV $ 44 60 2956 -129404 113256 400036 400036 400036 400036 400036 ____________________________________________________________________________________________________________________________________ FA410C DLINK Beg Inv 7267 67 -2933 2567 9067 9067 9067 9067 FA410C DLINK Build Plan 0 4500 13000 14000 7500 7500 7500 7500 FA410C DLINK Demand 7200 7500 7500 7500 7500 7500 7500 7500 FA410C DLINK End Inv 67 -2933 2567 9067 9067 9067 9067 9067 ____________________________________________________________________________________________________________________________________ FA510 ASP $ 94500 94500 113400 113400 157500 157500 189000 189000 FA510 INV $ 39 63 243766 340116 540524 471152 374802 278452 162832 47212 ____________________________________________________________________________________________________________________________________ FA510C AMBICOM Beg Inv 5825 6325 8825 14025 12225 9725 7225 4225 FA510C AMBICOM Build Plan 2000 4000 7000 0 0 0 0 0 FA510C AMBICOM Demand 1500 1500 1800 1800 2500 2500 3000 3000 FA510C AMBICOM End Inv 6325 8825 14025 12225 9725 7225 4225 1225 ____________________________________________________________________________________________________________________________________ FB104 ASP $ 64500 64500 64500 64500 64500 64500 64500 64500 FB104 INV $ 85 86 145965 82057 43713 47973 47973 47973 47973 47973 ____________________________________________________________________________________________________________________________________ FB104NA DELTA Beg Inv 2463 1713 963 513 563 563 563 563 FB104NA DELTA Build Plan 0 0 300 800 750 750 750 750 FB104NA DELTA Demand 750 750 750 750 750 750 750 750 FB104NA DELTA End Inv 1713 963 513 563 563 563 563 563 ____________________________________________________________________________________________________________________________________ FB108 ASP $ #REF! #REF! #REF! #REF! #REF! #REF! #REF! #REF! FB108 INV $ 117 139 #REF! #REF! #REF! #REF! #REF! #REF! #REF! #REF! ____________________________________________________________________________________________________________________________________ FB108NA DELTA Beg Inv 11 11 11 11 11 11 11 11 FB108NA DELTA Build Plan 0 0 0 0 0 0 0 0 FB108NA DELTA Demand 0 0 0 0 0 0 0 0 FB108NA DELTA End Inv 11 11 11 11 11 11 11 11 ____________________________________________________________________________________________________________________________________ FE104 ASP $ 22800 22800 34200 34200 28500 28500 28500 28500 FE104 INV $ 47 57 97002 172490 144182 115874 92284 68694 45104 21514 ____________________________________________________________________________________________________________________________________ FE104NA DELTA Beg Inv 456 2056 3656 3056 2456 1956 1456 956 FE104NA DELTA Build Plan 2000 2000 0 0 0 0 0 0 FE104NA DELTA Demand 400 400 600 600 500 500 500 500 FE104NA DELTA End Inv 2056 3656 3056 2456 1956 1456 956 456 ____________________________________________________________________________________________________________________________________ FE108 ASP $ 176400 117600 117600 117600 98000 98000 98000 98000 FE108 INV $ 85 98 -120573 32589 58116 83643 83643 83643 83643 83643 ____________________________________________________________________________________________________________________________________ FE108NA DELTA Beg Inv 183 -1417 383 683 983 983 983 983 FE108NA DELTA Build Plan 200 3000 1500 1500 1000 1000 1000 1000 FE108NA DELTA Demand 1800 1200 1200 1200 1000 1000 1000 1000 FE108NA DELTA End Inv -1417 383 683 983 983 983 983 983 ____________________________________________________________________________________________________________________________________ FE116 ASP $ 46250 64750 46250 46250 46250 46250 46250 46250 FE116 INV $ 139 185 56136 7503 -13339 21398 21398 21398 21398 21398 ____________________________________________________________________________________________________________________________________ FE116NA DELTA Beg Inv 654 404 54 -96 154 154 154 154 FE116NA DELTA Build Plan 0 0 100 500 250 250 250 250 FE116NA DELTA Demand 250 350 250 250 250 250 250 250 FE116NA DELTA End Inv 404 54 -96 154 154 154 154 154 ____________________________________________________________________________________________________________________________________ FE508 ASP $ 10600 10600 10600 10600 10600 10600 10600 10600 FE508 INV $ 154 212 8806 11896 14986 7261 7261 7261 7261 7261 ____________________________________________________________________________________________________________________________________ FE508NA DELTA Beg Inv 107 57 77 97 47 47 47 47 FE508NA DELTA Build Plan 0 70 70 0 50 50 50 50 FE508NA DELTA Demand 50 50 50 50 50 50 50 50 FE508NA DELTA End Inv 57 77 97 47 47 47 47 47 ____________________________________________________________________________________________________________________________________
Page 4 of 9 52 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR COST ASP Sep Oct Nov Dec Jan Feb Mar Apr FE516 ASP $ 45750 54900 54900 54900 54900 54900 54900 54900 FE516 INV $ 219 305 29319 77455 103711 64327 46823 40259 40259 40259 - ----------------------------------------------------------------------------------------------------------------------------- FE516NA DELTA BEG INV 10 134 354 474 294 214 184 184 FE516NA DELTA BUILD PLAN 274 400 300 0 100 150 180 180 FE516NA DELTA DEMAND 150 180 180 180 180 180 180 180 FE516NA DELTA END INV 134 354 474 294 414 184 184 184 - ----------------------------------------------------------------------------------------------------------------------------- FS102 ASP $ 4300 0 0 0 0 0 0 0 FS102 INV $ 74 86 8167 15525 15525 15525 15525 15525 15525 15525 - ----------------------------------------------------------------------------------------------------------------------------- FS102NA DELTA BEG INV 11 111 211 211 211 211 211 211 FS102NA DELTA BUILD PLAN 150 100 0 0 0 0 0 0 FS102NA DELTA DEMAND 50 0 0 0 0 0 0 0 FS102NA DELTA END INV 111 211 211 211 211 211 211 211 - ----------------------------------------------------------------------------------------------------------------------------- FS104 ASP $ 93100 93100 0 0 0 0 0 0 FS104 INV $ 133 133 -40177 -86495 -86495 -86495 -86495 -86495 -86495 -86495 - ----------------------------------------------------------------------------------------------------------------------------- FS104NA DELTA BEG INV 7 -301 -648 -648 -648 -648 -648 -648 FS104NA DELTA BUILD PLAN 392 353 0 0 0 0 0 0 FS104NA DELTA DEMAND 700 700 0 0 0 0 0 0 FS104NA DELTA END INV -301 -648 -648 -648 -648 -648 -648 -648 - ----------------------------------------------------------------------------------------------------------------------------- FS105 ASP $ 0 332500 266000 266000 266000 266000 266000 266000 FS105 INV $ 133 133 0 -66740 -66740 200220 266960 266960 266960 266960 - ----------------------------------------------------------------------------------------------------------------------------- FS105NA LITE-ON BEG INV 0 0 -500 -500 1500 2000 2000 2000 FS105NA LITE-ON BUILD PLAN 0 2000 2000 4000 2500 2000 2000 2000 FS105NA LITE-ON DEMAND 0 2500 2000 2000 2000 2000 2000 2000 FS105NA LITE-ON END INV 0 -500 -500 1500 2000 2000 2000 2000 - ----------------------------------------------------------------------------------------------------------------------------- FS108 ASP $ 363000 363000 363000 363000 363000 363000 363000 363000 FS108 INV $ 134 165 587334 291786 -3762 305220 305220 305220 305220 305220 - ----------------------------------------------------------------------------------------------------------------------------- FS108NA DELTA BEG INV 2022 4372 2172 -28 2272 2272 2272 2272 FS108NA DELTA BUILD PLAN 4550 0 0 4500 2200 2200 2200 2200 FS108NA DELTA DEMAND 2200 2200 2200 2200 2200 2200 2200 2200 FS108NA DELTA END INV 4372 2172 -28 2272 2272 2272 2272 2272 - ----------------------------------------------------------------------------------------------------------------------------- FS308 ASP $ 41800 52250 52250 52250 62700 62700 62700 62700 FS308 INV $ 159 209 103375 63737 47882 39955 39955 39955 39955 39955 - ----------------------------------------------------------------------------------------------------------------------------- FS308NA DELTA BEG INV 852 652 402 302 252 252 252 252 FS308NA DELTA BUILD PLAN 0 0 150 200 300 300 300 300 FS308NA DELTA DEMAND 200 250 250 250 300 300 300 300 FS308NA DELTA END INV 652 402 302 252 252 252 252 252 - ----------------------------------------------------------------------------------------------------------------------------- FS508 ASP $ 88660 88660 80600 80600 72540 72540 72540 72540 FS508 INV $ 271 403 71607 11935 -42313 66183 66183 66183 66183 66183 - ----------------------------------------------------------------------------------------------------------------------------- FS508NA ACCTON BEG INV 484 264 44 -156 244 244 244 244 FS508NA ACCTON BUILD PLAN 0 0 0 600 180 180 180 180 FS508NA ACCTON DEMAND 220 220 200 200 180 180 180 180 FS508NA ACCTON END INV 264 44 -156 244 244 244 244 244 - ----------------------------------------------------------------------------------------------------------------------------- FS509 ASP $ 67900 33950 67900 67900 67900 67900 67900 67900 FS509 INV $ 409 679 173285 357195 316326 275457 234588 193719 152850 111981 - ----------------------------------------------------------------------------------------------------------------------------- FS509NA DELTA BEG INV 435 424 874 774 674 574 474 374 FS509NA DELTA BUILD PLAN 89 500 0 0 0 0 0 0 FS509NA DELTA DEMAND 100 50 100 100 100 100 100 100 FS509NA DELTA END INV 424 874 774 674 574 474 374 274 - ----------------------------------------------------------------------------------------------------------------------------- FS510T ASP $ 0 0 0 0 0 0 0 0 FS510T INV $ 0 0 0 0 0 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------- FS510TNA DELTA BEG INV 0 0 0 100 100 100 100 150 FS510TNA DELTA BUILD PLAN 0 0 300 100 50 100 200 150 FS510TNA DELTA DEMAND 0 0 200 100 50 100 150 150 FS510TNA DELTA END INV 0 0 100 100 100 100 150 150 - -----------------------------------------------------------------------------------------------------------------------------
Page 5 of 9 53 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR COST ASP Sep Oct Nov Dec Jan Feb Mar Apr FS516 ASP $ 247950 192850 247950 247950 247950 247950 247950 247950 FS516 INV $ 533 551 -11727 -65030 228137 228137 228137 228137 228137 228137 - ---------------------------------------------------------------------------------------------------------- FS516NA DELTA BEG INV 10 -22 -122 428 428 428 428 428 FS516NA DELTA BUILD PLAN 418 250 1000 450 450 450 450 450 FS516NA DELTA DEMAND 450 450 450 450 450 450 450 450 FS516NA DELTA END INV -22 -122 428 428 428 428 428 428 - ---------------------------------------------------------------------------------------------------------- FS518 ASP $ 0 0 0 0 0 0 0 0 FS518 INV $ 676 0 135168 168960 168960 101376 67584 67584 67584 67584 - ---------------------------------------------------------------------------------------------------------- FS518NA DELTA BEG INV 59 200 250 250 150 100 100 100 FS518NA DELTA BUILD PLAN 241 150 100 0 50 100 100 100 FS518NA DELTA DEMAND 100 100 100 100 100 100 100 100 FS518NA DELTA END INV 200 250 250 150 100 100 100 100 - ---------------------------------------------------------------------------------------------------------- FS518T ASP $ 0 0 0 0 0 0 0 0 FS518T INV $ 0 0 0 0 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------- FS518TNA DELTA BEG INV 0 0 0 100 100 100 100 100 FS518TNA DELTA BUILD PLAN 0 0 250 100 50 100 100 100 FS518TNA DELTA DEMAND 0 0 150 100 50 100 100 100 FS518TNA DELTA END INV 0 0 100 100 100 100 100 100 - ---------------------------------------------------------------------------------------------------------- FS524 ASP $ 319000 223300 255200 255200 255200 287100 287100 287100 FS524 INV $ 393 638 78578 174836 96258 174836 174836 174836 174836 174836 - ---------------------------------------------------------------------------------------------------------- FS524NA DELTA BEG INV 700 200 445 245 445 445 445 445 FS524NA DELTA BUILD PLAN 0 595 200 600 400 450 450 450 FS524NA DELTA DEMAND 500 350 400 400 400 450 450 450 FS524NA DELTA END INV 200 445 245 445 445 445 445 445 - ---------------------------------------------------------------------------------------------------------- FS562 ASP $ 37700 37700 37700 37700 37700 37700 37700 37700 FS562 INV $ 486 754 28698 78797 54477 30157 5837 -18483 -42803 -67123 - ---------------------------------------------------------------------------------------------------------- FS562NA DELTA BEG INV 109 59 162 112 62 12 -38 -88 FS562NA DELTA BUILD PLAN 0 153 0 0 0 0 0 0 FS562NA DELTA DEMAND 50 50 50 50 50 50 50 50 FS562NA DELTA END INV 59 162 112 62 12 -38 -88 -138 - ---------------------------------------------------------------------------------------------------------- FS566 ASP $ 13572 13572 13572 13572 13572 13572 13572 13572 FS566 INV $ 741 1,131 287322 278436 269549 260663 251777 242891 234004 225118 - ---------------------------------------------------------------------------------------------------------- FS566NA DELTA BEG INV 400 388 376 364 352 340 328 316 FS566NA DELTA BUILD PLAN 0 0 0 0 0 0 0 0 FS566NA DELTA DEMAND 12 12 12 12 12 12 12 12 FS566NA DELTA END INV 388 376 364 352 340 328 316 304 - ---------------------------------------------------------------------------------------------------------- GA310 ASP $ 0 0 0 0 0 0 0 0 GA310 INV $ 0 0 0 0 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------- GA310 DELTA BEG INV 0 0 0 0 0 0 0 0 GA310 DELTA BUILD PLAN 0 0 0 0 0 0 0 0 GA310 DELTA DEMAND 0 0 0 0 0 0 0 0 GA310 DELTA END INV 0 0 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------- GA620 ASP $ 40500 40500 40500 48600 48600 48600 48600 48600 GA620 INV $ 166 270 231403 206521 214815 184956 155098 125239 95381 65523 - ---------------------------------------------------------------------------------------------------------- GA620 ALT/CTH BEG INV 1545 1395 1245 1295 1115 935 755 575 GA620 ALT/CTH BUILD PLAN 0 0 200 0 0 0 0 0 GA620 ALT/CTH DEMAND 150 150 150 180 180 180 180 180 GA620 ALT/CTH END INV 1395 1245 1295 1115 935 755 575 395 - ---------------------------------------------------------------------------------------------------------- GS504 ASP $ 0 0 0 0 0 0 0 0 GS504 INV $ 781 0 28913 62515 62515 46886 46886 46886 46886 46886 - ---------------------------------------------------------------------------------------------------------- GS504NA DELTA BEG INV 67 37 80 80 60 60 60 60 GS504NA DELTA BUILD PLAN 0 93 50 30 50 50 50 50 GS504NA DELTA DEMAND 30 50 50 50 50 50 50 50 GS504NA DELTA END INV 37 80 80 60 60 60 60 60 - ----------------------------------------------------------------------------------------------------------
Page 6 of 9 54 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR COST ASP Sep Oct Nov Dec Jan Feb Mar Apr GS504T ASP $ 0 0 0 0 0 0 0 0 GS504T INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- GS504TNA DELTA BEG INV 0 0 0 50 50 50 50 50 GS504TNA DELTA BUILD PLAN 0 0 100 50 50 50 50 50 GS504TNA DELTA DEMAND 0 0 50 50 50 50 50 50 GS504TNA DELTA END INV 0 0 50 50 50 50 50 50 - --------------------------------------------------------------------------------------------------------- GS508T ASP $ 0 0 0 0 0 0 0 0 GS508T INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- GS508TNA DELTA BEG INV 0 0 0 30 30 30 30 30 GS508TNA DELTA BUILD PLAN 0 0 60 30 30 30 30 30 GS508TNA DELTA DEMAND 0 0 30 30 30 30 30 30 GS508TNA DELTA END INV 0 0 30 30 30 30 30 30 - --------------------------------------------------------------------------------------------------------- ND508 ASP $ 23200 46400 46400 46400 69600 69600 69600 69600 ND508 INV $ 329 464 359837 326915 392759 359837 310454 261071 211688 162305 - --------------------------------------------------------------------------------------------------------- ND508NA DELTA BEG INV 41 1093 993 1193 1093 943 793 643 ND508NA DELTA BUILD PLAN 1102 0 300 0 0 0 0 0 ND508NA DELTA DEMAND 50 100 100 100 150 150 150 150 ND508NA DELTA END INV 1093 993 1193 1093 943 793 643 493 - --------------------------------------------------------------------------------------------------------- ND520 ASP $ 45240 75400 113100 113100 150800 150800 150800 150800 ND520 INV $ 497 754 120832 619076 743389 668801 569351 469901 370451 271001 - --------------------------------------------------------------------------------------------------------- ND520NA DELTA BEG INV 303 243 1245 1495 1345 1145 945 745 ND520NA DELTA BUILD PLAN 0 1102 400 0 0 0 0 0 ND520NA DELTA DEMAND 60 100 150 150 200 200 200 200 ND520NA DELTA END INV 243 1245 1495 1345 1145 945 745 545 - --------------------------------------------------------------------------------------------------------- PA101 ASP $ 0 0 0 0 0 0 0 0 PA101 INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- PA101 DELTA BEG INV 0 0 -1500 7500 7500 7500 7500 7500 PA101 DELTA BUILD PLAN 0 500 17000 4000 4000 4000 4000 4000 PA101 DELTA DEMAND 0 2000 8000 4000 4000 4000 4000 4000 PA101 DELTA END INV 0 -1500 7500 7500 7500 7500 7500 7500 - --------------------------------------------------------------------------------------------------------- PA301 ASP $ 0 0 0 0 0 0 0 0 PA301 INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- PA301 DELTA BEG INV 0 0 -1500 7500 7500 7500 7500 7500 PA301 DELTA BUILD PLAN 0 500 17000 4000 4000 4000 4000 4000 PA301 DELTA DEMAND 0 2000 8000 4000 4000 4000 4000 4000 PA301 DELTA END INV 0 -1500 7500 7500 7500 7500 7500 7500 - --------------------------------------------------------------------------------------------------------- PE302 ASP $ 0 0 0 0 0 0 0 0 PE302 INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- PE302NA DELTA BEG INV 0 0 400 300 500 500 500 500 PE302NA DELTA BUILD PLAN 0 400 400 700 500 500 500 500 PE302NA DELTA DEMAND 0 0 500 500 500 500 500 500 PE302NA DELTA END INV 0 400 300 500 500 500 500 500 - --------------------------------------------------------------------------------------------------------- PR356 ASP $ 0 0 0 0 0 0 0 0 PR356 INV $ 0 0 0 0 0 0 0 0 0 0 - --------------------------------------------------------------------------------------------------------- PR356NA DELTA BEG INV 0 0 0 1800 1600 1400 1200 1000 PR356NA DELTA BUILD PLAN 0 0 2000 0 0 0 0 0 PR356NA DELTA DEMAND 0 0 200 200 200 200 200 200 PR356NA DELTA END INV 0 0 1800 1600 1400 1200 1000 800 - --------------------------------------------------------------------------------------------------------- PS104 ASP $ 35100 27300 27300 27300 27300 27300 27300 27300 PS104 INV $ 64 78 109593 87109 64625 48565 48565 48565 48565 48565 - --------------------------------------------------------------------------------------------------------- PS104NA SERCOMM BEG INV 2156 1706 1356 1006 756 756 756 756 PS104NA SERCOMM BUILD PLAN 0 0 0 100 350 350 350 350 PS104NA SERCOMM DEMAND 450 350 350 350 350 350 350 350 PS104NA SERCOMM END INV 1706 1356 1006 756 756 756 756 756 - ---------------------------------------------------------------------------------------------------------
Page 7 of 9 55 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR Cost ASP Sep Oct Nov Dec Jan Feb Mar Apr PS105 ASP $ 0 0 0 0 0 0 0 0 PS105 INV $ 68 82 0 0 0 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------ PS105NA SERCOMM BEG INV 0 0 0 0 0 0 0 0 PS105NA SERCOMM BUILD PLAN 0 0 0 0 0 0 0 0 PS105NA SERCOMM DEMAND 0 0 0 0 0 0 0 0 PS105NA SERCOMM END INV 0 0 0 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------ PS110 ASP $ 199500 119700 119700 119700 119700 119700 119700 119700 PS110 INV $ 85 133 -64858 2790 -39490 78894 78894 78894 78894 78894 - ------------------------------------------------------------------------------------------------------------------ PS110NA SERCOMM BEG INV 733 -767 33 -467 933 933 933 933 PS110NA SERCOMM BUILD PLAN 0 1700 400 2300 900 900 900 900 PS110NA SERCOMM DEMAND 1500 900 900 900 900 900 900 900 PS110NA SERCOMM END INV -767 33 -467 933 933 933 933 933 - ------------------------------------------------------------------------------------------------------------------ RH340 ASP $ 0 0 0 0 0 0 0 0 RH340 INV $ 145 0 36310 36310 72620 101668 101668 101668 101668 101668 - ------------------------------------------------------------------------------------------------------------------ RH340NA ZYXEL BEG INV $ 0 250 250 500 700 700 700 700 RH340NA ZYXEL BUILD PLAN 250 500 750 1000 800 800 800 800 RH340NA ZYXEL DEMAND 0 500 500 800 800 800 800 800 RH340NA ZYXEL END INV 250 250 500 700 700 700 700 700 - ------------------------------------------------------------------------------------------------------------------ RH348 ASP $ 91000 91000 91000 91000 91000 91000 91000 91000 RH348 INV $ 177 260 94438 32656 50308 59134 59134 59134 59134 59134 - ------------------------------------------------------------------------------------------------------------------ RH348NA ZYXEL BEG INV 885 535 185 285 335 335 335 335 RH348NA ZYXEL BUILD PLAN 0 0 450 400 350 350 350 350 RH348NA ZYXEL DEMAND 350 350 350 350 350 350 350 350 RH348NA ZYXEL END INV 535 185 285 335 335 335 335 335 - ------------------------------------------------------------------------------------------------------------------ RM356 ASP $ 80850 80850 80850 80850 80850 80850 80850 80850 RM356 INV $ 148 231 96628 133735 156000 104049 52099 52099 52099 52099 - ------------------------------------------------------------------------------------------------------------------ RM356NA ZYXEL BEG INV 1001 651 901 1051 701 351 351 351 RM356NA ZYXEL BUILD PLAN 0 600 500 0 0 350 350 350 RM356NA ZYXEL DEMAND 350 350 350 350 350 350 350 350 RM356NA ZYXEL END INV 651 901 1051 701 351 351 351 351 - ------------------------------------------------------------------------------------------------------------------ RT210 ASP $ 0 0 0 0 0 0 0 0 RT210 INV $ 294 395 0 0 0 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------ RT210NA IMS BEG INV 0 0 0 0 0 0 0 0 RT210NA IMS BUILD PLAN 0 0 0 0 0 0 0 0 RT210NA IMS DEMAND 0 0 0 0 0 0 0 0 RT210NA IMS END INV 0 0 0 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------ RT311 ASP $ 0 0 0 0 0 0 0 0 RT311 INV $ 140 0 -27988 -27988 27988 27988 27988 27988 27988 27988 - ------------------------------------------------------------------------------------------------------------------ RT311NA ZYXEL BEG INV 0 -200 -200 200 200 200 200 200 RT311NA ZYXEL BUILD PLAN 0 200 600 200 200 200 200 200 RT311NA ZYXEL DEMAND 200 200 200 200 200 200 200 200 RT311NA ZYXEL END INV -200 -200 200 200 200 200 200 200 - ------------------------------------------------------------------------------------------------------------------ RT328 ASP $ 161700 161700 161700 0 0 0 0 0 RT328 INV $ 160 231 14045 30005 -81715 -81715 -18715 -18715 -18715 -18715 - ------------------------------------------------------------------------------------------------------------------ RT328NA ZYXEL BEG INV 788 88 188 -512 -512 -512 -512 -512 RT328NA ZYXEL BUILD PLAN 0 800 0 0 0 0 0 0 RT328NA ZYXEL DEMAND 700 700 700 0 0 0 0 0 RT328NA ZYXEL END INV 88 188 -512 -512 -512 -512 -512 -512 - ------------------------------------------------------------------------------------------------------------------ RT338 ASP $ 0 0 0 0 0 0 0 0 RT338 INV $ 172 0 0 103062 171770 137416 137416 137416 137416 137416 - ------------------------------------------------------------------------------------------------------------------ RT338NA ZYXEL BEG INV 0 0 600 1000 800 800 800 800 RT338NA ZYXEL BUILD PLAN 0 600 800 400 800 900 900 900 RT338NA ZYXEL DEMAND 0 0 400 600 800 900 900 900 RT338NA ZYXEL END INV 0 600 1000 800 800 800 800 800 - ------------------------------------------------------------------------------------------------------------------
Page 8 of 9 56 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4: BUILD PLAN EXAMPLE
PRODUCT MFR COST ASP Sep Oct Nov Dec Jan Feb Mar Apr SB104 ASP $ 45500 45500 45500 78000 78000 78000 78000 78000 SB104 INV $ 57 65 422735 382611 342487 273703 204919 136135 67351 67351 - ---------------------------------------------------------------------------------------------------------- SB104NA DELTA BEG INV 16075 7375 6675 5975 4775 3575 2375 1175 SB104NA DELTA BUILD PLAN -8000 0 0 0 0 0 0 1200 SB104NA DELTA DEMAND 700 700 700 1200 1200 1200 1200 1200 SB104NA DELTA END INV 7375 6675 5975 4775 3575 2375 1175 1175 - ---------------------------------------------------------------------------------------------------------- SW108 ASP $ 0 0 0 0 0 0 0 0 SW108 INV $ 149 265 9417 9417 9417 9417 9417 9417 9417 9417 - ---------------------------------------------------------------------------------------------------------- SW108NA DELTA BEG INV 58 63 63 63 63 63 63 63 SW108NA DELTA BUILD PLAN 5 0 0 0 0 0 0 0 SW108NA DELTA DEMAND 0 0 0 0 0 0 0 0 SW108NA DELTA END INV 63 63 63 63 63 63 63 63 - ---------------------------------------------------------------------------------------------------------- SW502 ASP $ 0 0 0 0 0 0 0 0 SW502 INV $ 148 549 2522 2522 2522 2522 2522 2522 2522 2522 - ---------------------------------------------------------------------------------------------------------- SW502NA ACCTON BEG INV 17 17 17 17 17 17 17 17 SW502NA ACCTON BUILD PLAN 5 0 0 0 0 0 0 0 SW502NA ACCTON DEMAND 0 0 0 0 0 0 0 0 SW502NA ACCTON END INV 17 17 17 17 17 17 17 17 - ---------------------------------------------------------------------------------------------------------- SW507 ASP $ 0 0 0 0 0 0 0 0 SW507 INV $ 234 445 0 0 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------- SW507NA ACCTON BEG INV 0 0 0 0 0 0 0 0 SW507NA ACCTON BUILD PLAN 0 0 0 0 0 0 0 0 SW507NA ACCTON DEMAND 0 0 0 0 0 0 0 0 SW507NA ACCTON END INV 0 0 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------- SW510 ASP $ 15660 20880 20880 20880 20880 20880 20880 20880 SW510 INV $ 206 261 39221 23459 6997 -9466 -25928 -42391 -58853 -75315 - ---------------------------------------------------------------------------------------------------------- SW510NA DELTA BEG INV 254 194 114 34 -46 -126 -206 -286 SW510NA DELTA BUILD PLAN 0 0 0 0 0 0 0 0 SW510NA DELTA DEMAND 60 80 80 80 80 80 80 80 SW510NA DELTA END INV 194 114 34 -46 -126 -206 -286 -368 - ---------------------------------------------------------------------------------------------------------- SW518 ASP $ 32240 32240 32240 32240 32240 32240 32240 32240 SW518 INV $ 245 403 66564 46986 27409 7831 -11747 -31324 -50902 -70479 - ---------------------------------------------------------------------------------------------------------- SW518NA DELTA BEG INV 39 272 192 112 32 -48 -128 -208 SW518NA DELTA BUILD PLAN 313 0 0 0 0 0 0 0 SW518NA DELTA DEMAND 80 80 80 80 80 80 80 80 SW518NA DELTA END INV 272 192 112 32 -48 -128 -208 -288 - ---------------------------------------------------------------------------------------------------------- XM128 ASP $ 63900 56800 56800 56800 56800 56800 56800 56800 XM128 INV $ 111 142 -26753 -15652 -26753 39853 39853 39853 39853 39853 - ---------------------------------------------------------------------------------------------------------- XM128NA ZYXEL BEG INV 209 -241 -141 -241 359 359 359 359 XM128NA ZYXEL BUILD PLAN 0 500 300 1000 400 400 400 400 XM128NA ZYXEL DEMAND 450 400 400 400 400 400 400 400 XM128NA ZYXEL END INV -241 -141 -241 359 359 359 359 359 - ----------------------------------------------------------------------------------------------------------
Page 9 of 9 EX-10.15 4 f65217a1ex10-15.txt EXHIBIT 10.15 1 Exhibit 10.15 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT (this "Agreement"), entered into with effect as of the 10th day of March, 2000 (the "Effective Date") BY AND BETWEEN: NORTEL NETWORKS NA INC., a Delaware corporation with offices located at 4401 Great America Parkway, Santa Clara, CA 95052 (hereinafter referred to as "NNNAI") which is a wholly-owned subsidiary of Nortel Networks Inc. ("NNI"), which, in turn, is a wholly-owned subsidiary of Nortel Networks Corporation (hereinafter referred to as "NNC"). AND: NETGEAR, INC., a corporation organized and existing under the laws of Delaware, with offices located at 4401 Great America Parkway, Santa Clara, CA 95052 (hereinafter referred to as "NETGEAR"). WHEREAS, prior to the Effective Date, NETGEAR was a wholly-owned subsidiary of NNNAI; and WHEREAS, NNNAI wishes to affirm NETGEAR'S ownership of certain of NNNAI's rights and obligations in and to the assets and liabilities involved in the NETGEAR Business (as defined below), all as more specifically provided for herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, NNNAI and NETGEAR, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS Capitalized terms used in this Agreement are used as defined in this Article I or elsewhere in this Agreement. As used herein: "Affiliate" means, as to a specified individual or entity, any individual or entity that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified individual or entity. For the purposes of this definition, "control" means the power to direct the management and policies of another, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" has the meaning specified in the preamble hereof. "Assumed Contracts" has the meaning specified in Section 2.01(a). "Assumed Liabilities" has the meaning specified in Section 3.01. 1 2 "Company Material Adverse Effect" means a material adverse effect on the business, assets or financial condition of NETGEAR. "Components" means materials, components, assemblies or parts not originating with NNNAI or the NETGEAR Business. "Confidential Information" means any business, marketing, technical, scientific or other information that, at the time of disclosure, is designated as confidential (or like designation), is disclosed in circumstances of confidence, or would be understood by the Parties, exercising reasonable business judgment, to be confidential. Confidential Information includes, without limitation, the terms and conditions of this Agreement and information included in or related to Licensed Intellectual Property and Transferred Intellectual Property. "Effective Date" means the close of business on the date of this Agreement. "Employee Plans" means all incentive, deferred compensation, supplemental retirement, severance, pension, profit-sharing, retirement, health, welfare, insurance, or other employee benefit plans and all material arrangements, plans, programs and practices pertaining to compensation, bonuses, securities purchases, options, commissions, incentives, allowances, vacation, sick days, education assistance, leaves of absence, relocation and the like, for the benefit of current or former employees, that are currently maintained by such employee's employer, or with respect to which such employer currently has or in the future may have any material liability or obligation to contribute or to make payments. "Excluded Assets" has the meaning specified in Section 2.02. "Excluded Intellectual Property" has the meaning specified in the IP Agreement. "Generalized Searches" has the meaning specified in Section 4.03(a). "Improvement" has the meaning specified in the IP Agreement. "Intellectual Property Rights" means all patent rights, copyrights, mask work rights, confidential information rights, trademark, trade name, distinguishing guise, trade secret or know-how rights, all rights of whatsoever nature in computer software and data, and any other intangible rights or privileges of a nature similar to any of the foregoing, in every case in any part of the world and whether or not registered. Intellectual Property Rights shall also include all rights in any applications and granted registration for any of the foregoing rights. "IP Agreement" means the Intellectual Property License Agreement between NNNAI and NETGEAR dated as of the date hereof. "Knowledge," with respect to NNNAI, as applicable, means the actual knowledge of Michael Dadoun and Stephanie Brecher-Siegel; and, with respect to NETGEAR, means, as applicable, the actual knowledge of Patrick Lo and Richard Fabiano. "Licensed Intellectual Property" has the meaning specified in the IP Agreement. "Loaned Employee Benefits" means the Loaned Employee Agreement, effective as of the date hereof, by and between Nortel Networks Inc., NNNAI, NETGEAR and Netgear International, Inc. "LTD Benefits" has the meaning specified in Section 4.02(a). 2 3 "NETGEAR" has the meaning specified in the preamble hereof. "NETGEAR Assets" has the meaning specified in Section 2.01. "NETGEAR Business" means the business related to (i) the design, research, manufacture and development of NETGEAR Products by NETGEAR on or after the date hereof, or by NNC, NNI, NNNAI or NETGEAR before the date hereof; and (ii) the marketing, distribution and licensing of the NETGEAR Products by NETGEAR on or after the date hereof, or by NNC, NNI, NNNAI or NETGEAR before the date hereof. "NETGEAR Employees" means the employees of NNNAI ("NNNAI Employees") that are listed on Exhibit E and are hired by NETGEAR as of the Effective Date, as provided in Section 4.01, or, if applicable, immediately upon termination of STD Benefits, an NNNAI leave of absence or services under the Loaned Employee Agreement(s), as provided in Section 4.02(a), (c) and (d), respectively. "NETGEAR'S Employment Liabilities" has the meaning specified in Section 4.04(b). "NETGEAR Hire Date" means the date on which a NETGEAR Employee commences employment with NETGEAR, as provided in Section 4.01 or 4.02, as applicable. "NETGEAR Products" means the current products and products under development listed on Exhibit G. "NNNAI's Employment Liabilities" has the meaning specified in Section 4.04(a). "No Solicitation Period" has the meaning set forth in Section 4.03(a). "Other Marks" shall mean the marks identified and listed as "Other Marks" in Exhibit J. "Party" means NNNAI or NETGEAR, and Parties means both of them. "Patent Cross Licenses" shall mean those corporate cross license agreements with third parties entered into by NNC and listed in Exhibit A. "Product Licenses" means the Intellectual Property Rights granted in the ordinary distribution of products manufactured by the NETGEAR Business. "Retained Liabilities" has the meaning specified in Section 3.02. "Subsidiary" of a person means an entity in which that person effectively owns or controls, directly or indirectly, more than fifty percent (50%) of the voting stock or other ownership interest therein. "STD Benefits" has the meaning specified in Section 4.02(a). "Third Party Licenses" means licenses and other written agreements relating to the Intellectual Property Rights that are used in the NETGEAR Business, including those listed on Exhibit B, but not including the Patent Cross Licenses, Transferable Software Licenses, and the Product Licenses. 3 4 "Transferable Software License" means a license agreement for software licensed to NNNAI or its Affiliates that is installed on computers forming a part of the NETGEAR Assets, and that is either (i) freely assignable by its terms by NNNAI or its Affiliates to the NETGEAR or (ii) as to which all actions necessary to make such software license assignable by NNNAI or its Affiliates to NETGEAR as of the Effective Date have been taken, and that is identified as being a Transferable Software License on Exhibit L. "Transferred Intellectual Property" shall mean: (i) the Transferred Software; (ii) the Transferred Technical Information; and (iii) the Transferred Trademarks. "Transferred Software" shall mean the software and related documentation, and the copyright therein, owned by NNNAI or its Subsidiaries and used exclusively in the NETGEAR Business as of the Effective Date and listed in Exhibit H. "Transferred Technical Information" shall mean all prototypes, works in progress, related drawings, schematics, specifications, designs and agency approval files related to NETGEAR Products and all trade secrets which are embodied in any know-how, manufacturing specifications, processing procedures or research and development information owned by NNNAI and used exclusively in the NETGEAR Business as of the Effective Date, and listed in Exhibit I. "Transferred Trademarks" shall mean the marks identified and listed as "Transferred Trademarks in Exhibit J. ARTICLE II NETGEAR ASSETS Section 2.01. Transfers to NETGEAR. Subject to the terms and conditions hereof, including, without limitation, the exclusion from transfer under this Agreement of a portion of such assets as set forth in Section 2.02, NNNAI hereby transfers, conveys and assigns to NETGEAR, and NETGEAR hereby acquires, NNNAI's entire right, title and interest in, to and under all of the assets and properties described below (collectively, the "NETGEAR Assets"): (a) Assumed Contracts. Subject to Section 2.03, all of the contracts and subcontracts listed on Exhibit C, which relate to the sale, purchase, support, distribution or licensing of NETGEAR Products or related services (including services of independent contractors), or both, entered into in the course of the NETGEAR Business (collectively, the "Assumed Contracts"); (b) Records. Customer and prospective customer lists, business records, reports, plans, records, product specifications, training manuals, correspondence, regulatory reports and documents, maintenance schedules, operating and production records, business plans, marketing or other studies and other documents and data that were prepared by employees of NETGEAR and relate to the NETGEAR Business existing on the Effective Date; (c) Furniture, Fixtures, Inventory and Equipment. The furniture, fixtures, inventory and other equipment listed on Exhibit D; and (d) Intellectual Property. The Transferred Intellectual Property and the goodwill of the NETGEAR Business associated with the Transferred Trademarks, and any Intellectual Property Rights owned by NNNAI in the Other Marks and the goodwill of the NETGEAR Business associated with the Other Marks; and 4 5 (e) Transferable Software Licenses. The Transferable Software Licenses listed in Exhibit L. Section 2.02. Excluded Assets. The following assets (the "Excluded Assets") are specifically excluded from the NETGEAR Assets and any contribution or acquisition pursuant to this Agreement, whether or not they would otherwise be included in the NETGEAR Assets: (a) Excluded Contracts. Any and all agreements between NNNAI and the NNNAI Employees (whether or not they subsequently become the NETGEAR Employees), except as otherwise provided in Section 4.03, and any agreements primarily of general application to NNNAI and it Affiliates from which the NETGEAR Business has benefited, not listed on Exhibit C; (b) Excluded Intellectual Property. Any and all (i) Licensed Intellectual Property, (which are hereby excluded from NETGEAR Assets, but which are licensed to NETGEAR under the IP Agreement and governed by the terms thereof), (ii) Excluded Intellectual Property, and (iii) rights in any computer software other than the Transferable Software Licenses and the Transferred Intellectual Property; and (c) All Other Assets. All other technology, real property, personal property, agreements and all other assets owned, leased or otherwise possessed by NNNAI and/or its Affiliates, whether or not related to the NETGEAR Business, that are not listed in Section 2.01 as NETGEAR Assets, including without limitation, all copies of NNNAI personnel, benefits, medical and payroll records concerning the NNNAI Employees (whether or not they become the NETGEAR Employees). Section 2.03. Assignment of Contracts. Nothing in this Agreement shall be construed as an attempt to assign to NETGEAR any Assumed Contract that, as a matter of law or by its terms, is not assignable without the consent of any other party or parties, including any Assumed Contracts that do not permit a change of control of the NETGEAR Business such as that resulting from the consummation of the transactions provided for in this Agreement and other agreements executed by the Parties as of the date hereof, unless such consent has been obtained by NETGEAR in writing and a copy of such consent has been delivered to NNNAI. NNNAI shall provide reasonable assistance to NETGEAR in its efforts to obtain such consents. ARTICLE III ASSUMED LIABILITIES Section 3.01. Assumption of Liabilities by NETGEAR. Subject to the terms and conditions hereof, NETGEAR hereby assumes and agrees to pay and discharge all liabilities, costs or obligations arising on or after the Effective Date that are related to or arise under or in connection with the NETGEAR Assets, the NETGEAR Products and/or the NETGEAR Business, and certain other liabilities as set forth in this Section 3.01, (collectively, the "Assumed Liabilities"), as and when the same become due and payable and performance is required thereunder, including, without limitation the following, but only insofar as the events that give rise to such liability occur on or after the Effective Date: (a) any and all liabilities and obligations of any nature whatsoever, whether fixed or contingent, that arise from or relate to the ownership, manufacture, sale or use of the NETGEAR Assets or the NETGEAR Products, including, but not limited to, product liability, tort liability, intellectual property and warranty claims with respect to NETGEAR Products sold or services rendered on or after the Effective Date, and any liability for violations of statutes or breach of contract (including without limitation claims relating to Assumed Contracts); 5 6 (b) any and all liabilities and obligations of any nature whatsoever, whether fixed or contingent, that arise from or relate to the business and operations of NETGEAR; (c) all taxes (including without limitation deferred taxes) arising from the conduct of the NETGEAR Business, including personal property tax liability attributable to the NETGEAR Assets (except as otherwise provided in Section 3.02 hereof); (d) NETGEAR'S Employment Liabilities (except as otherwise provided in Section 4.06 hereof); (e) any liability relating to the bulk sales or bulk transfer law of any jurisdiction, except any liability payable in connection with the transactions contemplated hereunder or under the IP Agreement; and (f) any statutory liens on the NETGEAR Assets. (g) All accounts payable and accrued expenses of NETGEAR as of the Effective Date including but not limited to any inter-company accounts payable to NNNAI. Section 3.02. Liabilities Not Assumed. Except as otherwise provided in Article IV or Article IX hereof, or pursuant to any other written agreement between NETGEAR and NNNAI and/or its Affiliates, NETGEAR does not and shall not assume or agree to pay or discharge (i) any liability, cost or obligation where the events that gave rise to such liability occurred prior to the Effective Date, notwithstanding that such liability, cost or obligation may arise under or in connection with the NETGEAR Assets, the NETGEAR Products and/or the NETGEAR Business, and regardless of whether or not such liability, cost or obligation is recognized as a liability on any books of account, is absolute or contingent or measurable, or (ii) any sales, transfer and/or documentary taxes, if any, payable in connection with the asset transfer contemplated hereunder or under the IP Agreement ("Retained Liabilities"). The Retained Liabilities include, without limitation, income tax liabilities and trade payables related to the NETGEAR Business, the NETGEAR Products and the NETGEAR Assets incurred prior to the Effective Date. ARTICLE IV EMPLOYEES Section 4.01. NETGEAR Employees. Except as otherwise provided in Section 4.02, NETGEAR affirms that, that no less than seven (7) calendar days prior to the Effective Date, it made an offer of full time employment, as a sole employer or joint employer with a third party acceptable to NNNAI, to all of the NNNAI United States Employees by means of an offer letter, the form of which has been approved by NNNAI, upon terms and conditions reasonably acceptable to NNNAI. NETGEAR covenants and agrees that it, either solely or jointly with such third party, shall employ all NNNAI Employees who have accepted and satisfied those conditions set forth in such offer of employment, as of 12:00 a.m. on the day following the Effective Date, upon terms and conditions reasonably acceptable to NNNAI. Section 4.02 NNNAI Employees on Leave and on Loan. Notwithstanding anything contained in Section 4.01 to the contrary, NETGEAR'S obligations with respect to the offer of employment to, and employment of, the NNNAI Employees receiving NNNAI's short-term or long-term disability benefits, on an NNNAI-approved leave of absence or providing services under the Loaned Employee Agreements as of the Effective Date, are as follows: 6 7 (a) Employees Receiving Short-Term Disability Benefits. Any of the NNNAI Employees who, as of the Effective Date, are receiving benefits under the Nortel Networks Inc. Short-Term Disability Plan ("STD Benefits"), shall be offered full time employment by NETGEAR, as a sole employer or joint employer with a third party reasonably acceptable to NNNAI, as provided in this Section 4.02(a), and shall be employed by NETGEAR, either solely or jointly with such third party, at the time such disability benefits terminate, provided that such employees are released to return to work with accommodations, if any, which can be reasonably implemented by NETGEAR, prior to the commencement of long-term disability benefits under the Nortel Networks, Inc. Long-Term Disability Plan ("LTD Benefits"), and such employees have satisfied the conditions set forth in NETGEAR's offer of employment. No later than the day immediately following the Effective Date, NETGEAR shall offer such NNNAI Employees employment by means of an offer letter that is reasonably acceptable to NNNAI. NETGEAR shall have no responsibility or liability for payment of any STD Benefits of any such NNNAI Employees prior to their employment by NETGEAR in accordance with this Section 4.02(a). If any of such NNNAI Employees become NETGEAR Employees, the other provisions of this Article IV shall apply to such NETGEAR Employee. (b) Employees Receiving Long-Term Disability Benefits. NETGEAR shall have no obligation under Section 4.01 to offer employment to or to employ any of the NNNAI Employees who, as of the Effective Date, are receiving LTD Benefits, or to employ any of the NNNAI Employees who are receiving STD Benefits as of the Effective Date and proceed to receive LTD Benefits prior to being released to return to work. (c) Employees on Other NNNAI-Approved Leaves. Any of the NNNAI Employees who, as of the Effective Date, are on leave from employment under NNNAI's Family Care, Medical, Personal or Military Leave policies, but are not receiving STD Benefits or LTD Benefits, shall be offered employment by NETGEAR, as a sole employer or joint employer with a third party reasonably acceptable to NNNAI, as provided in this Section 4.02(c), and be employed by NETGEAR, either solely or jointly with such third party, at the time such leave terminates and such employees have satisfied the conditions set forth in NETGEAR's offer of employment, provided, however, that Netgear's obligation to offer employment will not extend to such employees who have already notified NNNA of their intention to resign at the end of their leave prior to the Effective Date. No later than the day following the Effective Date, NETGEAR shall offer such NNNAI Employees employment as provided in this Section 4.02(c) by means of an offer letter that is reasonably acceptable to NNNAI. If any of such NNNAI Employees become NETGEAR Employees, the other provisions of this Article IV shall apply to such NETGEAR Employees. (d) Employees on Loan. Any of the NNNAI Employees who, immediately upon the Effective Date, are supplying services to NETGEAR pursuant to the Loaned Employee Agreements, shall be offered employment by NETGEAR (as sole employer or joint employer with a third party reasonably acceptable to NNNAI) and be employed by NETGEAR (either solely or jointly with such third party) at the time that such employees cease to supply services under the Loaned Employee Agreements, provided that (i) such services ceased for the purpose of such employees commencing employment with NETGEAR and (ii) such employees have satisfied the conditions set forth in NETGEAR's offer of employment. NETGEAR shall offer, or in the case of European based employees, transfer such NNNAI Employees employment as provided in this Section 4.02(d) by means of an offer letter or in the case of European based employees by means of a notice of "transfer of undertaking" reasonably acceptable to NNNAI, to be delivered at a time determined by NNNAI. If any of such NNNAI Employees become NETGEAR Employees, the other provisions of this Article IV shall apply to such NETGEAR Employees. If any of such NNNAI Employees are receiving STD Benefits or on a leave of absence, as described in Section 4.02(a) and (c) respectively, when such employee's employment with NETGEAR pursuant to this Section 4.02(d) is scheduled to commence, the provisions of 7 8 Section 4.02(a) or (c), as applicable, shall apply to such employee, unless otherwise prohibited by local law. Section 4.03. No Solicitation of Employment. (a) No Solicitation by NNNAI. Unless otherwise agreed by NETGEAR, during the twelve (12) month period immediately following the Effective Date (the "No Solicitation Period"), neither NNNAI nor its Affiliates (other than NETGEAR) shall solicit for employment or hire any NETGEAR Employees who continue to be employed by NETGEAR or who have voluntarily terminated their employment with NETGEAR during the No Solicitation Period; provided, however, that nothing in this sub-section (a) shall prevent NNNAI or its Affiliates (other than NETGEAR) from (i) conducting generalized employment searches, by advertisements, engaging firms to conduct searches, or by other means ("Generalized Searches"), that are not focused on NETGEAR Employees or (ii) hiring any current or former NETGEAR Employees identified through such Generalized Searches. (b) No Solicitation by NETGEAR. Unless otherwise agreed to by NNNAI, during the No Solicitation Period, NETGEAR shall not solicit for employment or hire any employees of NNNAI or its Affiliates or former employees who voluntarily terminate their employment with NNNAI or its Affiliates during the No Solicitation Period; provided, however, that nothing in this sub-section (b) shall prevent NETGEAR from (i) conducting Generalized Searches that are not focused on employees of NNNAI or its Affiliates or (ii) hiring current or former employees of NNNAI or its Affiliates identified through such Generalized Searches. Section 4.04. Employment Matters Liabilities and Indemnification. (a) NNNAI's Employment Liabilities. Except as otherwise provided in the Loaned Employee Agreements or Section 4.04(b) hereof, NNNAI shall be liable for any and all liabilities and obligations of any nature whatsoever, whether fixed or contingent, known or unknown, with respect to any NETGEAR Employee, that exist or accrue prior to such employee's NETGEAR Hire Date and relate to NNNAI's employment or termination of employment of such employee, including without limitation, such liabilities and obligations with respect to wages, bonuses, workers compensation and benefits (collectively, "NNNAI's Employment Liabilities"). (b) NETGEAR'S Employment Liabilities. NETGEAR shall be liable for any and all liabilities and obligations of any nature whatsoever, whether fixed or contingent, known or unknown, that exist or accrue on or after the Effective Date and relate to NETGEAR'S: (A) offer of employment to, or failure to offer employment to, any NNNAI Employee in accordance with the terms of this Agreement, or (B) utilization of NNNAI's employees, agents or representatives to generate, assemble or deliver material related to NETGEAR'S employment offer pursuant to Section 4.01 or 4.02 or (C) with respect to any NETGEAR Employee, on or after such employee's NETGEAR Hire Date and relate to NETGEAR'S employment or termination of employment of such employee, including without limitation, such liabilities and obligations with respect to wages, bonuses, workers compensation and benefits (collectively, "NETGEAR'S Employment Liabilities"). ARTICLE V CONSIDERATION Section 5.01. Consideration. The consideration for the NETGEAR Assets and the Licensed Intellectual Property shall be paid and satisfied in full by the assumption by NETGEAR of the Assumed Liabilities. 8 9 ARTICLE VI TRANSFER Section 6.01. Transfer of NETGEAR Assets; Risk of Loss. The transfer of the NETGEAR Assets shall take place on the Effective Date. All risk of loss or damage with respect to the NETGEAR Assets shall be borne by NNNAI until 11:59 p.m. eastern daylight time on the day before the Effective Date, and thereafter shall be borne by NETGEAR. Section 6.02. Deletion of Non-Transferable Software. NETGEAR agrees that, following the Effective Date, it will (i) not use, and shall cause each of its Affiliates to not use, software loaded on the NETGEAR Assets as of the Effective Date other than software specifically transferred or licensed under this Contribution Agreement or the IP Agreement ("Unlicensed Software"); and (ii) as soon as reasonably practical and in any event no later than sixty (60) days following the Effective Date, delete or cause to be deleted all Unlicensed Software. ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01. Limited Representations and Warranties of NNNAI. (a) Recognizing that, immediately prior to the Effective Date, the officers of NETGEAR and the NETGEAR Employees were employees of NNNAI, and that some of the officers and employees of NETGEAR operated the NETGEAR Business immediately prior to the Effective Date, and are familiar with and have been involved with the creation of the NETGEAR Assets and the NETGEAR Products for NNNAI, NETGEAR hereby acknowledges that, except as expressly set forth herein, the NETGEAR Assets are being transferred by NNNAI under this Agreement "AS IS" AND "WHERE IS" WITHOUT ANY REPRESENTATIONS, WARRANTIES OR CONDITIONS INCLUDING, WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. (b) Notwithstanding the foregoing, NNNAI hereby represents and warrants to NETGEAR that: (i) Due Authorization. The transactions provided for under this Agreement have been duly authorized and approved by NNNAI and this Agreement has been duly executed and delivered by NNNAI; (ii) Assumed Contracts in Good Standing. NNNAI has performed in all material respects the obligations required to be performed by it under each Assumed Contract as it relates to the NETGEAR Business contributed by NNNAI; (iii) Good Title. NNNAI is transferring to NETGEAR good and valid title to the furniture, fixtures, inventory and equipment listed in Exhibit D, free and clear of all title defects, objections or other encumbrances, except (A) minor imperfections of title, if any, none of which is substantial in amount or materially impairs the use of the property subject thereto, that have arisen in the ordinary course of business consistent with past practice, (B) liens for current taxes not yet due, and (C) software incorporated therein; 9 10 (iv) Completeness of Assets. The NETGEAR Assets include all leases, contracts, furniture, fixtures, inventory and equipment used by NNNAI in the operation of the NETGEAR Business prior to the Effective Date, except for the Excluded Assets. (v) Employees and Labor Matters. NNNAI has paid in full, or shall pay in full when due, all salaries and other compensation for all services performed by each NETGEAR Employee that has accrued on or prior to such employee's NETGEAR Hire Date; (vi) NNNAI's Employee Plans. All of NNNAI's Employee Plans are in compliance in all material respects with requirements prescribed by all applicable laws. NNNAI has performed all material obligations required to be performed by it under all of its Employee Plans. There is not, to NNNAI's knowledge, any material written claim or dispute in respect of any of NNNAI's Employee Plans; (vii) Litigation. There is no action, suit or proceeding, or governmental inquiry or investigation, pending, or, to NNNAI's Knowledge, any threat thereof, against NETGEAR, that questions the validity of this Agreement or the right of NETGEAR or NNNAI to enter into it, or that might have, either individually or in the aggregate, a Company Material Adverse Effect, nor is there any litigation pending, or, to NNNAI's Knowledge, any threat thereof, against NNNAI or NETGEAR by reason of the proposed activities of NETGEAR or negotiations by NETGEAR and/or NNNAI or NNNAI with possible investors in NETGEAR. NETGEAR is not subject to any outstanding judgement, order or decree; (viii) Financial Statements. Set forth as Exhibit K hereto is a complete and correct copy of the income statements, statements of assets and liabilities and statements of cash flows (audited) of the NETGEAR Business as of and for the fiscal years ended December 31, 1996, 1997 and 1998 (the "Financial Statements"). Such Financial Statements include the assets, liabilities, revenues and expenses that were directly related to the NETGEAR Business, including expenses charged to the NETGEAR Business by NNNAI. Except as set forth on Exhibit K, the Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") consistently applied, are complete and correct and present fairly the financial condition and results of operations of the NETGEAR Business; (ix) Taxes. Except as set forth on Exhibit L, NETGEAR has not been required to file any federal, state, county, local or foreign tax returns, and any returns prepared by it or on its behalf are true and correct and all taxes have been timely paid with exceptions not material to NETGEAR. NETGEAR has had no employees prior to the NETGEAR Hire Date. Neither NETGEAR nor any of its stockholders has ever filed (a) an election pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that NETGEAR be taxed as an S Corporation or (b) consent pursuant to Section 341(f) of the Code relating to collapsible 10 11 corporations. With respect to any tax periods ending prior to the date hereof, NETGEAR is, and at all times has been, a member of the NNNAI-affiliated group (the "Affiliated Group") for Federal income tax purposes, and NETGEAR has no liability for any Federal, state or other tax liability asserted by the Internal Revenue Service or any other competent taxing authority or jurisdiction resulting from membership in the Affiliated Group or the preparation of the Affiliated Group's consolidated Federal income tax returns or otherwise; (x) Environmental Matters. There is no pending or, to the Knowledge of NNNAI, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or investigation, inquiry or information request by any governmental entity, relating to environmental matters involving NETGEAR, including without limitation those arising under the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment, which violation would have a Company Material Adverse Effect; (xi) Year 2000 Compliance. NNNAI represents and warrants that the NETGEAR Products, as they exist as of the Effective Date shall function, during the warranty period for such products, without any material, date-related service-affecting nonconformance to the applicable specifications; and (xii) Disclosures. Neither this Agreement nor any Exhibit hereto, nor any report, certificate or instrument furnished to NETGEAR or its counsel in connection with the transactions contemplated by this Agreement, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. Section 7.02. Limited Representations and Warranties of NNNAI Relating to Intellectual Property. NNNAI hereby represents and warrants to NETGEAR that: (a) Intellectual Property Rights. NNNAI owns the Transferred Intellectual Property, NNC owns the Licensed Intellectual Property, NNNAI has the right and ability to transfer, assign and grant the rights conveyed under this Agreement and NNC has the right and ability to grant the licenses under the IP Agreement; (b) except for the Intellectual Property Rights relating to (i) Components, (ii) the Third Party Licenses, (iii) the Transferable Software Licenses, and (iv) the Excluded Intellectual Property, to its Knowledge the Transferred Intellectual Property and the Licensed Intellectual Property comprise all Intellectual Property Rights that are material to the NETGEAR Business as conducted as of the Effective Date; 11 12 (c) except for the Patent Cross Licenses, the Third Party Licenses, the Product Licenses, Transferable Software Licenses, and employment agreements, to its Knowledge there is no other written agreement relating to the Transferred Intellectual Property that is material to the NETGEAR Business; (d) except as disclosed on Exhibit F, it has no Knowledge of any claims that have been made during the past two (2) years that the conduct of the NETGEAR Business infringes any Intellectual Property Right of any third person, and to its Knowledge, no such claims are threatened; (e) except as disclosed on Exhibit F, it has no Knowledge that the NETGEAR Business, as conducted as of the Effective Date, infringes or misappropriates any Intellectual Property Right of any third person; (f) except as disclosed on Exhibit F, it has no Knowledge of any claims, suits or actions against NETGEAR relating to the ownership, licensing or enforceability of the Transferred Intellectual Property or the Licensed Intellectual Property, and no such claims, suits or actions are threatened; and (g) it is NNNAI's practice to obtain assignments of Intellectual Property Rights from third parties who have participated in the creation of Intellectual Property used in the NETGEAR Business, and to its Knowledge such assignments were obtained from all third parties who participated in the creation of all Transferred Intellectual Property. Section 7.03. Survival of Obligations. The representations and warranties made by each Party in this Article VII shall continue in full force and effect for the benefit of the other Parties for a period of eighteen (18) months from and including the Effective Date, after which time each Party is released from all obligations and liabilities hereunder in respect of such representations and warranties, except with respect to claims made by any Party in writing prior to the expiration of such period; provided, however, that Section 7.01(b)(viii), Taxes, shall continue in full force and effect for the benefit of NETGEAR for a period of six (6) months beyond the statute of limitation applicable to such tax. ARTICLE VIII CONDITIONS OF CLOSING Section 8.01. Conditions Precedent to NNNAI's Obligations. NNNAI's obligations under this Agreement are subject to the satisfaction, as of the Effective Date, of the following condition, unless waived by NNNAI in writing: The full assumption by NETGEAR of the Assumed Liabilities as consideration for the NETGEAR Assets and the Licensed Intellectual Property pursuant to Section 5.01. ARTICLE IX INDEMNIFICATION Section 9.01. Indemnification by NNNAI. Subject to the provisions of this Article IX and Section 11.10 hereof, NNNAI hereby agrees to pay and indemnify fully, hold harmless and defend NETGEAR and its agents, directors, officers, partners, employees, servants, consultants, representatives, successors and assigns, from and against any and all damages, losses, 12 13 deficiencies, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) that result from, relate to or arise out of any and all actions, suits, proceedings, claims, demands, judgments or assessments or legal, administrative, arbitration, governmental or other proceedings or investigations (whether based on negligent acts or omissions, statutory liability, strict liability or otherwise) arising out of, relating to or based upon allegations of: (a) any inaccuracy or breach of any representation or warranty, or any nonfulfillment of any covenant or agreement of NNNAI contained in this Agreement or the IP Agreement, as applicable; (b) any Retained Liability; (c) any of NNNAI's Employment Liabilities; or (d) any and all actions, suits, proceedings, claims, demands, judgments, assessments, reasonable costs and expenses, incurred in investigating or attempting to avoid the foregoing or in enforcing this indemnity. Section 9.02. Indemnification by NETGEAR. From and after the Effective Date, subject to the provisions of this Article IX and Section 11.10 hereof, NETGEAR agrees to pay and indemnify fully, hold harmless and defend NNNAI and its Affiliates, agents, directors, officers, partners, employees, servants, consultants, representatives, successors and assigns, from and against any and all damages, losses, deficiencies, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) that result from, relate to or arise out of any and all actions, suits, proceedings, claims, demands, judgments or assessments or legal, administrative, arbitration, governmental or other proceedings or investigations (whether based on negligent acts or omissions, statutory liability, strict liability or otherwise) arising out of, relating to or based upon allegations of: (a) any non-fulfillment of any covenant or agreement of NETGEAR contained in this Agreement or the IP Agreement, as applicable; (b) any Assumed Liability; (c) any of NETGEAR'S Employment Liabilities; or (d) any and all actions, suits, proceedings, claims, demands, judgments, assessments, reasonable costs and expenses, incurred in investigating or attempting to avoid the foregoing or in enforcing this indemnity. Section 9.03. Method of Asserting Claims. The indemnified party ("Indemnitee") shall provide the indemnifying party ("Indemnitor") prompt notice in writing upon the Indemnitee becoming aware of any action, suit, proceeding, claim, demand, judgment or assessment for which the Indemnitor would be liable pursuant to Section 9.01 or Section 9.02 (a "Claim"), provided, however, that any failure to give such prompt notice shall not relieve the Indemnitor of its obligations hereunder. Indemnitor shall provide, at its sole cost and expense, for the defense of the Claim with legal counsel reasonably acceptable to Indemnitee. In addition, Indemnitee shall cooperate with Indemnitor, at Indemnitor's expense, in the defense or settlement of the Claim. Neither Indemnitee nor Indemnitor shall compromise or settle a Claim without the other party's prior written consent, which consent shall not be unreasonably withheld. Indemnitee may participate in the defense of a claim at its own expense. Notwithstanding the foregoing, if Indemnitee, in its reasonable discretion, determines that Indemnitor is not vigorously defending 13 14 the Claim, Indemnitee may hire additional legal counsel, at the sole cost and expense of Indemnitor, to assume the defense of the Claim. Section 9.04. Coordination of Indemnification Rights. (a) Indemnification Independent Right. Each right of a person to be indemnified, defended and/or held harmless pursuant to this Article IX is independent of such person's rights pursuant to any other Section of this Agreement and shall not be affected or limited in any way by any event or circumstance unless this Article IX expressly provides that such event or circumstance shall affect or limit such right of such person, regardless of whether or not such event or circumstance affects or limits any other right of such person or any right of any other person under this Article IX. (b) Right of Subrogation. In the event that an Indemnitee has a right of recovery against any third party with respect to any damages in connection with which a payment is made to such Indemnitee by an Indemnitor, then (i) such Indemnitor shall, to the extent of such payment, be subrogated to all of the rights of recovery of Indemnitee against such third party with respect to such damages and (ii) Indemnitee shall execute all papers required and take all action necessary to secure such rights, including, but not limited to, the execution of such documents as are necessary to enable such Indemnitor to bring suit to enforce such rights. Section 9.05. Limitation of Liability for Consequential Damages. Except as expressly provided in this Section 9.05, neither Party (including their Subsidiaries, Affiliates, shareholders, officers, contractors, directors, employees and agents) shall be liable for any special, indirect, incidental or consequential damages of any kind, including without limitation, damages arising from lost business, lost savings, lost data or lost profits, regardless of the cause and whether arising in contract (including fundamental breach), tort (including negligence), or otherwise, even if such party has been advised of the possibility of such damages. The foregoing exclusion of liability shall not apply where such damages arise out of or in connection with (i) an allegation that any NETGEAR Product or Improvement thereto infringes or violates any Intellectual Property Right of a third party, to the extent that such damages are payable to a third party, or (ii) disclosure of any Confidential Information, provided that: (a) the Indemnitee permits the Indemnitor to have complete carriage and control of the defense of the claim; (b) the Indemnitee cooperates fully with the Indemnitor in all aspects of the defense against the claim; (c) such damages are either actual damages finally awarded by a court of competent jurisdiction, or constitute a settlement approved in writing by the Indemnitor; (d) the Indemnitor shall not be liable for any portion of such damages arising from willful infringement by any party or constituting treble damages (except that an Indemnitor shall be liable for damages resulting from its own willful infringement); (e) the Indemnitee promptly pays all damages other than those for which the Indemnitor is responsible in accordance with the provisions of this Article IX; and (f) where the claim relates to a NETGEAR Product or Improvement as described at (i) above, provided additionally that: 14 15 (1) the Indemnitee modifies the NETGEAR Product or Improvement thereto within a reasonable time so as to avoid the allegation of infringement or violation of Intellectual Property Rights, if requested to do so by the Indemnitor; and (2) the NETGEAR Product or Improvement thereto has not been modified by any party after the Effective Date (A) so as to be a combination of a NETGEAR Product or Improvement thereto, with other hardware or software not constituting a NETGEAR Product or Improvement thereto, where such infringement or violation would not have arisen from the use of such NETGEAR Product or Improvement thereto or portion thereof standing alone; (B) in such a manner that the claim of infringement or violation of Intellectual Property Rights would not have occurred but for such modification, or (C) to be used in a manner or for a purpose not contemplated as of the Effective Date. Section 9.06. Overall Limitation of Liability of NNNAI under this Contribution Agreement. Notwithstanding anything herein to the contrary, the combined, cumulative liability of NNNAI under this Agreement shall not exceed an amount equal to Two Million US Dollars (US$2,000,000)(the "Overall Indemnity Cap"). ARTICLE X CONTINUING COVENANTS Section 10.01. Further Assurance and Cooperation. The parties shall from time to time and at all times hereafter make, do and execute or cause and procure to be made, done and executed all such further acts, deeds, conveyances, consents and assurances as may be required to carry out the transfer of the NETGEAR Assets, the Transferred Intellectual Property, and assumption of the Assumed Liabilities contemplated under this Agreement, including without limitation, appropriate assignments (notarized if required) for filing with any relevant government body or agency. If the parties agree that an asset that was intended by both of them to be an NETGEAR Asset as defined herein was inadvertently not listed on Exhibit C or Exhibit D hereto, the parties shall take such actions as may be required to properly convey such asset to NETGEAR hereunder, including without limitation execution of an amendment to this Agreement pursuant to Section 11.03 hereof to amend the schedules hereto. Section 10.02. Future Advertising and Sales Activities. NETGEAR shall identify itself as the owner of the NETGEAR Assets, and, as of the Effective Date, shall use the trade names and trademarks of NNNAI only as permitted pursuant to Article 8 of the IP Agreement. Section 10.03. Provision of Information to NNNAI. For so long as NNNAI owns at least fifty percent (50%) of the outstanding capital stock of NETGEAR (assuming conversion of any preferred shares), NETGEAR shall provide to the appropriate officers of NNNAI any information, financial or otherwise, reasonably requested by NNNAI (provided, however, that NETGEAR may require that NNNAI execute non-compete and non-disclosure agreements relating to any such information). Section 10.04. Confidential Information. For the term of this Agreement and for a period of ten (10) years thereafter, any Confidential Information of one Party (hereinafter "Disclosing Party") received by the other Party (hereinafter "Receiving Party") under this Agreement shall be used, disclosed, or copied, only for the purposes of, and only in accordance with, this Agreement. The Receiving Party shall use the same degree of care as it uses to protect its own Confidential Information of a similar nature, but no less than reasonable care, to prevent the unauthorized use, disclosure or publication of the Confidential Information. Without limiting the generality of the foregoing, the Receiving Party shall only disclose Confidential Information to its employees, contractors, NNNAI users and third party sub licensees who need to obtain 15 16 access thereto consistent with such Party's rights under this Agreement. The Receiving Party shall not make or have made any copies of Confidential Information except those copies that are necessary for the purposes of this Agreement; and the Receiving Party shall affix to any copies it makes of the Confidential Information, all proprietary notices or legends affixed to the Confidential Information as they appear on the copies of the Confidential Information originally received from Disclosing Party. Neither Party shall be bound by any obligation restricting the disclosure and use of Confidential Information set forth in this Agreement, that: (a) is necessary to enable NETGEAR to provide specifications to suppliers for the procurement of materials, parts, components and assemblies for use in the manufacture, use or sale of NETGEAR Products; or (b) is necessary to enable NNNAI users purchasing, sublicensing or otherwise acquiring NETGEAR Products to operate and maintain such NETGEAR Products; or (c) was lawfully in the public domain prior to its disclosure, or becomes publicly available other than through a breach of this Agreement; or (d) was disclosed to the Receiving Party by a third party provided such third party, or any other party from whom such third party receives such information, is not in breach of any confidentiality obligation in respect of such information; or (e) is disclosed when such disclosure is required pursuant to legal, judicial, or administrative proceedings, or otherwise required by law, subject to the Receiving Party using reasonable efforts to provide prior notice to the Disclosing Party to allow it to seek protective or other court orders; or (f) is disclosed, pursuant to a standard confidentiality agreement, to a potential purchaser, in connection with a possible acquisition of NETGEAR or substantially all of its assets, through an asset transaction, merger, stock transaction or otherwise; or (g) is disclosed in connection with a registration of securities of NETGEAR with the Securities and Exchange Commission. Within twenty (20) business days of the Disclosing Party's request, the Receiving Party shall return to the Disclosing Party all Confidential Information and all copies thereof (or such copies or portion of the Confidential Information as the Disclosing Party specifies), or, if so directed by the Disclosing Party, shall immediately destroy such Confidential Information and all copies thereof (or such copies or portion of the Confidential Information as the Disclosing Party specifies) and shall certify such destruction to the Disclosing Party. Each Party shall notify the other Party immediately upon learning of any unauthorized disclosure of the other Party's Confidential Information. ARTICLE XI MISCELLANEOUS Section 11.01. Notices. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed delivered (i) two business days after being sent by registered or certified mail, return receipt requested, postage prepaid or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, in each case to the intended recipient as set forth below: 16 17 If to NETGEAR, at 4401 Great America Parkway, MS: SC1-06, Santa Clara, CA 95052, Attention: President, or at such other address or addresses as may have been furnished in writing by NETGEAR to the other Parties hereto, with a copy to Stephanie Brecher-Seigal; or If to NNNAI, at 4401 Great America Parkway, MS: SC1-03, Santa Clara, CA 95052, Attention, Attention: Vice-President, Mergers & Acquisitions, or at such other address or addresses as may have been furnished to the other parties hereto in writing by NNNAI, with a copy to the Law Department at the same address; or Any party may give any notice, request, consent or other communication under this Agreement using any other means (including, without limitation, personal delivery, messenger service, telecopy, first class mail or electronic mail), but no such notice, request, consent or other communication shall be deemed to have been duly given unless and until it is actually received by the party for whom it is intended. Any party may change the address to which notices, requests, consents or other communications hereunder are to be delivered by giving the other parties notice in the manner set forth in this Section. Section 11.02. Entire Agreement. This Agreement and the IP Agreement embody the complete Agreement and understanding of NETGEAR and NNNAI with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. Section 11.03. Modification. No change or modification of this Agreement shall be of any force unless such change or modification is in writing and has been signed by the duly authorized representatives of the parties hereto. Section 11.04. Waivers. No waiver of any breach of any of the terms of this Agreement shall be effective unless such waiver is in writing and signed by the party against which such waiver is claimed. No waiver of any breach shall be deemed to be a waiver of any other or subsequent breach. Section 11.05. Severability. In the event that any provision of this Agreement is found to be invalid, voidable or unenforceable, the Parties agree that such invalidity, voidability or unenforceability shall affect neither the validity of this Agreement nor the remaining portions thereof, and that the provision in question shall be deemed to be replaced with a valid and enforceable provision most closely reflecting the intent and purpose of the original provision. Section 11.06. Governing Law. This Agreement shall be governed by and be construed in accordance with the laws of the State of California, without regard to principles of conflict of laws. Section 11.07. Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 11.08. Limitation on Rights of Others. No person other than a party hereto shall have any legal or equitable right, remedy or claim under or in respect of this Agreement. Section 11.09. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 17 18 Section 11.10. Legal Fees. If either party is required to take any action to enforce its rights under this Agreement, the prevailing party shall be entitled to its reasonable expenses, including attorneys' fees, incurred in connection with such action. 18 19 IN WITNESS HEREOF, the parties hereto have duly executed this Agreement as of the Effective Date. NORTEL NETWORKS NA INC. NETGEAR INC. By: /s/ Rick Tallman By: /s/ Patrick Lo ------------------- --------------- Name: Rick Tallman Name: Patrick Lo ------------------- --------------- Title: Assistant Secretary Title: CEO ------------------- --------------- 19 20 EXHIBIT A NORTEL NETWORKS' PATENT CROSS-LICENSES The following is a list of material Nortel Networks' patent cross-licenses. Captured material is all patents and applications (in all countries) owned or controlled by the Parties and their subsidiaries (at any time) during the capture period having a filing date before the end of the capture period.
DATE OF COMPANY AGREEMENT CAPTURE PERIOD OR CAPTURED PATENTS DURATION OF LICENSE 1. Alcatel 1-Jan-96 5 yrs from Date of Agreement Term of patent 2. AT&T 1-Jul-83 5 yrs from Date of Agreement Term of patent 3. Ericsson 1-Dec-93 5 yrs from Date of Agreement Term of patent 4. HP 1-Jan-94 5 yrs from Date of Agreement Term of patent 5. Hitachi 1-Apr-95 5 yrs from Date of Agreement Term of patent 6. IBM 1-Jul-90 6 yrs from Date of Agreement Term of patent 7. Lucent 1-Oct-98 all patents issued on filings prior to 1-Jan-98 31-Dec-07 8. MatraCom 2-Jul-92 Perpetual Term of patent 9. Matsushita 27-Jun-94 5 yrs from Date of Agreement Term of patent 10. Mitsubishi 26-Dec-94 5 yrs from Date of Agreement Term of patent 11. Oki 16-Mar-94 5 yrs from Date of Agreement Term of patent 12. Philips 1-Apr-95 10 yrs from Date of Agreement Term of patent 13. Sanyo 13-Feb-93 5 yrs from Date of Agreement Term of patent 14. Sharp 16-Mar-94 5 yrs from Date of Agreement Term of patent 15. Siemens 21-Dec-93 5 yrs from Date of Agreement Term of patent 16. Sony 29-Aug-94 5 yrs from Date of Agreement Term of patent 17. Texas Instruments 1-Jan-82 5 yrs from Date of Agreement Term of patent 18. Toshiba 23-Mar-94 5 yrs from Date of Agreement Term of patent 19. Tellabs Operations 20-Dec-99 all patents issued on filings prior to 1-Jan-00 31-Dec-03
In addition, the following is a material Nortel Networks' patent cross-license specifically relating to terminals. Captured material is patents and applications (in all countries) relating to apparatus, systems and methods for voice and data terminal equipment owned or controlled by the Parties and their subsidiaries (at any time) during the capture period having a filing date before the end of the capture period.
DATE OF COMPANY AGREEMENT CAPTURE PERIOD OR CAPTURED PATENTS DURATION OF LICENSE 1. Cidco 1-Jan-97 5 yrs from Date of Agreement Term of patent
20 21 EXHIBIT B THIRD-PARTY LICENSES Third Party Licenses are used in the NETGEAR business associated with the following products:
XM128 - ISDN DIGITAL MODEM PRODUCT - ---------------------------------------------------------------------------------------------------------------------------------- Vendor Product Notes Adobe Acrobat Reader 3.0 Distribution Version Adtran Algorithm Algorithm to determine SPID and Switch types in North America. Includes license for Adtran Expert ISDN logo. Microsoft Internet Explorer 3.0 Part of IEDK (Internet Explorer Developers Kit) ZyXEL Windows 95/98/NT drivers - ----------------------------------------------------------------------------------------------------------------------------------
PA301 - 10M PCI PHONE LINE ADAPTER PRODUCT - ---------------------------------------------------------------------------------------------------------------------------------- Vendor Product Notes Broadcom Windows 95/98/NT drivers Includes license for Broadcom logo. Ragula Systems Internet Sharing software Based on Fatpipe software. Includes license for Fatpipe logo. Ragula Systems Network Services auto Modifications to Microsoft MSDN installer Microsoft MSDN CD Redistributable freeware from MSDN CD - ----------------------------------------------------------------------------------------------------------------------------------
PA101 - 10M USB PHONE LINE ADAPTER PRODUCT - ---------------------------------------------------------------------------------------------------------------------------------- Vendor Product Notes Broadcom Windows 95/98/NT Includes license for Broadcom logo. Embedded drivers (ported from Windows PCI drivers) Ragula Systems Internet Sharing software Based on Fatpipe software. Includes license for Fatpipe logo. Ragula Systems Network Services auto Modifications to Microsoft MSDN installer Microsoft MSDN CD Redistributable freeware from MSDN CD - ----------------------------------------------------------------------------------------------------------------------------------
PE102 - PHONE LINE ETHERNET BRIDGE PRODUCT - ---------------------------------------------------------------------------------------------------------------------------------- Vendor Product Notes Broadcom Windows 95/98/NT Includes license for Broadcom logo. drivers (same as PA101) KSLI/AOX KSLI Embedded drivers Ethernet drivers for KSLI microchip. - ----------------------------------------------------------------------------------------------------------------------------------
21 22 PR356-56K ANALOG PHONE LINE ROUTER PRODUCT
Vendor Product Notes - -------------------------------------------------------------------------------- Broadcom Windows 95/98/NT Includes license for Broadcom logo. drivers (same as PA101) KSLI/AOX KSLI Embedded drivers Ethernet drivers for KSLI microchip. Ramp Networks Ramp Router Firmware Modification of their existing 200I firmware. - --------------------------------------------------------------------------------
RT210/211-ISDN ROUTER PRODUCT
Vendor Product Notes - -------------------------------------------------------------------------------- Xylogics Hardware and Routing Product discontinued, but software software on NETGEAR website for support reasons - --------------------------------------------------------------------------------
RT328 ISDN ROUTER, RH348 ROUTER HUB, RT 338 ISDN 10/100 ROUTER, RM 356 56K MODEM/ROUTER W/4PT HUB, AND RT311 ETHERNET ROUTER PRODUCTS
Vendor Product Notes - -------------------------------------------------------------------------------- ZyXEL Hardware and Routing software ZyXEL GUI for the RT338 and RT311 products - --------------------------------------------------------------------------------
ND508/520 NETWORK DISK DRIVE PRODUCTS
Vendor Product Notes - -------------------------------------------------------------------------------- Realm Hardware and Routing Information software Technologies Apache ApacheWeb Microsoft 1. 40comupd.exe- upgrades, comct132.dll 2. W95ws2setup.exe- upgrade to winsock DLLs - --------------------------------------------------------------------------------
PS110/104/105 PRINT SERVER PRODUCTS
Vendor Product Notes - -------------------------------------------------------------------------------- Sercomm Hardware and print serving software InstallShield Installation Program Public software, one time fee paid by Sercomm - --------------------------------------------------------------------------------
FA310-10/100MBPS PCI ETHERNET ADAPTER PRODUCT
Vendor Product Notes - -------------------------------------------------------------------------------- Lite-On Windows 95/98/NT/Novell Windows 2000 is just now being Communications 3.x, 4.x, 5.x, submitted to Microsoft for inclusion SCO Unix, NDIS 2 on CD and packet drivers - --------------------------------------------------------------------------------
FA311/312-10/100MBPS PCI ETHERNET ADAPTER PRODUCTS
Vendor Product Notes - -------------------------------------------------------------------------------- National Windows Not on Microsoft CD Semiconductor 95/98/2000/NT/Novell - --------------------------------------------------------------------------------
22 23 - -------------------------------------------------------------------------------- 4.x, 5.x and SCO Unix and Linux drivers Lite-on Drivers for using the Communications National Chipset - -------------------------------------------------------------------------------- FA410 -- 10/100MBPS PCMCIA ETHERNET ADAPTER PRODUCTS - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- D-Link Windows Uses Abocom IC, manufactured by Cameo 95/98/2000/NT/Novell Client and NDIS 2 - -------------------------------------------------------------------------------- FA510 -- 10/100MBPS CARDBUS ETHERNET ADAPTER PRODUCTS - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- Ambicom Windows Manufactured by Ambicom 95/98/2000/NT/Novell Client and NDIS 2 - -------------------------------------------------------------------------------- GA620 -- GIGABIT ETHERNET FIBER PCI ADAPTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- Alteon Windows Websystems 98/2000/NT/Novell server 4.x, 5.x drivers - -------------------------------------------------------------------------------- EA101 -- USB 10MB ETHERNET ADAPTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- KLSI/AOX Windows 98/2000drivers Ethernet drivers for KSLI microcchip. - -------------------------------------------------------------------------------- EA201 -- ISA 10MB ETHERNET ADAPTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- D-Link Windows 95/98/2000/NT/Novell client, 3.x, 4.x, 5.x and NDIS2 and SCO Unix drivers - -------------------------------------------------------------------------------- 23 24 PRODUCTS UNDER DEVELOPMENT - ------------------------------------------------------------------------------- GA620T - GIGABIT ETHERNET 1000BASE-T TWISTED PAIR PCI ADAPTER PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- Alteon Windows 98/NT drivers Product under development Websystems
- ------------------------------------------------------------------------------- WAXXX - PCI TO WIRELESS 11MB ADAPTER PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- Sharewave Windows 95/98/NT drivers Product under development.
- ------------------------------------------------------------------------------- WBXXX - WIRELESS 11MB TO ETHERNET BRIDGE PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- Sharewave Windows 95/98/NT drivers Product under development.
- ------------------------------------------------------------------------------- WAXXX - PCMCIA TO WIRELESS 11MB ADAPTER PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- Sharewave Windows 95/98/NT drivers Product under development.
- ------------------------------------------------------------------------------- RD381 - ADSL (G.LITE) INTEGRATED DSL ROUTER AND FULL RATE ADSL ROUTER. - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- ZyXEL Hardware and Routing software Product under development. ZyXEL GUI for the products.
- -------------------------------------------------------------------------------- RT3XX - FIREWALL ROUTER PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- ZyXEL Hardware and Routing software Product under development. ZyXEL GUI for the products.
- -------------------------------------------------------------------------------- NDXXX - AUDIO/VIDEO JUKEBOX PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- TBD Video and audio serving software Product under development.
- ------------------------------------------------------------------------------- PS1XX 3 PORT AND 1 PORT PRINT SERVER PRODUCT - -------------------------------------------------------------------------------
Vendor Product Notes - ------ ------- ----- Sercomm Hardware and Routing software Product under development
- ------------------------------------------------------------------------------- 24 25 ADDITIONAL 3RD PARTY SOFTWARE IS CURRENTLY USED BY NETGEAR EMPLOYEES FOR THE FOLLOWING TASKS: SOFTWARE DEVELOPMENT - -------------------- RedHat 5.2 and 6.0 (Linux) which includes the following: g++ C/C+ compiler Perl. Telnet, FTP. Apache Web Server. Microsoft Visual C/C++ Professional. HARDWARE DEVELOPMENT - -------------------- ORCAD FIRMWARE DEVELOPMENT - -------------------- Microsoft Visual C++ Premia Codewright Professional Edition Clear Case THE FOLLOWING SOFTWARE IS USED BY NETGEAR IN THE PC DESKTOP ENVIRONMENT: VENDOR APPLICATION ADOBE ACROBAT READER FRAME FRAMEMAKER TECHNOLOGY MCAFEE VIRUSSCAN FOR WIN95 MICROSOFT EXCEL MICROSOFT EXCEL 97 MICROSOFT FRONTPAGE MICROSOFT INTERNET EXPLORER MICROSOFT INTERNET EXPLORER MICROSOFT MS-DOS MICROSOFT OUTLOOK 97 MICROSOFT POWERPOINT 97 MICROSOFT PROJECT 98 MICROSOFT SCHEDULE + MICROSOFT TEAM MEMBER MICROSOFT VISUAL BASIC MICROSOFT VISUAL C++ MICROSOFT WINDOWS 95 MICROSOFT WINDOWS NT MICROSOFT WORD 97 NICO MAK WINZIP PETER NORTON NORTON COMMANDER COMPUTING VISO CORP. VISIO PROF. V5.0 USED IN OPERATIONS SUPPORT: Netcom Smartbit Applications 25 26 SOFTWARE APPLICATIONS - ------------------------------------------------------ Email Outlook Eudora Office Suite Microsoft Office Word Excel PowerPoint OS Windows 95 Anti-virus Norton Antivirus Archive/Compression WINZIP Browser Netscape Microsoft IE Reporting Impromptu Web Publishing TeamSite Frontpage Graphics editing PhotoShop Project Management Microsoft Project Tech Publications Framemaker Adobe Illustrator Enterprise SunSystems (Systems Union) Oracle Unix/Solaris Reporting Impromptu Vision 27 CIRCUIT CITY CMS LIMITED COMPUSHACK GMBH COMPUTER 2000 BELGIUM COMPUTER 2000 FINLAND OY COMPUTER 2000 UK CSK ELECTRONICS CORPORATION DAIL INFORMATION COMM. DATATEL S.A. DATRONTECH RETAIL PLC DELTA ELECTRONICS INC. DEUTCHE TELECOM DIGITAL NETWORK SVCS DEUTCH D-LINK CORPORATION DUXBURY NETWORKING DIST. EGGHEAD, INC ELECTRONICA SANG HNOS., S.A. EXPRESS DATA EXPRESS DATA (aka ComTech) FRY'S ELECTRONICS FUJI XEROX CO., LTD. GALILEO TECHNOLOGIES GANDALF DATA GATEWAY COMPUTER RESOURCES HELTEL LIMITED IEE IMS IMS HONG KONG INGRAM DENMARK INGRAM MACROTRON AG INGRAM MEXICO INGRAM MICRO INGRAM MICRO ASIA LTD. INGRAM MICRO CANADA INGRAM MICRO CHILE S.A. INGRAM MICRO EUROPE AG INGRAM MICRO NORWAY INTEC INFORMATION TECHNOLOGY INTERMEMORY CORP INTERVALLE SA KANSAI ELECTRIC CO. LTD KODO INFORMATION & COMMUNICATION LATAM COMPUSER CORP. LDL DISTRIBUTION (CHINA) LTD LINK INTERNATIONAL LITE-ON MARUBENI SOLUTIONS CORP. MEI/MICRO CENTER MICRO PERIPHERALS LTD. MICROSTANDARD DISTRIBUTORS INC MITSUI COMTEK CORP MPS MAYORISTA, S.A. DE C.V. NETEKS A.S. NETSERVE, INC 28 28 NETWORK VALUE COMPONENTS NETWORLD, INC. NYHERJI HF PC WAREHOUSE INC. POULIADIS ASSOCIATES CORP. POWER & TELEPHONE SUPPLY, INC. RAMCO SYSTEMS RIGHTNET SEICOM COMMUNICATION SYSTEMS SEICOM SUBDISTRIBUTOR SISTEMAS DATASYS C.A. SOFTWAY SA STONE COMPUTER LTD. SUNDAYNET SUNKYONG DISTRIBUTION LIMITED SYNNEX TD BRASIL, LTDA TECH DATA TECH DATA CANADA TECH PACIFIC AUSTRALIA PTY. LTD TECH PACIFIC NZ TECHNOLOGY SOLUTIONS GROUP INC TECHNOSS S.A. TECKSEL TELECTRONIC S.A. TELIA SYSTEMS AB TERRA CORPORATION UNISEL S.A. WESTCON BRASIL LTDA. Development: SLIMWARE - Contractor Agreement ADTRAN - License Agreement REALM - License Agreement PHILIP PELLOUCHOUD - Contractor Agreement [NOTE: ABOVE SEEMS TO BE MISSING AGREEMENTS IMPLIED BY OTHER SUBMISSIONS RELATING TO: ADOBE - LICENSE AGREEMENT BROADCOM - LICENSE AGREEMENT CICAT NETWORKS - CONTRACTOR AGREEMENT INSTALLSHIELD - LICENSE AGREEMENT IDOC - CONTRACTOR AGREEMENT KLSI/AOX - LICENSE AGREEMENT MICROSOFT - LICENSE AGREEMENT RAGULA - MAINTENANCE AND DISTRIBUTION AGREEMENT RAMP - LICENSE AGREEMENT XYLOGICS - LICENSE AGREEMENT ZYXEL - OEM LICENSE AGREEMENT NATIONAL SEMICONDUCTOR - LICENSE AGREEMENT LEASE AGREEMENTS FOR DELL PCS NOTED IN OWNED ASSET LIST.] Misc. agreements: 29 29 EXECUTIVE OFFICE LEASE -- NEW JERSEY AUTO LEASES: FRANCE, GERMANY (2), SWEDEN Assignment of Rights of Gearguy in Gearland Agreement Between Mark Fischer and Bay Networks, Inc., dated February 1998. 30 30 EXHIBIT D FURNITURE, FIXTURES, INVENTORY AND EQUIPMENT
Asset NT Asset Dept # # Description 1 Serial # Description 2 Lease/Purch Cap/Exp Smart Bit 2000 8373 Test Equipment Purchased Smart Bit 2000 9364 Test Equipment Purchased Smart Bit 1000 3239 Test Equipment Purchased Pentium PC ND508/520 Test Station 486PC ZyXel Test Station Pentium 100MHz PC FA410 Test Station Pentium PC FA 510 Test Station Pentium PC FA 510 Test Station Pentium PC PS Series Test Station Pentium PC EA101 Test Station Pentium PC EA101 Test Station Pentium PC FA101 Test Station 181 HP LaserJet 551 MX - USJK209705 Printer Purchased C3167A 181 HP LaserJet 551 MX - USJK210598 Printer Purchased C3167A 181 HP LaserJet 551 MX - Printer Purchased C3167A 507 1039178 NEC 6230 7Z001220 Laptop registrar 507 1036924 BOXLIGHT 4000 ULTRA LIGHT 2J7520288 Projector Purchased registrar DLP 507 1037029 NEC 6230MX 81072112 Laptop Purchased registrar 507 1036449 WINBOOK XL P233 RBL256R5427S Laptop Purchased registrar 42 507 1030735 MAC POWERBOOK 3400C/200 Laptop Purchased registrar 507 1037180 WINBOOK XL P233 RBL256R3507L Laptop Purchased registrar 07 507 1042318 WinBook XL P266 RCN456W11385 Laptop Purchased registrar 07 507 1045570 IBM THINKPAD 600E 78-BXY04 Laptop Purchased registrar 507 1036220 WINBOOK XL P233 LAPTOP SBI256R14571 Laptop Purchased registrar 507 Dell Latitude Cpi336 H9949476 Laptop Leased 507 Dell 19" Monitor 2221DA67VE89 Monitor Leased 507 expensed HP 600 Office Jet Printer Purchased exp 507 1038329 WinBook XL RCM256 Laptop Purchased registrar R4068Z40 507 Dell Latitude Cpi336 H9950697 Laptop Leased 507 Dell 19" Monitor Monitor Leased 507 expensed HP 600 Office Jet Printer Purchased expensed 507 1041487 Toshiba 320CT 5801442 Laptop Purchased 507 expensed HP 600 Office Jet Printer Purchased expensed 507 1046181 Toshiba Portege 7010CT 19361415A Laptop Purchased 507 HP 570 Office Jet Printer Purchased expensed
31 31 507 WINBOOK XL 266 RBL256 LAPTOP PURCHASED R3517L18 507 expensed HP 590 OFFICE JET PRINTER PURCHASED expensed 52M 1049320 SONY PGC 505TR LAPTOP PURCHASED registar 52M 1048391 IBM THINKPAD 600E 78WKL07 LAPTOP PURCHASED registar 507 00089 1048321 DELL LATITUDE 366 WP8Q8 LAPTOP PURCHASED registar 181 1031784 TOSHIBA 800CT LAPTOP PURCHASED registar 181 00084 1032037 NEC 6050 77001286 LAPTOP PURCHASED registar 181 1046902 NEC VERSA SX + doc 93120359 LAPTOP PURCHASED registar + mon + key + ms 181 00085 1047732 DELL LATITUDE 300 WF18Q LAPTOP PURCHASED registar 181 00082 1039505 TOSHIBA 750CDM 48653258A LAPTOP PURCHASED registar 181 1040578 HIQ PENTIUM II 233MHZ PC TOWER PURCHASED registar 181 1041013 SUN ULTRA 10 PURCHASED registar 181 1047085 DELL LATITUDE 300 + doc WCD7C LAPTOP PURCHASED registar + mon + key + ms 181 1046530 IBM THINKPAD 560 LAPTOP PURCHASED registar 181 1037116 SUN ULTRA 2 809FC40D PURCHASED registar 181 1046075 NEC VERSA SX + doc + mon + 8Z120468 LAPTOP PURCHASED registar key + ms 181 00083 1049311 CANON LC9000 FAX UYG41256 FAX PURCHASED registar 181 NEC 6200 LAPTOP 341 expensed SONY NOTEBOOK PII LAPTOP PURCHASED expensed 341 1038319 MERGE 2000 AF FLASH PURCHASED registar 341 1048757 NETCOM GIGABIT ETHERNET PURCHASED registar SX SMA 341 00079 1047702 NETCOM SMARTBITS 2000 9844A TEST EQUIPT PURCHASED registar 341 1038849 NETCOM SMARTBITS 2000 8364 TEST EQUIPT PURCHASED registar 341 1044008 IBM THINKPAD 600 1S264551U78G LAPTOP PURCHASED registar Y232 341 1043874 NETCOM GIGABIT SMARTCARD PURCHASED registar 341 1046345 NETCOM SMARTCARDS PURCHASED registar 341 00046 1045290 ISO/LINK PENTIUM II SYSTEM 17582 PURCHASED registar 341 1044516 IBM THINKPAD 600 1S264551U78H LAPTOP PURCHASED registar C753 341 1042601 NETCOM ETHERNET PURCHASED registar SMARTCARDS 341 1042137 IBM THINKPAD 600 1S264551U78A LAPTOP PURCHASED registar V521 341 1041775 NETCOM SMARTBITS 2000 8373 TEST EQUIPT PURCHASED registar 341 00086 1039409 NEC 5080 83042671 LAPTOP PURCHASED registar 341 00047 1042320 SHARP MEBIUS 80004865 LAPTOP PURCHASED registar 341 00048 1042319 SHARP MEBIUS 80001835 LAPTOP PURCHASED registar 341 00080 1022213 NETCOM SMARTBITS 10 5116 PURCHASED registar 341 1022211 NETCOM ET-1000 1577 PURCHASED registar 341 1021587 INTEL PENTIUM P90 PC TOWER PURCHASED registar 341 1026574 ISDN NETWORK SIMULATOR PURCHASED registar 341 1024387 INTEL PENTIUM P166 PURCHASED registar 341 00049 1023461 TOSHIBA T2130CT 12530403 LAPTOP PURCHASED registar 341 1021579 INTEL PENTIUM P90 PURCHASED registar 341 1021577 INTEL PENTIUM P90 PURCHASED registar 341 1019767 COMPAQ PRESARIO CDS 9548 PURCHASED registar 341 1021585 INTEL PENTIUM P90 PURCHASED registar 341 1021583 INTEL PENTIUM P90 PURCHASED registar 341 1021581 INTEL PENTIUM P90 PURCHASED registar
32 32
341 1033296 SUPERCOM NETBOX PURCHASED registar 341 00054 1036999 NEC 6230MX 81072120 LAPTOP PURCHASED registar 341 00045 1049043 GATEWAY INTEL400MHZ E1200 14909816 DESKTOP PURCHASED registar 341 1049071 NETCOM SX SMARTCARD PURCHASED registar 341 1026673 COMPAQ ARMADA 41201 LAPTOP PURCHASED registar 341 1025117 ISDN NETWORK SIMULATOR PURCHASED registar 181 1007745 RICOH FAX 3100L PURCHASED registar 181 1009327 TEKTRONIX 2467B OSCILLOSCOPE B053956 PURCHASED registar 341 1048993 TEKTRONIX TDS 3054 OSCILLOSCOP PURCHASED registar 341 1034282 NETCOM SMARTBITS 20 3236 TEST EQUIPT PURCHASED registar 341 1032496 NETCOM SMARTBITS 20 3239 TEST EQUIPT PURCHASED registar 341 1036192 ISDN 2000AFP FLASH PURCHASED registar 341 1029207 NETCOM 100BASE-X FAST SMARTCAR PURCHASED registar 341 1029393 LAN CABLE TESTER AND CABLE PURCHASED registar 341 1049526 TEKTRONIX PROBE P6246 PURCHASED registar 341 1029774 HP DIGITIZING OSCILLOSCOPE 3327A00467&49 PURCHASED registar 5 181 00001 SONY NOTEBOOK PII LAPTOP PURCHASED registar 341 00002 ML-7710 10/100 BASE TX MULTILY SMARTCARD SMARTCARD PURCHASED registar 341 00003 ML-7710 10/100 BASE TX MULTILY SMARTCARD SMARTCARD PURCHASED registar 341 00004 ML-7710 10/100 BASE TX MULTILY SMARTCARD SMARTCARD PURCHASED registar 341 00005 ML-7710 10/100 BASE TX MULTILY SMARTCARD PURCHASED registar SMARTCARD 341 00006 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00007 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00008 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00009 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00010 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00011 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00012 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00013 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00014 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00015 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00016 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00017 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00018 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00019 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00020 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00021 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00022 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00023 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00024 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD 341 00025 SX-7410B 10/100 BASE TX SMARTCARD PURCHASED registar ETHERNET SMARTCARD
33 33 341 00026 GX-1420A Gigabit Ethernet Copper SmartCard Purchased registar Smartcard 341 00027 GX-1420A Gigabit Ethernet Copper SmartCard Purchased registar Smartcard 341 00028 GX-1420A Gigabit Ethernet Copper SmartCard Purchased registar Smartcard 341 GX-1420A Gigabit Ethernet Copper SmartCard Purchased registar Smartcard 507 00030 Compucare SYS Missouri IX PC Tower Purchased registar 507 00031 Compucare SYS Missouri IX PC Tower Purchased registar 507 00032 Compucare SYS Missouri IX PC Tower Purchased registar 341 00033 20 Chl Hybrid Recorder DR130-12 Purchased registar 22-1D/C2 507 00034 600 MHZ PIII System w/CD PC Tower Purchased registar 507 00035 600 MHZ PIII System w/DVD PC Tower Purchased registar 507 00036 600 MHZ PIII System w/DVD PC Tower Purchased registar 507 00037 600 MHZ PIII System w/CD PC Tower Purchased registar 507 00038 600 MHZ PIII System w/CD PC Tower Purchased registar 507 00039 400 MHZ Laptop Purchased registar 341 00040 Meridian Snap Server 32G w/Raid Purchased registar 52M 00041 Netis Technology Purchased registar 181 00042 Computer Market Research Software Purchased registar 52M 00043 Precision Consulting Software Purchased registar 52M 00044 TCN Software Purchased registar AU507 Toshiba Tecra 8000 Y8014324 Laptop Purchased registar AU507 Toshiba Tecra 730XCDT 5712835 Laptop Purchased registar AU507 Nokia 6110 Mobile Phone Purchased exp AU507 Nokia 6110 Mobile Phone Purchased exp FF507 Model GH688 GSM Phone Purchased exp FF507 338210 Compaq Armada 3500 Laptop Purchased registar GE507 old Toshiba Portege 660CDT 2716083 Laptop Purchased GE507 old Toshiba DeskStation V+ 4717462 Docking Station Purchased GE507 old NET Monitor 17 7501490TA Monitor Purchased GE507 New Toshiba Tecra 8000CDT 998D024846 Laptop Purchased registar GE507 New Dell Latitude Xpi WK7HZ F0333- Laptop Purchased registar 4 GE507 New Dell 17" Monitor Monitor Purchased registar GE507 Dell Doc Docking Station Purchased registar JP507 IBM ThinkPad560E 97-AT1BK Laptop JP507 Sony VAIO 5055X 28987600- Laptop Purchased registar 1110937 JP507 Nanao FlexScan 54T B2175115- Monitor Purchased registar JAPAN JP507 Sony VAIO 5055X 28987600- Laptop Purchased registar 1117992 JP507 Dell XP5R350 T03JS PC Purchased JP507 Nanao FlexScan 54T 55399097_JAW Monitor Purchased JP507 Dell GXA6233L/EM 19648625 PC Leased
34 34 JP50 ViewSonic VPA150 EK91010861 Monitor Leased 7 K050 Dell Latitude Xpi S42XL PC Purchased registrar 7 SE50 IBM ThinkPad 600 55206WP Laptop Purchased registrar 7 SE50 Philips 107MB HD0098470010 Monitor Purchased registrar 7 23 GB50 325789/00 Compaq Notebook PC 8749BB730191 Laptop Purchased registrar 7 731 GB50 A039750 Compaq Docking Station 6747BCL10710 Docking Station Purchased registrar 7 GB50 00732 Philips 107B Color Monitor TY1097370203 Monitor Purchased registrar 7 62 GB50 Nokia 2110 Mobile Phone 490138 Mobile Phone Purchased registrar 7 341 Tester #13 N/A PC Tower Built exp 341 Dual 400 server N/A PC Tower Built exp 341 00053 Dell Dimension XPSH266 9KOSV PC Tower Purchased exp 341 00050 HIQ 233MHZ 9803025 PC Tower Purchased exp 341 00051 HIQ 150MHZ 9709233 PC Tower Purchased exp 341 00052 GLI 90MHZ 88112912 PC Tower Purchased exp 341 00055 HIQ 150MHZ 9705014 PC Tower Purchased exp 341 Tester #9 N/A PC Tower Built exp 341 00056 HIQ 150MHZ 9705013 PC Tower Purchased exp 341 00057 HIQ 90MHZ 9409387 PC Tower Purchased exp 341 00058 HIQ 150MHZ 9705016 PC Tower Purchased exp 341 00059 HIQ 150MHZ 9709230 PC Tower Purchased exp 341 00060 HIQ 150MHZ 9709038 PC Tower Purchased exp 341 00061 T/Link 90MHZ MLP PC Tower - Purchased exp 069703740 mini Purchased exp 341 00062 Power Spec PIII 7.2201E+12 PC Tower Purchased exp 341 00063 Pentium III P96A8400249 PC Tower Purchased exp 341 00064 GLI 90MHZ 88112910 PC Tower Purchased exp 341 00065 GLI 90MHZ 88112909 PC Tower Purchased exp 341 00066 GLI 60MHZ 88222232 PC Tower Purchased exp 341 00067 GLI 88104075 PC Tower Purchased exp 341 Tester "Rob" N/A PC Tower Built exp 341 00068 HIQ 150MHZ 9709231 PC Tower Purchased exp 341 00069 GLI 90MHZ 88222228 PC Tower Purchased exp 341 00070 HP VECTRA 510 US63554336 Desk Top Purchased exp 341 00071 HP Pavilion Pentium 266 5002-3651 PC Tower Purchased exp 341 Tester #18 350MHZ N/A PC Tower Built exp 341 00072 GLI 88101540 PC Tower Purchased exp 341 00073 GLI 88222231 PC Tower Purchased exp 341 00074 HIQ 150MHZ PIII 9709037 PC Tower Purchased exp 341 00075 GLI 88112911 PC Tower Purchased exp 341 00076 ISO/LINK CELERION 17826 PC Tower Purchased exp 341 00077 HIQ PENTIUM 9804016 PC Tower Purchased exp 341 00078 HIQ DUAL PENTIUM 9803179 PC Tower Purchased exp 341 00081 SMARTBITS 2000 9252 Purchased exp 341 00087 TOSHIBA - Satellite 69812276A Laptop Purchased exp 2065CDS 341 00088 Dell Dimension F134F PC Tower Purchased exp
35 35 341 AMD 300 N/A PC TOWER BUILT exp 341 00090 SCANNER SG8AF231QS SCANNER PURCHASED exp 341 00091 T/LINK 60MHZ 069703749 PC TOWER PURCHASED exp 341 MISCELLANEOUS LAB BENCHES W/LIGHTS 341 LAB STOOLS 341 341
36 36 EXHIBIT E CERTAIN NNNA EMPLOYEES
EMP# LAST NAME FIRST NAME - ------- --------- ---------- 4715074 Abba Annabelle 4715621 Ajinga Leilani 4715699 Berkowitz Phil 4715750 Blum John 4715206 Chatburn Michele 4714972 Cunningham Robert A. 4715353 Ding Josh 4713752 Dix Stephen 4713717 Fabiano Rick 4715916 Gregory Heath 4737130 Gross Don 4716071 Hill Mark 4716073 Huang Lillian 4715156 Kerr Duncan 4714885 Kim Kathy 4714938 Lee Raymond 4712802 Lo Patrick 4715103 Malloy John 4710048 Merrill Mark 4725493 Otero Eric 4714130 Pramanik Debashis 4715267 Reed Rob 4713988 Romero Kelly 4511220 Runkle Lisa 4711765 Shields Mike 4714400 Smith Chip (Authur) 4710628 Su Jimmy 4715018 Viahos Gus 4715501 Werdann Michael 4724176 Yi Bobi 4716019 Zompetti Tracey 4740579 Bielli Jean-Michel 4740729 Erlandsson Magnus 4740823 Jell Thomas 4750049 Kim Jin Gyeom 4750103 McLean Ian 4740886 Montanhas Eugenia 4713766 Nakagawa Hirohito 4750303 Owada Yumi 4740613 Peters Marco 4750351 Ponder Sue 4740500 Soares David 4750494 Takeuchi Hiroshi
37 37 EXHIBIT F CLAIMS RELATED TO INTELLECTUAL PROPERTY 1. Infringement claims: None. 2. Knowledge of infringement or misappropriation: None. 3. Claims relating to ownership, licensing or enforceability: None. 38 38 EXHIBIT H TRANSFERRED SOFTWARE Transferred Software includes the software, firmware and related documentation owned by NNNAI or any of its Subsidiaries, and used exclusively in the NETGEAR Business and which is incorporated in the following products:
XM128 - ISDN DIGITAL MODEM PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- NETGEAR First Gear Configuration Engineering Software Slimware AutoSwitch/Auto SPID Program implementation to determine SPID and Switch types in North America. - -------------------------------------------------------------------------------- PA301 - 10M PCI PHONE LINE ADAPTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- NETGEAR First Gear Configuration Engineering/ Software Ragula Systems - -------------------------------------------------------------------------------- PA101 - 10M USB PHONE LINE ADAPTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- NETGEAR First Gear Configuration Engineering/ Software Ragula Systems PE102 - PHONE LINE ETHERNET BRIDGE PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- Slimware Firmware code combining Broadcom and KLSI drivers PR356 - 56K ANALOG PHONE LINE ROUTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- Slimware Firmware code combining Broadcom and KLSI drivers RT210/211 - ISDN ROUTER PRODUCT - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- CICAT Graphical User Interface Product discontinued, but software Program on NETGEAR website for support reasons - --------------------------------------------------------------------------------
42 39
RT328 ISDN ROUTER, RH348 ROUTER HUB, RT 338 ISDN 10/100 ROUTER, RM 356 56K MODEM/ROUTER W/4PT HUB, AND RT311 ETHERNET ROUTER PRODUCTS - -------------------------------------------------------------------------------- Vendor Product Notes - -------------------------------------------------------------------------------- Pellichoud GUI for the RT328/348 and RM356 products - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ND508/520 Production software, Production testing software, Client Utility software - --------------------------------------------------------------------------------
43 40 EXHIBIT I TRANSFERRED TECHNICAL INFORMATION Transferred Technical Information includes all drawings, schematics, specifications, functional descriptions, application engineering support systems, design documents, feature documents, engineering manuals, assembly drawings, stock lists, part drawings, procurement information specifications, component information, inspection information, design change control procedures, specifications for finishes, and quality assurance procedures, all trade secrets embodied in any know-how, manufacturing specifications, processing procedures or research and development information, and agency approval files related to the NETGEAR Products listed below which are owned by NNNAI and which used exclusively in the NETGEAR Business as of the Effective Date: CURRENT NETGEAR PRODUCTS
COUNT OF MODELS VERSION - ------------------------------------------------------------------------------------------ PRODUCT DESCRIPTION AU FR GE GR JP KO NA UK WW - ------------------------------------------------------------------------------------------ DB104 DUAL SPEED STARTER KIT 1 1 1 1 1 2 1 DS104 4 PORT DUAL SPEED 10/100 HUB 1 1 1 1 1 1 1 DS106 6 PORT SLIM DUAL SPEED HUB 1 1 1 1 1 1 1 DS108 8 PT SLIM 10/100 HUB 1 1 1 1 1 1 1 DS116 16 PORT SLIM DUAL SPEED HUB 1 1 1 1 1 1 1 DS309 9PT DUAL SPEED HUB W/UPLINK 1 1 1 1 1 1 1 DS508 8 PT D-SPD STACK HUB 1 1 1 1 1 DS516 16 PT D-SPD STACK HUB 1 1 1 1 1 DS524 24 PT D-SPD STACK HUB 1 1 1 1 1 EA101 USB ETHERNET ADAPTER 1 1 1 EA201 10 MBPS ISA CARD 1 1 3 EB104 NETWORK STARTER KIT ISA 1 1 1 1 1 EN104 4 PT 10BASE-T HUB 1 1 1 1 1 EN104TP 4 PT 10BASE-T HUB 1 1 1 1 1 1 EN106TP 6 PT 10BASE-T HUB 1 1 1 1 1 EN108 8 PT 10BASE-T HUB 1 1 1 1 1 EN108TP 8 PT 10BASE-T HUB 1 1 1 1 1 EN116 16 PT 10BASE-T HUB 1 1 1 1 1 EN308 8 PT 10BASE-T HUB 1 1 1 1 1 EN308TC 8 PT 10BASE-T HUB 1 1 1 1 1 1 1 EN516 16 PT 10BASE-T HUB 1 1 1 1 1 EN524 24 PT 10BASE-T HUB 1 1 1 1 1 FA310-10 10-PK 10/100 PCI ADAPTER 1 FA310-50 50-PK 10/100 PCI ADAPTER 1 FA310TX 10/100 PCI ADAPTER 1 1 1 FA310TXC 10/100 PCI ADAPTER&CBL 1 1 1 FA311 10/100 PCI ADAPTER NS 1 FA312 10/100 PCI ADAPTER WOL 1 FA410C 10/100 PCMIA ADAPTER 1 FA510 10/100 CARDBUS ADAPTER 1
1 41
FB104 4 PORT FE-NET STARTER KIT 1 1 1 1 1 1 FB108 8 PORT FE-NET STARTER KIT 1 1 1 1 FE104 4 PT FAST E-NET HUB 1 1 1 1 1 FE108 8 PT FAST E-NET HUB 1 1 1 1 1 FE116 16 PT 100BASE-TX FE HUB 1 1 1 1 1 FE508 8 PT FE STACK HUB 1 1 1 1 1 FE516 16 PT FE STACK HUB 1 1 1 1 1 FS102 2 PT FAST E0NET SW 1 1 1 1 1 FS104 4 PT FAST E-NET SW 1 1 1 1 1 FS105 5 PT FAST E-NET SWITCH 1 1 1 1 1 FS108 8 PORT 10/100 SWITCH,EXT PWR 1 1 1 1 1 FS308 8 PORT 10/100 SWITCH,INT PWR 1 1 1 1 1 FS508 8 PT FAST E-NET SW 1 1 1 1 1 FS509 9 PORT SWITCH W/GBIT UPLINK 1 1 1 1 1 FS516 16 PT FAST E-NET SW 1 1 1 1 1 FS518 18 PT FAST E-NET SW 1 1 1 1 1 FS524 24 PT FAST E-NET SW 1 1 1 1 1 FS562 8 PORT FIBER SWITCH 1 1 1 1 1 FS566 12 PORT FIBER SWITCH 1 1 1 1 1 GA620 IGBPS PCT FIBER CARD 1 1 GS504 GIGABIT FIBERSWT 4PATENT 1 1 1 1 1 LCP100 CABLE MODEM 1 MISC ACCESSORIES: POWER, PKG, ETC. Mult ND508 NETWORK DISK DRIVE 8GB 1 1 1 1 ND520 NETWORK DISK DRIVE 20GB 1 1 1 1 PA101 10M USB PHONELINE ADAPTER 1 PA301 10M PCI PHONELINE ADAPTER 1 PE102 PHONELINE ETHERNET BRIDGE 1 PR356 56K ANALOG PHONELINE ROUTER 1 PS104 PRINT SERVER WITH 4 PATENT HUB 1 1 1 1 1 PS105 PRINT SERVER WITH 5 PATENT HUB 1 1 1 1 1 1 1 PS110 10/100 MBPS PRINT SERVER 1 1 1 1 1 1 1 RH340 ROUTER HUB 1 RH348 ROUTER HUB 1 1 1 1 RM356 56K MODEM/ROUTER W/4PT HUB 1 1 1 1 1 RT210 ISDN ROUTER 1 1 1 1 RT311 ETHERNET ROUTER 1 RT328 ISDN ROUTER 1 1 1 1 1 RT338 ISDN 10/100 ROUTER 1 SB104 NT WRK STARTER KIT 1 1 1 1 1 1 SW108 8PT 10B-T E-NET SW 1 1 1 1 1 SW502 2PT 10/1000 E-NET SW 1 1 1 1 1 SW507 7PT 10/100 E-NET SW 1 1 1 1 1 SW510 10PT 10/100 E-NET SW 1 1 1 1 1 SW518 18PT 10/100 E-NET SW 1 1 1 1 1 XM128 ISDN DIGITAL MODEM 1 1 1 1 1 1 1 TOTAL 55 15 57 15 52 2 65 56 15
2 42 3 43 EXHIBIT J TRANSFERRED TRADE MARKS
APPLICATION REGISTRATION DATE OF TRADE MARK COUNTY NUMBER FILING DATE NUMBER REGISTRATION - ---------- ------ ----------- ----------- ------------ ------------ NETGEAR Argentina 1634345 30 May 1997 1634345 30 May 1997 NETGEAR Australia 781510 5 Aug 1996 781510 5 Aug 1996 NETGEAR Brazil 819235202 22 May 1996 819235202 29 Dec 1998 NETGEAR Canada 834,529 24 Jan 1997 503,133 30 May 1997 NETGEAR European 000238576 23 April 1996 000238576 11 Sept 1998 Community Trademarks (CTM) NETGEAR India 753803 28 Jan 1997 NETGEAR Japan 9-6723 24 Jan 1997 NETGEAR New Zealand 265381 5 Aug 1996 265381 5 Aug 1996 NETGEAR United States 75/026,272 30 Nov 1995 2,124,219 23 Dec 1997
OTHER MARKS NETGEAR Logo The Gearguy in Gearland FirstGEAR netgear.com netgearinc.com 5 44 EXHIBIT K FINANCIAL STATEMENTS A substantial portion of the Financial Statements for Netgear, Inc. has been re-stated to reflect its stand-alone status. 6 45 EXHIBIT L TRANSFERABLE SOFTWARE LICENSES None 7 EX-10.18 5 f65217a1ex10-18.txt EXHIBIT 10.18 1 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. AMENDMENT TO THE DISTRIBUTOR AGREEMENT BETWEEN INGRAM MICRO AND NETGEAR This Amendment is entered into effective October 1, 1996 ("Amendment Date") by and between NETGEAR, Inc. ("NETGEAR"), a wholly owned subsidiary of Bay Networks, Inc., and Ingram Micro ("Distributor") acting on behalf of itself and its affiliates. NETGEAR and Distributor having previously entered into a Distributor Agreement ("Agreement") with an Effective Date of March 1, 1996, now mutually agree to amend that Agreement as follows: 1. Subject to the terms of this Amendment, the Territory listed in Section 2 of the Agreement is amended to be the United States and [*] 2. During the initial one year period beginning on the Amendment Date, Distributor shall be the only distributor appointed by NETGEAR in [*] subject to Distributor conducting mutually agreed to marketing activities as described in the Marketing Plan for [*] to be developed and agreed to by and between the parties and which shall be attached to and made a part of this Agreement as Exhibit 4a. For the purposes of this provision, distributor shall mean a company acquiring products directly from NETGEAR for resale or license to dealers or other second tier resellers which in turn resell or license the products to end use customers. The foregoing notwithstanding, during the initial [*] term and any subsequent period, NETGEAR reserves the right to sell or license Products in * to customers other than distributors such as, but not limited to resellers who procure Products at centralized locations for resale to end-use customers solely through their wholly or majority owned retail outlets, both store-front and catalog. Following the initial [*] term, for any extension or renewal term, Distributor's appointment as Distributor shall be non-exclusive and NETGEAR may appoint other distributors in [*] at its sole discretion. 3. The terms and conditions of this Amendment, shall amend and supersede any conflicting terms of the original Agreement. All other terms of the original Agreement shall remain unchanged. 2 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. IN WITNESS WHEREOF, the parties have executed this Amendment to be effective as of the date first written above. NETGEAR: DISTRIBUTOR: NETGEAR, INC. INGRAM MICRO By: /s/ Lloyd Carney By: /s/ Michael Terrell -------------------------------- ---------------------------------- Name: Lloyd Carney Name: Michael Terrell ----------------------------- -------------------------------- Title: Executive VP Enterprise Group Title: Vice President Purchasing ----------------------------- -------------------------------- Date: 4/30/97 Date: 2/21/97 ----------------------------- -------------------------------- -2- 3 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. AMENDMENT #2 TO THE DISTRIBUTION AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 15th day of July 1998, by and between INGRAM MICRO INC. ("Ingram") and NETGEAR, INC. ("Vendor"). The parties have agreed to amend their Distribution Agreement ("Agreement") dated October 1, 1996. 1. Section 2, TERRITORY, is amended to be United States, *. 2. This Amendment shall remain in effect for the current term and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The Undersigned has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. NETGEAR, INC. 1600 East St. Andrew Place 4401 Great America Parkway Santa Ana, CA 92705 P.O. Box 58185 Santa Clara, CA 95052-8185 By: /s/ Al Mann By: /s/ Patrick Lo -------------------------------- -------------------------------- Name: Al Mann Name: Patrick Lo -------------------------------- -------------------------------- Title: Vice President Purchasing Title: Vice President 4 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. DISTRIBUTOR AGREEMENT between INGRAM MICRO and NETGEAR NETGEAR Agreement Number: N115 Effective Date: March 1, 1996 Term: 1 Year Ingram Micro, a corporation organized under the laws of the State of California, having a place of business located at 1600 E. St. Andrew Place, Santa Ana, California, USA, ("Distributor") and NETGEAR, Inc. ("NETGEAR"), a wholly owned subsidiary of Bay Networks, Inc., organized under the laws of the State of Delaware, having a place of business at 4401 Great America Parkway, Santa Clara, California, USA, agree that the following terms govern the purchase, sale, and licensing of Products (as defined below) between the parties. NOTICES: All notices given under the Agreement are to be in writing and may be sent by mail, telefax, courier service or otherwise delivered to the party to be notified at the following address, or to such other address as may have been substituted by written notice: To Distributor: To NETGEAR: 1600 E. St. Andrew Pl. 4401 Great America Parkway P.O. Box 25125 P.O. Box 58185 Santa Ana, CA 92799-5125 Santa Clara, CA 95052-8185 Katlyn Cho Patricia Dutra-Gerard DISTRIBUTOR AND NETGEAR ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT TOGETHER WITH THE ATTACHED EXHIBIT, UNDERSTANDS IT AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. AGREED: AGREED: Distributor NETGEAR, Inc. By: /s/ Sanat K. Dutta By: /s/ Joe Booker -------------------------------- -------------------------------- (authorized signature) (authorized signature) Name: Sanat K Dutta Name: Joe Booker -------------------------------- -------------------------------- (type or print) (type or print) Title: Executive Vice President Title: Vice President & General Manager -------------------------------- Commercial Business Unit -------------------------------- Date: October 16, 1996 Date: November 5, 1996 -------------------------------- -------------------------------- -1- 5 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. 1. APPOINTMENT Subject to Distributor's performance of its obligations under this Agreement, Distributor is appointed as a NETGEAR Distributor and may purchase certain equipment ("Hardware") and licenses for software including revisions and updates ("Software"), as are listed in NETGEAR's then-current price list (the "Price List") for resale within the Territory (as defined below). During the initial one (1) year term of this Agreement, Distributor shall be the only distributor appointed by NETGEAR in the Territory, subject to Distributor conducting mutually agreed to marketing activities as described in the Marketing Plan to be developed and agreed to by and between the parties and which shall be attached to and made a part of this Agreement as Exhibit 4. For the purposes of this provision, distributor shall mean a company acquiring products directly from NETGEAR for resale or license to dealers or other second tier resellers which in turn resell or license the products to end use customers. The foregoing notwithstanding, during the initial one (1) year term and any subsequent period, NETGEAR reserves the right to sell or license Products in the Territory to customers other than distributors such as, but not limited to resellers who procure Products at centralized locations for resale to end-use customers solely through their wholly or majority owned retail outlets, both store-front and catalog. Following the initial one (1) year term, for any extension or renewal term, Distributor's appointment as Distributor shall be non-exclusive and NETGEAR may appoint other distributors in the Territory at its sole discretion. 2. TERRITORY Except as may be otherwise provided by law, Distributor may not distribute or re-export any Products outside of the Territory identified herein as the United States without the specific written consent of NETGEAR. In the event that Distributor wishes to expand the scope of the Territory and is able to adequately sell and support Products within the additional region, then upon the approval of NETGEAR, the parties may choose by written agreement to modify the Territory. 3. ORDERS A. Distributor may purchase Products by placing orders under this Agreement which are accepted by NETGEAR. No order will be effective until accepted by delivery of NETGEAR's order acknowledgment. Distributor agrees that each order placed with NETGEAR for Products shall be governed by this Agreement, regardless of any additional or conflicting term in Distributor's order. Unless otherwise specifically stated in the Order, all Orders accepted by NETGEAR shall be deemed to be for immediate release. Orders may be sent by telefax or other electronic media approved by NETGEAR and must specify: (a) Distributor's Purchase Order number; (b) Product and/or Service number and description for each item ordered; (c) Desired quantities; (d) Purchase price for each Product or Service ordered; -2- 6 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. (e) Tax status, including exemption certificate number if tax exempt; (f) Preferred shipping method; and (g) Exact "Bill to" and "Ship to" address. B. Minimum/Standard Lot Sizes. Products must be ordered in the minimum and/or standard lot size quantities specified in the Price Schedule. Orders for less than minimum or non-standard lot size quantities of any Product may, at NETGEAR's discretion, be rejected. 4. PRICES, PRICE LIST, TAXES AND PAYMENT A. Prices. Prices for Products are those set out in NETGEAR's Price List, less the applicable discount specified in Exhibit 1. All Product prices are F.O.B. NETGEAR's point of shipment, except as specified in Section 5 D. B. Changes. NETGEAR may modify the Price List at any time, including changes to the Products or their corresponding list prices, but NETGEAR will provide Distributor with written notice thirty days in advance of the effective date of any price increase or Product deletion. Price decreases will apply to the corresponding Products that are shipped by NETGEAR on or after the effective date of the list price decrease. C. Inventory Price Protection. In the event of a list price decrease on any of the Products, Distributor may apply for a credit on those units of Product: a) which were shipped by NETGEAR to Distributor no more than [*] prior to the effective date of the list price decrease and remain unsold in Distributor's inventory or are being returned under open RMA's or are in the inventories of certain mutually agreed to Distributor retail accounts ("CMD Named Accounts") as listed in Exhibit 3 to this Agreement on the effective date of the list price decrease or b) which were in transit between NETGEAR and Distributor on the effective date of the list price decrease. The amount of the credit on any unit shall be equal to [*]. The foregoing notwithstanding, in the event any of the Products were acquired under special competitive pricing arrangements, the credit on such Products shall be [*]. In order to receive a credit, Distributor a) must submit to NETGEAR within [*] of the effective date of the list price decrease, a report of inventory eligible for the price credit and must have submitted its regular monthly inventory report on time, according to Section 11, in each of the [*] prior to the effective date of the list price decrease. Upon verification by NETGEAR of the eligible units and credit amounts, NETGEAR will issue a credit to the Distributor's account. D. Taxes and other levies. Prices are exclusive of any tax, value-added tax, fee, duty or governmental charge, however designated (except for NETGEAR's franchise taxes or for taxes on NETGEAR's net income) which may be levied or based on the Products, their sale, importation, use, or possession, or on this Agreement. All such taxes or duties shall be for the account of Distributor and any such taxes or duties required to be paid or collected by NETGEAR -3- 7 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. shall be paid by Distributor to NETGEAR unless Distributor provides NETGEAR with a valid certificate of exemption acceptable to the appropriate taxing or governmental authority. E. Payment. Except as may be specifically authorized in writing by NETGEAR, and subject to NETGEAR's continuing approval of Distributor's credit status and financial condition, Distributor will pay NETGEAR for all Products ordered by Distributor within [*] of the date the corresponding invoice is issued by NETGEAR. The foregoing notwithstanding, the parties agree that payment for the initial order placed by Distributor under this Agreement shall be due and payable within [*] of the date the corresponding invoice is issued by NETGEAR. NETGEAR, in its sole discretion, reserves the right to specify, and to change from time to time, Distributor's credit line and payment terms. All payments are to be made in U.S. dollars. Payment for shipments made outside of the United States shall be made by wire transfer in accordance with wire transfer procedures provided by NETGEAR. If at any time Distributor is delinquent in the payment of any invoice, exceeds the credit line established by NETGEAR, or is otherwise in breach of the Agreement, NETGEAR may, in its discretion, withhold shipment (including partial shipments) of any order or may require Distributor to pay cash on delivery for further shipments. Payment not received by NETGEAR when due may be subject to a late payment service charge provided NETGEAR has provided 10 days written notice to Distributor of Distributor's failure to pay. The foregoing notwithstanding, Distributor shall not be deemed in default under this provision if Distributor withholds payment of amounts legitimately in dispute on any invoice provided that (1) Distributor promptly pays the undisputed portion of the invoice in accordance with the terms of this Agreement; (2) Distributor provides NETGEAR with written notice of the disputed amount within 10 days of receipt of the invoice; and (3) Distributor works in good faith with NETGEAR to resolve any dispute within a reasonable time period. 5. SHIPMENT, CANCELLATION, RETURNS, TITLE, RISK OF LOSS, SECURITY INTEREST A. Shipment. Unless otherwise instructed by Distributor, NETGEAR will ship Products ordered by Distributor using the method and carrier specified in Distributor's then current Routing Guide, as may be amended from time to time by written notice from Distributor. The version of the Routing Guide which is in force on the Effective Date of this Agreement is attached to and made a part of this Agreement as Exhibit 2. Distributor is responsible for all freight, handling, insurance and other transportation charges, and agrees to pay all such charges if separately identified on NETGEAR's invoice. NETGEAR will ship freight collect, uninsured, if so instructed by Distributor's order. B. Cancellation and Rescheduling. Distributor may not cancel or reschedule any order, in whole or in part, less than five business days prior to the corresponding shipment date specified in NETGEAR's order acknowledgment. C. Returns. Products received by Distributor as a result of an error by NETGEAR in shipment may be returned for credit. Such credit will include an amount equal to the purchase price of the Product shipped in error as well as the cost of return freight paid by Distributor to return the Product to NETGEAR. Products with defects covered by the warranty may be returned -4- 8 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. for remedy under the warranty. Prior to returning any Product, whether for exchange or warranty or non-warranty action, Distributor must obtain a Return Materials Authorization (RMA) number from NETGEAR. Distributor should return the Product to NETGEAR, with shipping charges PREPAID. NETGEAR will not accept collect shipments. Any Product returned to NETGEAR, which is not returned in accordance with terms of this Agreement, may be refused. D. Title, risk of loss, security interest. For all shipments to locations within the United States, title to the Hardware passes to Distributor when presented by NETGEAR or its agent to the carrier, from which point Distributor is responsible for risk of all loss, damage to, or theft of all Products. For shipments to locations outside of the United States, (i) risk of loss of all Products passes from NETGEAR to Distributor upon arrival at the point of entry in the destination country specified in Distributor's order. 6. SOFTWARE LICENSES A. Internal Use by Distributor. Distributor may purchase for its internal use licenses to Software and accompanying documentation by placing orders under this Agreement. Distributor's right to use the Software is subject to the "shrink-wrap" license agreement with the Software and in its accompanying documentation shipped by NETGEAR to Distributor. B. Distribution of Software licenses to end-users. Distributor may procure and distribute Software and accompanying documentation by placing orders under this Agreement. The terms of the licenses for such Software to which end-users are subject are included as a "shrink-wrap" license agreement with the Software and in its accompanying documentation when shipped by NETGEAR (the "License Agreement"). Distributor agrees that for each Software product it procures under this Agreement, Distributor will (i) assure the deliver the License Agreement to its customers, and (ii) use reasonable efforts to inform its resale customers of the requirement to deliver the License Agreement to their end-user customers in the form supplied by NETGEAR with the Products. C. Limitations. Distributor may not, nor authorize its resale customers or the end-user to translate, decompile, disassemble, use for any competitive analysis, or reverse engineer the Software or its documentation, in any way, except for the event where the end-user locates Products within the European Union, in which case the Software Directive enacted by the Council of European Communities Directive dated 14 May 1991 will apply to the examination of the Software to facilitate interoperability; in such event Distributor agrees to notify, and cause its end-user to notify NETGEAR of any such intended examination of the Software and procure from NETGEAR its support and assistance. Distributor agrees to not translate, nor allow end-users to translate any portion of the Software or associated documentation into any other format or foreign language without the prior written consent of NETGEAR. In no event will Distributor grant the U.S. Government rights in any Software greater than those set out in subparagraphs (a) through (d) of the Commercial Computer Software - Restricted Rights clause at FAR 52.227-19 and the limitations for civilian agencies set out the License Agreement; and subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 for agencies of the Department of Defense. -5- 9 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. 7. WARRANTIES A. Warranty Period. The warranty period for each Product is specified in the Price List that is in effect on the date NETGEAR receives Distributor's order, and shall apply regardless of any extended warranty period which Distributor may choose to provide to its customers. NETGEAR reserves the right to change a warranty period for a specific Product but only for orders placed after the effective date of such change, provided that the minimum warranty period for all Products is ninety days, except for those Products specifically identified in the Price List as provided "AS IS" with no warranties. B. Hardware Warranty. NETGEAR warrants to end-users that each item of Hardware will be free from defects in workmanship and materials for its respective warranty period which begins on the date of purchase by the end user. Should a Product fail within this warranty period, Distributor shall replace such defective Product from Distributor's inventory and accept return of the failed Product from Distributor's customer. At intervals to be mutually agreed upon between NETGEAR and Distributor, Distributor shall contact NETGEAR to receive a Return Material Authorization number for the collected failed Product. Upon receipt of the failed Product, NETGEAR shall issue a credit to Distributor for Distributor's purchase price of the replacement Product issued, less any prior credits or allowances. End-users' exclusive remedy is to receive replacement Product from reseller and NETGEAR's sole obligation and liability under this warranty is to issue an off-setting credit to reseller for Product returned by reseller on behalf of its end-user because of defects in workmanship or material. C. Software Warranty. NETGEAR warrants to the end-user that each item of Software, as delivered or updated by NETGEAR and properly installed and operated on the Hardware or other equipment it is originally licensed for, will function substantially as described in its then-current user documentation during its respective warranty period. If any item of Software fails to so perform during its warranty period, as the sole remedy NETGEAR or NETGEAR's supplier will at its discretion provide a suitable fix, patch or workaround for the problem which may be included in a future revision of the Software. For specific Software which is distributed by NETGEAR as a licensee of third parties, additional warranty terms offered by such third parties to end-users may apply. D. Distributor's internal use warranty. For Products ordered under this Agreement for Distributor's internal use, NETGEAR provides Distributor the same warranties as described above for end-users. E. Limitations. NETGEAR does not warrant that any item of Software is error-free or that its use will be uninterrupted. NETGEAR is not obligated to remedy any Software defect which cannot be reproduced with the latest revision of the Software. These warranties do not apply to any Product which has been (i) altered, except by NETGEAR or in accordance with its instructions, or (ii) used in conjunction with another vendor's product resulting in the defect, or (iii) damaged by improper environment, abuse, misuse, accident or negligence. Replacement parts furnished under this warranty may be refurbished or contain refurbished components. -6- 10 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. THE FOREGOING WARRANTIES AND LIMITATIONS ARE EXCLUSIVE REMEDIES AND ARE IN LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY LIMITATION WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ANY PRODUCT THAT MAY BE FURNISHED BY NETGEAR WHICH IS NOT LISTED IN THE PRICE LIST, OR WHICH IS IDENTIFIED IN THE PRICE LIST AS AN "AS IS" PRODUCT, IS FURNISHED "AS IS" WITH NO WARRANTIES OF ANY KIND. 8. PRODUCT RETURNS Prior to returning any Product, whether for exchange or warranty or non-warranty action, Distributor must obtain a Return Materials Authorization (RMA) number from NETGEAR. Distributor should return the product to NETGEAR, [*]. NETGEAR will not accept collect shipments. Any Product returned to NETGEAR, which is not returned in accordance with the terms of this Agreement, may be rejected. 9. PRODUCT EXCHANGE PRIVILEGES A. Distributor may return previously purchased Products for replacement by an equal or greater value of different Products, under the following conditions: (a) Distributor may return Products only within the [*] period following [*] and [*] of each year. (b) The total value of the returned Products shall not exceed [*] of the Net Shipments invoiced by NETGEAR for all Products, [*], during the [*] immediately preceding each of the above dates. (c) The replacement Products are not identical to the returned Products. Distributor shall be invoiced for the replacement Products at prices in effect at the time of return, and credited for the value of the returned products at the prices actually paid by the Distributor less any prior credits. (d) The returned Products have not been in the Distributor's inventory for more than [*] after shipment from NETGEAR. (e) The returned Products are in their original shipping containers and have not been altered, damage or used. 10. DISTRIBUTOR'S RESPONSIBILITIES A. Promotion and sale. Distributor shall sell or license Products only to resale customers which will in-turn resell or transfer the licenses to those Products to end use customers. Distributor may not sell or license Products directly to end use customers without the express written -7- 11 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. consent of NETGEAR. Distributor agrees to use commercially reasonable efforts to maximize sales of NETGEAR Products. B. Support. Distributor shall be the sole point of contact for its resale customers and their end-use customers in all support situations. Distributor shall provide first level support for its customers. NETGEAR shall provide second and third level support to Distributor in order to resolve end user technical problems. C. Training. Distributor agrees to maintain, and to adequately and thoroughly train on an on-going basis, a sufficient staff of qualified sales, marketing, technical and support personnel familiar with the applications, features, benefits, operation and configuration of the Products so as to effectively promote and support the Products and to assure end-user satisfaction. NETGEAR agrees to provide assistance to Distributor to allow Distributor to comply with the foregoing training responsibility. D. Restriction on Appointment of Additional Distributors. NETGEAR's agreement not to appoint additional distributors of NETGEAR Products in the Territory during the * term of this Agreement is predicated upon Distributor performing the mutually agreed upon activities included in the Marketing Plan attached as Exhibit 4. In the event Distributor fails to perform the activities included in the Marketing plan in [*] NETGEAR may appoint additional distributors in the Territory and the provisions of this Agreement appointing Distributor as the only NETGEAR distributor in the Territory shall be deemed deleted. 11. REPORTS A. Each month Distributor shall submit a Point of Sale (POS) shipments report covering the preceding month, broken out by Product. The report may be submitted via BBS and shall include, at a minimum, Distributor's [*], part number, quantity shipped and unit cost. B. Each month Distributor shall prepare and forward to NETGEAR a weekly report showing Distributor's inventory of the Products purchased and licensed from NETGEAR as of the end of the previous calendar month. The report may be submitted via BBS and shall include, at a minimum the part number and the number of units and purchase value of the inventory remaining by Product. C. From time to time, but not more than twice per year, NETGEAR may request access to information about the Distributor's business reasonably required to insure that Distributor is in compliance with the terms of this Agreement and the Distributor will grant the right for a NETGEAR representative to visit the Distributor's place of business during normal business hours at a mutually agreed upon time to examine such information. 12. PROPRIETARY RIGHTS AND INFORMATION A. Use of Proprietary Information. "Proprietary information" includes, without limitation, diagnostics, the Software, all documentation for Software, other user manuals, as well as 8 12 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. electronically and visually transmitted printed materials and information disclosed by Distributor or NETGEAR, such as new product information, financial or technical data, information reported under Section 11 above or other information or data, that is marked with a proprietary or confidential legend. Each party agrees to hold the Proprietary Information of the other in confidence and to use the Proprietary Information only for the purposes expressly permitted under this Agreement, and to disclose Proprietary Information only to its employees and contractors as authorized in this Agreement and then only on a need-to-know basis. Each party agrees to maintain adequate internal procedures, including appropriate agreements with employees and authorized third parties, to protect the confidentiality of the Proprietary Information as required by this Agreement. Each party is entitled to appropriate injunctive relief in the event of any unauthorized disclosure or use of its Proprietary Information by the other party. B. Limitations. Proprietary Information does not include information which (i) is rightfully in the receiving party's possession in a complete and tangible form before it is received from the disclosing party, (ii) is or becomes a matter of public knowledge through no fault of the receiving party, (iii) is rightfully furnished to the receiving party by a third party without restriction on disclosure or use, or (iv) is independently developed by the receiving party without use of or reference to the disclosing party's Proprietary Information. C. Reservation of Rights. NETGEAR, on behalf of itself and its suppliers, reserves all proprietary rights in and to (i) all designs, engineering details, and other data pertaining to the Products, (ii) all original works, computer programs, fixes, updates (but not Distributor's or end-users' developed programs), discoveries, inventions, patents, know-how and techniques arising out of work done wholly or in part by NETGEAR or its subcontractors in connection with the Agreement, and (iii) any and all products developed as a result of such work. The performance by NETGEAR of professional Services shall not be deemed a work-for-hire but shall instead be subject to this section. D. Administrative procedures. Distributor and end-users are each responsible for the security of their own proprietary and confidential information and for maintaining adequate procedures apart from the Products to reconstruct lost or altered files, data or programs. 13. TRADEMARKS AND TRADE NAMES A. Use of trademarks. In the advertising and promotion of the Products, Distributor agrees to use NETGEAR's and certain of Bay Networks' trade names, logos and trademarks (the "Trademarks") as reasonably instructed by NETGEAR during the term of the Agreement. Solely for this purpose, NETGEAR and Bay Networks grant Distributor a non-exclusive, royalty-free, limited right to use the Trademarks. Distributor will not make or permit the removal or modification of any Trademarks or tags, proprietary notices, labels, or other identifying marks placed by Bay Networks, NETGEAR or their agents on the Products or associated literature. B. Rights to Trademarks. Distributor acknowledges that Bay Networks is the exclusive owner of the Trademarks and the use of the Trademarks by Distributor does not convey to Distributor any right, title or interest in or to the Trademarks. Distributor has no claim or right in the -9- 13 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. Trademarks, service marks, or trade names owned, used or claimed now or in the future by NETGEAR. Distributor agrees that it will not register, nor attempt to register any Trademark or any mark confusingly similar to any Trademark in any jurisdiction unless expressly approved in writing by Bay Networks in advance. C. Notification. In order to assure proper use and protection of Trademarks, Distributor agrees to inform NETGEAR in writing if Distributor purchases, or is offered for purchase, any Products with a Trademark or other mark of NETGEAR from a source other than NETGEAR, its subsidiaries, or an authorized NETGEAR Distributor. 14. CLAIMS OF INFRINGEMENT A. Indemnification. NETGEAR agrees to defend at its own expense any action brought against Distributor to the extent that it is based on a claim that any Product infringes a United States or Territory patent, copyright, trade mark, trade secret or other valid intellectual property right, and will pay any costs and damages finally awarded against Distributor in any such actions which are attributable to any such claim. NETGEAR shall have no liability for any settlement or compromise made without its prior written consent. NETGEAR shall, at its option and expense, (1) procure the right to continue using the Product, (2) replace or modify the Product so that it becomes non-infringing or, if (1) or (2) are not reasonably or economically possible, (3) Distributor may return the Product to NETGEAR for a refund of an amount equal to the depreciated value of the equipment, or an amount equal to the Distributor's actual purchase price paid without any depreciation minus any prior credits or allowances if the returned Products are in their original shipping containers and have not been altered, damaged or used. B. Limitations. NETGEAR has no liability to Distributor under this Section entitled CLAIMS OF INFRINGEMENT with respect to any claim which is based upon or results from (i) the combination of any Product with any equipment, device, firmware or software not furnished by NETGEAR, or (ii) any modification of any Product by a party other than NETGEAR, (iii) Distributor's failure to install or have installed changes, revisions or updates as instructed by NETGEAR, or (iv) NETGEAR's compliance with Distributor's or end-user's specifications, designs or instructions. 15. TERM OF AGREEMENT AND TERMINATION A. Term. This Agreement will be in effect for * from the Effective Date and will automatically renew for successive [*] periods unless terminated as provided below. B. Termination. This Agreement may be canceled at any time without cause, by either party upon ninety (90) days written notice to the other party. Either party may terminate this Agreement immediately if (i) the other party becomes insolvent, files or has filed against it a petition in bankruptcy, or ceases doing business; or (ii) the other party fails to cure a material breach of the Agreement within thirty (30) day after receipt of written notice of such breach from the party not in default. Upon termination of the Agreement by NETGEAR for Distributor's breach, NETGEAR may cancel all of Distributor's unfulfilled orders without further obligation. This Agreement may be -10- 14 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. terminated at any time without cause by either party upon ninety (90) days written notice to the other party. C. Effect of termination. Except as otherwise specifically stated in the Agreement, neither party will be liable to the other for damages in any form by reason of the expiration or earlier termination of the Agreement. D. Continuing effect. Any expiration or earlier termination of the Agreement does not modify or alter any of the obligations of the parties which accrued prior to such expiration or termination. The sections of the Agreement which address taxes; duty; fee; payment; security interest; proprietary rights and information; warranties; foreign reshipment; remedies; limitations; termination and governing law survive any expiration or termination of the Agreement. The section entitled SOFTWARE LICENSES also survives any expiration or termination provided Distributor and end-users continues to comply with the provisions of the applicable software license terms. Except as expressly agreed in writing between the parties, no party is liable to the other for any dollar amounts, costs or damages by reason of the expiration or earlier termination of the Agreement. 16. LIMITATION OF LIABILITY A. NETGEAR agrees to indemnify Distributor against any claim arising out of or resulting from the Products or the Agreement, provided that any such claim (i) is attributable to bodily injury, death, or to injury to or destruction of physical property (other than the Products), and (ii) is caused by the negligent act or omission of NETGEAR or a material defect in the Product. This obligation on the part of NETGEAR is subject to Distributor's obligation to (a) give NETGEAR prompt written notice of any such claim, (b) grant NETGEAR control of the defense and settlement of such claim, and (c) assist fully in the defense provided that NETGEAR reimburses Distributor's out-of pocket costs. NETGEAR has no liability for any settlement or compromise made without its prior written consent. Under no circumstances is NETGEAR liable for any third-party claims except for those described in this section and in the section entitled CLAIMS OF INFRINGEMENT. B. NETGEAR, at its expense, agrees to maintain insurance coverage to protect against its liabilities under the Agreement in an amount no less than is reasonable or required by applicable statute. The insurance will include (a) worker's compensation insurance, (b) comprehensive general liability insurance, including coverage for product liability, bodily injury and property damage, and (c) automobile liability insurance. Upon Distributor's written request, NETGEAR will furnish the applicable certificate of insurance. IN NO EVENT WILL EITHER PARTY OR THEIR RESPECTIVE PARENT CORPORATIONS OR SUPPLIERS BE LIABLE FOR (1) THE COST OF SUBSTITUTE PROCUREMENT, SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, OR (2) ANY DAMAGES RESULTING FROM INACCURATE OR LOST DATA OR LOSS OF USE OR PROFITS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE FURNISHING OF SERVICES, OR THE USE OR PERFORMANCE OF PRODUCTS, EVEN IF INFORMED OF SUCH DAMAGES. EXCEPT FOR DAMAGES ARISING UNDER -11- 15 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. SECTIONS 14.A AND 16.A, IN NO EVENT WILL NETGEAR's OR BAY NETWORKS' TOTAL LIABILITY FOR ANY DAMAGES IN ANY ACTION BASED ON OR ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT EXCEED [*] TO NETGEAR PURSUANT TO THE AGREEMENT. EXCEPT FOR DAMAGES ARISING FROM BREACH OF SECTIONS 6.C AND 12, 13 OR 17, IN NO EVENT WILL DISTRIBUTOR's TOTAL LIABILITY FOR ANY DAMAGES IN ANY ACTION BASED ON OR ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT EXCEED [*] TO NETGEAR PURSUANT TO THE AGREEMENT. 17. FOREIGN RESHIPMENT This Agreement is made subject to all laws, regulations, orders or other restrictions on the export from the United States of Products and accompanying documentation, or of other technical data and information about such Products, which may be imposed from time to time. Distributor agrees not to export, directly or indirectly, any such Products or information to any country for which an export license or other governmental approval is required at the time of export without first obtaining such license or approval. Distributor is solely responsible, at its own expense, for obtaining all necessary import and re-export permits and certificates and for the payment of any and all taxes and duties imposed upon the movement and delivery of Products. 18. GENERAL A. The relationship of NETGEAR and Distributor is that of independent contractors. There is no relationship of agency, partnership, joint venture, employment or franchise between the parties. Neither party has the authority to bind the other or to incur any obligation on the other's behalf or to represent itself as the other's agent or in any way which might result in confusion as to the fact that the parties are separate and distinct entities. B. If any provision of this Agreement is held to be invalid or unenforceable, the remainder of the provisions shall remain in full force and effect. C. NETGEAR and Distributor agree to comply with the provisions of all applicable federal, state, county and local laws, ordinances, regulations and codes, domestic and foreign. D. NETGEAR reserves the right to change the discount schedule, policy or program, whether referred to in the Agreement or set forth in an Exhibit to the Agreement. For changes which, in NETGEAR's opinion, may adversely affect Distributor, NETGEAR will provide thirty (30) days notice, or such longer period as NETGEAR deems appropriate, prior to the effective date of such change. E. Distributor will keep suitable records to demonstrate compliance with this Agreement. NETGEAR or its representative, at NETGEAR's cost may review these records during normal business hours for the sole purpose of determining Distributor's compliance with this Agreement. -12- 16 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. F. Any waiver, amendment or modification of any right, remedy or other term under the Agreement will not be effective unless mutually agreed to in writing and signed by authorized representatives of both parties. Neither party shall be bound by typographical or clerical errors. G. Neither party is liable for its failure or delay to perform its obligations under the Agreement due to strikes, wars, revolutions, acts of terrorism, fires, floods, explosions, earthquakes, shortages in labor, components or materials, government regulations, or other causes beyond its control. H. This Agreement may not be assigned by either party without prior written permission from the other party, which permission shall not be unreasonably withheld or delayed. Any attempt by either party to assign any right, or delegate any duty or obligation which arises under the Agreement without such permission will be voidable. 19. ENTIRE AGREEMENT, GOVERNING LAW This Agreement, including its attachment and order acknowledgments under the Agreement, constitutes the entire agreement between Distributor and NETGEAR with respect to the purchase, resale and distribution of the Products and is governed by the laws of the State of California except that body of law dealing with conflicts of law. -13- 17 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 1 DISCOUNT SCHEDULE The initial Discount offered Distributor for purchase or license of NETGEAR Products included on the NETGEAR Price List in effect on the Effective Date of this Agreement is [*] off of the then current NETGEAR list price. Distributor agrees that the foregoing Discount is only applicable to Products included on the NETGEAR Price List on the Effective Date of this Agreement. NETGEAR reserves the right to add Products to the Price List at its sole discretion and any such additional Products shall be offered to Distributor at discounts to be determined at that time. 18 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2 DISTRIBUTOR'S ROUTING GUIDE 19 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 CMD NAMED ACCOUNTS [*] 20 * Portions denoted with an asterisk have been CONFIDENTIAL TREATMENT REQUESTED omitted and filed separately with the EXHIBIT 10.18 Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4 MARKETING PLAN EX-10.19 6 f65217a1ex10-19.txt EXHIBIT 10.19 1 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 10.19 DISTRIBUTOR AGREEMENT between TECH DATA PRODUCT MANAGEMENT, INC. and NETGEAR, INC. NETGEAR Agreement Number: N130 Effective Date: March 1, 1997 Term: 1 Year Tech Data Product Management, Inc., a corporation organized under the laws of Florida having a place of business located at 5350 Tech Data Drive, Clearwater, FL 34620 ("Distributor") and NETGEAR, Inc. ("NETGEAR"), a wholly owned subsidiary of Bay Networks, Inc., organized under the laws of the State of Delaware, having a place of business at 4401 Great America Parkway, Santa Clara, California, USA, agree that the following terms govern the purchase, sale, and licensing of Products (as defined below) between the parties. NOTICES: All notices given under the Agreement are to be in writing. Notices of a legal nature shall be sent via registered or certified mail return receipt requested, postage prepaid. All other notices will be sent via telefax with a confirming "hard" copy to follow sent via mail, courier service or otherwise delivered to the party to be notified. Notices of whatever nature shall be addressed to the following address, or to such other address as may have been substituted by written notice: To Distributor: To NETGEAR: Tech Data Product Management, Inc. 4401 Great America Parkway 5350 Tech Data Drive P.O. Box 58185 Clearwater, FL 34620 Santa Clara, CA 95052-8185 Attn: Tamra Muir Attn: Patricia Dutra-Gerard Vice President - Marketing Operations cc: Contracts Administration
DISTRIBUTOR AND NETGEAR ACKNOWLEDGE THAT EACH HAS READ THIS AGE TOGETHER WITH THE ATTACHED EXHIBIT, UNDERSTANDS IT AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. AGREED: AGREED: TechData Product Management Inc. NETGEAR, Inc. By: /s/ PEGGY K. CALDWELL By: /s/ LLOYD CARNEY --------------------------- ------------------------------------------- (authorized signature) (authorized signature) Name: PEGGY K. CALDWELL Name: LLOYD CARNEY --------------------------- ------------------------------------------- (type or print) (type or print) Title: Sr. V.P. Marketing Title: Exec V.P. & G.M. Enterprise Business Group --------------------------- ------------------------------------------- Date: 4/11/97 Date: 4/18/97 --------------------------- -------------------------------------------
2 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 1. APPOINTMENT Subject to Distributor's performance of its obligations under this Agreement, Distributor is appointed as a non-exclusive NETGEAR Distributor and may purchase certain equipment ("Hardware") and licenses for software including revisions and updates ("Software"), as are listed in NETGEAR's then-current price list (the "Price List") for resale within the Territory as defined below. For the purposes of this Agreement, Hardware and Software shall be collectively referred to as "Products" unless stated otherwise. For the purposes of this provision, "Distributor" shall mean a company acquiring Products directly from NETGEAR for resale or license to dealers or other second tier resellers which in turn resell or license the Products to end user customers. 2. TERRITORY Except as may be otherwise provided by law, Distributor may not distribute or re-export any Products outside of the Territory identified herein as the United States without the specific written consent of NETGEAR. In the event that Distributor wishes to expand the scope of the Territory and is able to adequately sell and support Products within the additional region, then upon the approval of NETGEAR, the parties may choose by written agreement to modify the Territory. 3. ORDERS A. Distributor may purchase Products by placing orders under this Agreement which are accepted by NETGEAR. No order will be effective until accepted by delivery of NETGEAR's order acknowledgment. NETGEAR will use reasonable efforts to transmit an acknowledgment in writing within 5 days of receipt of an acceptable order. Distributor agrees that each order placed with NETGEAR for Products shall be governed by this Agreement, regardless of any additional or conflicting term in Distributor's order, unless otherwise agreed to in writing by the parties. Unless otherwise specifically stated in the Order, all Orders accepted by NETGEAR shall be deemed to be for immediate release. Orders may be sent by telefax or other electronic media approved by NETGEAR and must specify: (a) Distributor's Purchase Order number; (b) Product and/or Service number and description for each item ordered; (c) Desired quantities; (d) Purchase price for each Product or Service ordered; (e) Tax status, including exemption certificate number if tax exempt; (f) Preferred shipping method; and (g) Exact "Bill to" and "Ship to" address. B. MINIMUM/STANDARD LOT SIZES. Products must be ordered in the minimum and/or standard lot size quantities specified in the Price Schedule. Orders for less than minimum or non-standard lot size quantities of any Product may, at NETGEAR's discretion, be rejected. 4. PRICES, PRICE LIST, TAXES AND PAYMENT A. PRICES. Prices for Products are those set out in NETGEAR's Price List, less the applicable discount specified in Exhibit 1. All Product prices are F.O.B. NETGEAR's point of shipment, except as specified in Section 5D. B. CHANGES. NETGEAR may modify the Price List at any time, including changes to the Products or their corresponding list prices, but NETGEAR will provide Distributor with written notice thirty days in advance of the effective date of any price increase or Product deletion. Price decreases will apply to the 2 3 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. corresponding Products that are shipped by NETGEAR on or after the effective date of the list price decrease. In the event of a List Price increase for any of the Products, NETGEAR will extend to Distributor the price in effect at the time the Distributor's order is acknowledged by NETGEAR provided that such order was placed prior to the announcement of the list price increase and further provided that Distributor requests shipment of the order within 60 days of the effective date of the list price increase. C. INVENTORY PRICE PROTECTION. In the event of a list price decrease on any of the Products, Distributor may apply for a credit on those units of Product: a) which were shipped by NETGEAR to Distributor prior to the effective date of the list price decrease and remain unsold in Distributor's inventory or are being returned under open RMA's or are in the inventories of certain mutually agreed to Distributor retail accounts ("Named Accounts") as listed in Exhibit 3 to this Agreement on the effective date of the list price decrease or b) which were in transit between NETGEAR and Distributor on the effective date of the list price decrease. The amount of the credit on any unit shall be equal to the difference between the Distributor's actual purchase price paid minus any prior credits and allowances, and the new lower purchase price. In order to receive a credit, Distributor a) must submit to NETGEAR within thirty (30) days of the effective date of the list price decrease, a report of inventory eligible for the price credit and must have submitted its regular monthly inventory report on time, according to Section 11, in each of the three months prior to the effective date of the list price decrease. Upon verification by NETGEAR of the eligible units and credit amounts, NETGEAR will issue a credit to the Distributor's account. D. TAXES AND OTHER LEVIES. Prices are exclusive of any tax, value-added tax, fee, duty or governmental charge, however designated (except for NETGEAR's franchise taxes or for taxes on NETGEAR's net income) which may be levied or based on the Products, their sale, importation, use, or possession, or on this Agreement. Distributor shall be responsible for franchise taxes, sales and use taxes or other similar taxes (excluding taxes on NETGEAR's income) and such taxes shall be paid by Distributor to NETGEAR unless Distributor provides NETGEAR with a valid certificate of exemption acceptable to the appropriate taxing or governmental authority. No taxes of any type shall be added to invoices without the prior written consent of Distributor. E. PAYMENT. Except as may be specifically authorized in writing by NETGEAR, and subject to NETGEAR's continuing approval of Distributor's credit status and financial condition, Distributor will pay NETGEAR for all Products ordered by Distributor within thirty days of the date the corresponding invoice is issued by NETGEAR. NETGEAR, in its sole discretion, reserves the right to specify, and to change from time to time, Distributor's credit line and payment terms. All payments are to be made in U.S. dollars. Payment for shipments made outside of the United States shall be made by wire transfer in accordance with wire transfer procedures provided by NETGEAR. If at any time Distributor is delinquent in the payment of any invoice, exceeds the credit line established by NETGEAR, or is otherwise in material breach of the Agreement and Distributor fails to cure said breach within 30 days, NETGEAR may, in its discretion, withhold shipment (including partial shipments) of any order or may require Distributor to pay cash on delivery for further shipments. The foregoing notwithstanding, Distributor shall not be deemed in default under this provision if Distributor withholds payment of amounts legitimately in dispute on any invoice provided that (1) Distributor promptly pays the undisputed portion of the invoice in accordance with the terms of this Agreement; (2) Distributor provides NETGEAR with written notice of the disputed amount within 10 days of receipt of the invoice; and (3) Distributor works in good faith with NETGEAR to resolve any dispute within a commercially reasonable time period. 5. SHIPMENT, CANCELLATION, RETURNS, TITLE, RISK OF LOSS 3 4 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. A. SHIPMENT. Unless otherwise instructed by Distributor, NETGEAR will ship Products ordered by Distributor using the method and carrier specified in Distributor's then current Routing Guide, as may be amended from time to time by written notice from Distributor. The version of the Routing Guide which is in force on the Effective Date of this Agreement is attached to and made a part of this Agreement as Exhibit 2. Distributor is responsible for all freight, handling, insurance and other transportation charges, and agrees to pay all such charges if separately identified on NETGEAR's invoice. NETGEAR will ship freight collect, uninsured, if so instructed by Distributor's order. B. CANCELLATION AND RESCHEDULING. Distributor may not cancel or reschedule any order, in whole or in part, less than five business days prior to the corresponding shipment date specified in NETGEAR's order acknowledgment. C. RETURNS. Products received by Distributor as a result of an error by NETGEAR in shipment may be returned for credit. Such credit will include an amount equal to the purchase price of the Product shipped in error as well as the cost of return freight paid by Distributor to return the Product to NETGEAR. Products with defects covered by the warranty may be returned for remedy under the warranty. Prior .to returning any Product, whether for exchange or warranty or non-warranty action, Distributor must obtain a Return Materials Authorization (RMA) number from NETGEAR. NETGEAR will use best efforts to respond to Distributor's request for an RMA number within 5 business days of receipt of the request. Distributor should return the Product to NETGEAR, with shipping charges prepaid. NETGEAR will not accept collect shipments. Any Product returned to NETGEAR, which is not returned in accordance with the terms of this. Agreement, may be refused. D. TITLE, RISK OF LOSS. For all shipments, title to the Hardware passes to Distributor when presented by NETGEAR or its agent to the carrier, from which point Distributor is responsible for risk of all loss, damage to, or theft of all Products. 6. SOFTWARE LICENSES A. INTERNAL USE BY DISTRIBUTOR. Distributor may purchase for its internal use licenses to Software and accompanying documentation by placing orders under this Agreement. Distributor's right to use the Software is subject to the "shrink-wrap" license agreement with the Software and in its accompanying documentation shipped by NETGEAR to Distributor. B. DISTRIBUTION OF SOFTWARE LICENSES TO END-USERS. Distributor may procure and distribute Software and accompanying documentation by placing orders under this Agreement. The terms of the licenses for such Software to which end-users are subject are included as a "shrink-wrap" license agreement with the Software and in its accompanying documentation when shipped by NETGEAR (the "License Agreement"). Distributor agrees that for each Software product it procures under this Agreement, Distributor will (i) deliver the License Agreement to its customers, provided that said License Agreement is provided by NETGEAR to Distributor, and (ii) use commercially reasonable efforts to inform its resale customers of the requirement to deliver the License Agreement to their end-user customers in the form supplied by NETGEAR with the Products. C. LIMITATIONS. Distributor may not, nor authorize its customers to translate, decompile, disassemble, use for any competitive analysis, or reverse engineer the Software or its documentation, in any way. Distributor agrees to not translate, nor authorize others to translate any portion of the Software or associated documentation into any other format or foreign language without the prior written consent of NETGEAR. In no event will Distributor grant the U.S. Government rights in any Software greater than those set out in subparagraphs (a) through (d) of the Commercial Computer Software - Restricted Rights clause at FAR 52.227-19 and the limitations for civilian agencies set out the License Agreement; and 4 5 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 for agencies of the Department of Defense. 7. WARRANTIES A. WARRANTY PERIOD. The warranty period for each Product is specified in the Price List that is in effect on the date NETGEAR receives Distributor's order, and shall apply regardless of any extended warranty period which Distributor may choose to provide to its customers. NETGEAR reserves the right to change a warranty period for a specific Product but only for orders placed after the effective date of such change, provided that the minimum warranty period for all Products is ninety days, except for those Products specifically identified in the Price List as provided "AS IS" with no warranties. B. HARDWARE WARRANTY. NETGEAR warrants to end-user that each item of Hardware will be free from defects in workmanship and materials for its respective warranty period which begins on the date of purchase by the end user. Should a Product fail within this warranty period, Distributor shall replace such defective Product from Distributor's inventory and accept return of the failed Product from Distributor's customer. At intervals to be mutually agreed upon between NETGEAR and Distributor, Distributor shall contact NETGEAR to receive a Return Material Authorization number for the collected failed Product. Upon receipt of the failed Product, NETGEAR shall issue a credit to Distributor for Distributor's purchase price of the replacement Product issued, less any prior credits or allowances. The exclusive remedy of Distributor's customer under this warranty is to receive replacement Product from Distributor and NETGEAR's sole obligation and liability under this warranty is to issue an off-setting credit to Distributor for Product returned by Distributor on behalf of its customer because of defects in workmanship or material. C. SOFTWARE WARRANTY. NETGEAR warrants to the end-user that each item of Software, as delivered or updated by NETGEAR and properly installed and operated on the Hardware or other equipment it is originally licensed for, will function substantially as described in its then-current user documentation during its respective warranty period. If any item of Software fails to so perform during its warranty period, as the sole remedy NETGEAR or NETGEAR's supplier will at its discretion provide a suitable fix, patch or workaround for the problem which may be included in a future revision of the Software. For specific Software which is distributed by NETGEAR as a licensee of third parties, additional warranty terms offered by such third parties to end-users may apply. D. DISTRIBUTOR'S INTERNAL USE WARRANTY. For Products ordered under this Agreement for Distributor's internal use, NETGEAR provides Distributor the same warranties as described above for end-users. E. GENERAL WARRANTY. NETGEAR warrants that NETGEAR has the right, title, ownership interest and/or marketing rights necessary to provide Products to Distributor as set forth in this Agreement. NETGEAR warrants that the Products, when shipped, will be new, free and clear of all liens and encumbrances and that subject to Distributor paying the applicable prices to NETGEAR as provided for in this Agreement and to the terms of any Software license that accompanies any Software, Distributor shall be entitled to resell or relicense the Products to its customers for use without disturbance by NETGEAR. NETGEAR represents and warrants that the Products, when shipped by NETGEAR, conform to all applicable codes, laws and regulations then in effect in the Territory. NETGEAR agrees that Distributor may pass through to its customers warranties granted by NETGEAR. F. LIMITATIONS. NETGEAR does not warrant that any item of Software is error-free or that its use will be uninterrupted. NETGEAR is not obligated to remedy any Software defect which cannot be reproduced with the latest revision of the Software. These warranties do not apply to any Product which has been (i) altered, except by NETGEAR or in accordance with its instructions, or (ii) used in conjunction 5 6 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. with another vendor's product resulting in the defect, or (iii) damaged by improper environment, abuse, misuse, accident or negligence. Distributor shall not alter, enlarge or limit the representations, liabilities or warranties of NETGEAR in any way beyond those expressly set forth in this Agreement. Distributor shall hold harmless and indemnify NETGEAR for any expenses, claims, damages or liability arising from or related to any unauthorized guarantees, warranties or representations made by Distributor, including without limitation, attorneys' fees. THE FOREGOING WARRANTIES AND LIMITATIONS ARE EXCLUSIVE REMEDIES AND ARE IN LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY LIMITATION WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ANY PRODUCT THAT MAY BE FURNISHED BY NETGEAR WHICH IS NOT LISTED IN THE PRICE LIST, OR WHICH IS IDENTIFIED IN THE PRICE LIST AS AN "AS IS" PRODUCT, IS FURNISHED "AS IS" WITH NO WARRANTIES OF ANY KIND. 8. PRODUCT RETURNS Prior to returning any Product, whether for exchange or warranty or non-warranty action, Distributor must obtain a Return Materials Authorization (RMA) number from NETGEAR. Distributor should return the product to NETGEAR, with shipping charges PREPAID. NETGEAR will not accept collect shipments. Any Product returned to NETGEAR, which is not returned in accordance with the terms of this Agreement, may be rejected. 9. PRODUCT EXCHANGE PRIVILEGES A. Distributor may return previously purchased Products for replacement by an equal or greater value of different Products, under the following conditions: a) Distributor may return Products only within the thirty (30) day period following March 31, June 30, September 30 and December 31 of each year. b) The total value of the returned Products shall not exceed ten percent (10%) of the Net Shipments invoiced by NETGEAR for all Products, less any credits granted, during the three (3) months immediately preceding each of the above dates. c) The replacement Products are not identical to the returned Products. Distributor shall be invoiced for the replacement Products at prices in effect at the time of return, and credited for the value of the returned products at the prices actually paid by the Distributor less any prior credits. d) The returned Products are in their original shipping containers and have not been altered, damaged or used. B. Subject to the following, Distributor may return for replacement previously purchased Product which has had its packaging damaged and is thus rendered unsaleable. Products returned under this provision must be new and unused and, with the exception of the packaging, undamaged. When requesting an RMA for return of Products under this provision, Distributor must advise NETGEAR that the Products are being returned because of damaged packaging. In addition, Distributor must, at that time, place an order for a like quantity of the same Products as replacement for those to be returned. All Products returned under this provision must be returned to NETGEAR with freight charges prepaid. If the quantity of Products returned due to damaged packaging becomes excessive, NETGEAR and Distributor agree to negotiate in good faith limitations or restrictions to be imposed on such returns. 6 7 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. C. Products which are returned under the Warranty or as a result of erroneous shipment by NETGEAR or because Product packaging has become damaged and unsaleable shall not be included in the ten percent (10%) maximum return above. D. NETGEAR may, at its sole option, allow Distributor to exchange additional products in order to correct major product mix imbalances in Distributor's inventory or address inventory imbalances resulting from Product obsolescence. Any additional Product exchanges will be subject to terms and conditions mutually agreed to by NETGEAR and Distributor at the time of the exchange. 10. DISTRIBUTOR'S RESPONSIBILITIES A. PROMOTION AND SALE. Distributor shall sell or license Products only to resale customers which will in-turn resell or transfer the licenses to those Products to end use customers. Distributor may not sell or license Products directly to end use customers without the express written consent of NETGEAR. Distributor agrees to use commercially reasonable efforts to maximize sales of NETGEAR Products. B. SUPPORT. Distributor shall be the sole point of contact for its resale customers and their end-use customers in all support situations. Distributor shall provide first level support for its customers. NETGEAR shall provide second and third level support to Distributor in order to resolve end user technical problems. C. TRAINING. Distributor agrees to maintain, and to adequately and thoroughly train on an on-going basis, a sufficient staff of qualified sales, marketing, technical and support personnel familiar with the applications, features, benefits, operation and configuration of the Products so as to effectively promote and support the Products and to assure end-user satisfaction. NETGEAR agrees to provide assistance to Distributor to allow Distributor to comply with the foregoing training responsibility. 11. REPORTS A. Each month Distributor shall submit a Point of Sale (POS) shipments report covering the preceding month, broken out by Product. The report may be submitted via BBS and shall include, at a minimum, Distributor's reseller's name, address, part number, quantity shipped and unit cost. B. Each month Distributor shall prepare and forward to NETGEAR a weekly report showing Distributor's inventory of the Products purchased and licensed from NETGEAR as of the end of the previous calendar month. The report may be submitted via BBS and shall include, at a minimum the part number and the number of units and purchase value of the inventory remaining by Product. C. From time to time, but not more than twice per year, NETGEAR may request access to information about the Distributor's business reasonably required to insure that Distributor is in compliance with the terms of this Agreement and the Distributor will grant the right for a NETGEAR representative to visit the Distributor's place of business during normal business hours at a mutually agreed upon time to examine such information. Distributor shall not be charged by NETGEAR nor will it charge NETGEAR a fee of any kind for inspection to information as provided for in this provision. 12. PROPRIETARY RIGHTS AND INFORMATION A. USE OF PROPRIETARY INFORMATION. "Proprietary Information" includes, without limitation, diagnostics, the Software, all documentation for Software, other user manuals, as well as electronically and visually transmitted printed materials and information disclosed by Distributor or NETGEAR, such as 7 8 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. new product information, financial or technical data, that is marked with a proprietary or confidential legend. Each party agrees to hold the Proprietary Information of the other in confidence and to use the Proprietary Information only for the purposes expressly permitted under this Agreement, and to disclose Proprietary Information only to its employees and contractors as authorized in this Agreement and then only on a need-to-know basis or as may be necessary by reason of legal, accounting or regulatory requirements beyond said party's reasonable control. Each party agrees to maintain adequate internal procedures, including appropriate agreements with employees and authorized third parties, to protect the confidentiality of the Proprietary Information as required by this Agreement. Each party is entitled to appropriate injunctive relief in the event of any unauthorized disclosure or use of its Proprietary Information by the other party. B. LIMITATIONS. Proprietary Information does not include information which (i) is rightfully in the receiving party's possession in a complete and tangible form before it is received from the disclosing party, (ii) is or becomes a matter of public knowledge through no fault of the receiving party, (iii) is rightfully furnished to the receiving party by a third party without restriction on disclosure or use, or (iv) is independently developed by the receiving party without use of or reference to the disclosing party's Proprietary Information. D. RESERVATION OF RIGHTS. NETGEAR, on behalf of itself and its suppliers, reserves all proprietary rights in and to (i) all designs, engineering details, and other data pertaining to the Products, (ii) all original works, computer programs, fixes, updates (but not Distributor's or end-users' developed programs), discoveries, inventions, patents, know-how and techniques arising out of work done wholly or in part by NETGEAR or its subcontractors in connection with the Agreement, and (iii) any and all products developed as a result of such work. E. ADMINISTRATIVE PROCEDURES. Distributor is responsible for the security of their own proprietary and confidential information and for maintaining adequate procedures apart from the Products to reconstruct lost or altered files, data or programs. 13. TRADEMARKS AND TRADE NAMES A. USE OF TRADEMARKS. In the advertising, promotion and distribution of the Products, Distributor agrees to use NETGEAR's and certain of Bay Networks' trade names, logos and trademarks (the "Trademarks") as reasonably instructed in writing by NETGEAR during the term of the Agreement. Solely for this purpose, NETGEAR and Bay Networks grant Distributor a non-exclusive, royalty-free, limited right to use the Trademarks. Distributor will not make or permit the removal or modification of any Trademarks or tags, proprietary notices, labels, or other identifying marks placed by Bay Networks, NETGEAR or their agents on the Products or associated literature. NETGEAR hereby represents and warrants to Distributor that NETGEAR has the right and authority to grant Distributor the right to use the Trademarks in accordance with this Agreement. B. RIGHTS TO TRADEMARKS. Distributor acknowledges that Bay Networks is the exclusive owner of the Trademarks and except as set forth herein, the use of the Trademarks by Distributor does not convey to Distributor any right, title or interest in or to the Trademarks. Distributor has no claim or right in the Trademarks, service marks, or trade names owned, used or claimed now or in the future by NETGEAR. Distributor agrees that it will not register, nor attempt to register any Trademark or any mark confusingly similar to any Trademark in any jurisdiction unless expressly approved in writing by Bay Networks in advance. C. NOTIFICATION. In order to assure proper use and protection of Trademarks, Distributor agrees to inform NETGEAR in writing if Distributor purchases any Products with a Trademark or other mark of 8 9 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. NETGEAR from a source other than NETGEAR, its subsidiaries, or an authorized NETGEAR Distributor. 14. CLAIMS OF INFRINGEMENT A. INDEMNIFICATION. NETGEAR agrees at its own expense to indemnify, defend and hold harmless Distributor and its customers from and against any and all actions, claims, direct losses, damages or liabilities arising or resulting from any action brought against Distributor or its customers to the extent that it is based on a claim that any Product infringes any patent, copyright, trade mark, trade secret or other valid intellectual property right, and will pay any costs, expenses and damages finally awarded against Distributor or its customers in any such actions which are attributable to any such claim. NETGEAR shall have no liability for any settlement or compromise made without its prior written consent. NETGEAR shall, at its option and expense, (1) procure the right to continue using the Product, (2) replace or modify the Product so that it becomes non-infringing or, if (1) or (2) are not reasonably or economically possible, (3) Distributor may return the Product to NETGEAR for a refund of an amount equal to the Distributor's actual purchase price paid without any depreciation minus any prior credits or allowances if the returned Products are in their original shipping containers and have not been altered, damaged or used. B. LIMITATIONS. NETGEAR has no liability to Distributor under this section entitled CLAIMS OF INFRINGEMENT with respect to any claim which is based upon or results from (i) the combination of any Product with any equipment, device, firmware or software not furnished or otherwise authorized by NETGEAR, or (ii) any modification of any Product by a party other than NETGEAR, (iii) Distributor's failure to install or have installed changes, revisions or updates as instructed by NETGEAR, or (iv) NETGEAR's compliance with Distributor's or end-user's specifications, designs or instructions. 15. TERM OF AGREEMENT AND TERMINATION A. TERM. This Agreement will be in effect for one year from the Effective Date and will automatically renew for successive one (1) year periods unless terminated as provided below. B. TERMINATION. This Agreement may be terminated at any time without cause, by either party upon thirty (30) days prior written notice to the other party. Either party may terminate this Agreement immediately if (i) the other party becomes insolvent, files or has filed against it a petition in bankruptcy, or ceases doing business; or (ii) the other party fails to cure a material breach of the Agreement within thirty (30) days after receipt of written notice of such breach from the party not in default. Upon termination of the Agreement by NETGEAR for Distributor's uncured breach, NETGEAR may cancel all of Distributor's unfulfilled orders without further obligation. C. INVENTORY REPURCHASE. If NETGEAR cancels this Agreement without cause or if Distributor terminates this Agreement for breach of a material obligation by NETGEAR, NETGEAR shall repurchase from Distributor, at Distributor's option, all Products in Distributor's inventory on the effective date of cancellation, provided NETGEAR verifies that a) the Products are in their original shipping containers and have not been altered, damaged or used, and b) the Products have been included in the appropriate monthly inventory reports submitted per Section 11. The repurchase price shall be the price actually paid by Distributor less any prior credits. Upon termination, Distributor agrees contact NETGEAR for an RMA number and to ship the repurchased Products to NETGEAR's plant, freight prepaid. D. EFFECT OF TERMINATION. Except as otherwise specifically stated in the Agreement, neither party will be liable to the other for damages in any form by reason of the expiration or early termination of the Agreement. 9 10 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. E. CONTINUING EFFECT. Any expiration or earlier termination of the Agreement does not modify or alter any of the obligations of the parties which accrued prior to such expiration or termination. The sections of the Agreement which address taxes; payment of duties; payment of fees; payment; indemnification; refunds and credits; inventory repurchase; proprietary rights and information; warranties; foreign reshipment; remedies; limitations; termination and governing law survive any expiration or termination of the Agreement. The section entitled SOFTWARE LICENSES also survives any expiration or termination provided Distributor and end-users continues to comply with the provisions of the applicable software license terms. Except as expressly agreed in writing between the parties, no party is liable to the other for any dollar amounts, costs or damages by reason of the expiration or earlier termination of the Agreement. 16. LIMITATION OF LIABILITY A. NETGEAR agrees to indemnify Distributor against any claim arising out of or resulting from the Products or the Agreement, provided that any such claim (i) is attributable to bodily injury, death, or to injury to or destruction of physical property (other than the Products), and (ii) is caused by the negligent act or omission of NETGEAR or a material defect in the Product. This obligation on the part of NETGEAR is subject to Distributor's obligation to (a) give NETGEAR prompt written notice of any such claim, (b) grant NETGEAR control of the defense and settlement of such claim, and (c) assist fully in the defense provided that NETGEAR reimburses Distributor's out-of pocket costs and reasonable expenses. NETGEAR has no liability for any settlement or compromise made without its prior written consent. Under no circumstances is NETGEAR liable for any third-party claims except for those described in this section and in the section entitled CLAIMS OF INFRINGEMENT. B. NETGEAR, at its expense, agrees to maintain insurance coverage to protect against its liabilities under the Agreement in an amount no less than is reasonable or required by applicable statute. This insurance will include (a) worker's compensation insurance, (b) comprehensive general liability insurance, including coverage for product liability, bodily injury and property damage, and (c) automobile liability insurance. Upon Distributor's written request, NETGEAR will furnish the applicable certificate of insurance which certificate of insurance shall name Distributor as an additional insured for purposes of claims arising pursuant to this Agreement. IN NO EVENT WILL EITHER PARTY OR THEIR RESPECTIVE PARENT CORPORATIONS OR SUPPLIERS BE LIABLE FOR (1) THE COST OF SUBSTITUTE PROCUREMENT, SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR (2) ANY DAMAGES RESULTING FROM INACCURATE OR LOST DATA OR LOSS OF USE OR PROFITS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE FURNISHING OF SERVICES, OR THE USE OR PERFORMANCE OF PRODUCTS, EVEN IF INFORMED OF SUCH DAMAGES. EXCEPT FOR DAMAGES ARISING UNDER SECTIONS 12, 13, 14.A AND 16.A, IN NO EVENT WILL NETGEAR's TOTAL LIABILITY FOR ANY DAMAGES IN ANY ACTION BASED ON OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT EXCEED THE TOTAL AMOUNT PAID TO NETGEAR PURSUANT TO THE AGREEMENT. EXCEPT FOR DAMAGES ARISING FROM DISTRIBUTOR'S BREACH OF SECTIONS 6.C AND 12,13 OR 17, IN NO EVENT WILL DISTRIBUTOR'S TOTAL LIABILITY FOR ANY DAMAGES IN ANY ACTION BASED ON OR ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT EXCEED THE TOTAL AMOUNT PAID TO NETGEAR PURSUANT TO THE AGREEMENT. 17. FOREIGN RESHIPMENT This Agreement is made subject to all laws, regulations, orders or other restrictions on the export from the United States of Products and accompanying documentation, or of other technical data and information 10 11 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. about such Products, which may be imposed from time to time. Distributor agrees not to export any such Products or information to any country for which an export license or other governmental approval is required at the time of export without first obtaining such license or approval. Distributor is solely responsible, at its own expense, for obtaining all necessary import and re-export permits and certificates and for the payment of any and all taxes and duties imposed upon the movement and delivery of Products. 18. GENERAL A. The relationship of NETGEAR and Distributor is that of independent contractors. There is no relationship of agency, partnership, joint venture, employment or franchise between the parties. Neither party has the authority to bind the other or to incur any obligation on the other's behalf or to represent itself as the other's agent or in any way which might result in confusion as to the fact that the parties are separate and distinct entities. B. If any provision of this Agreement is held to be invalid or unenforceable, the remainder of the provisions shall remain in full force and effect. C. NETGEAR and Distributor agree to comply with the provisions of all applicable federal, state, county and local laws, ordinances, regulations and codes, domestic and foreign. In addition, NETGEAR shall obtain applicable regulatory, testing laboratory or similar certifications and/or approvals which, in its sole discretion, are required for sale of the Products in the Territory. D. NETGEAR reserves the right to change the discount schedule, policy or program, whether referred to in the Agreement or set forth in an Exhibit to the Agreement. NETGEAR will use commercially reasonable efforts to provide thirty (30) days written notice, or such longer period as NETGEAR deems appropriate, prior to the effective date of such change. E. Distributor will keep suitable records to demonstrate compliance with this Agreement. NETGEAR or its representative, at NETGEAR's cost may review these records during normal business hours for the sole purpose of determining Distributor's compliance with this Agreement. F. Any waiver, amendment or modification of any right, remedy or other term under the Agreement will not be effective unless mutually agreed to in writing and signed by authorized representatives of both parties. Neither party shall be bound by typographical or clerical errors. G. Neither party is liable for its failure or delay to perform its obligations under the Agreement due to strikes, wars, revolutions, acts of terrorism, fires, floods, explosions, earthquakes, shortages in labor, components or materials, government regulations, or other causes beyond its control. H. This Agreement may not be assigned by either party without prior written permission from the other party, which permission shall not be unreasonably withheld or delayed. Any attempt by either party to assign any right, or delegate any duty or obligation which arises under the Agreement without such permission will be voidable. 19. ENTIRE AGREEMENT, GOVERNING LAW This Agreement, including its attachment and order acknowledgments under the Agreement, constitutes the entire agreement between Distributor and NETGEAR with respect to the purchase, resale and distribution of the Products. There are no oral or written representations, understandings or agreements relating to the 11 12 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. subject matter of this Agreement which are not expressed herein. This Agreement shall be governed by the laws of the State of California except that body of law dealing with conflicts of law. 12 13 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 1 DISCOUNT SCHEDULE The initial Discount offered Distributor for purchase or license of NETGEAR Products included on the NETGEAR Price List in effect on the Effective Date of this Agreement is [*] off of the then current NETGEAR list price. Distributor agrees that the foregoing Discount is only applicable to Products included on the NETGEAR Price List on the Effective Date of this Agreement. NETGEAR reserves the right to add Products to the Price List at its sole discretion and any such additional Products shall be offered to Distributor at discounts to be determined at that time. 13 14 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2 DISTRIBUTOR'S ROUTING GUIDE 14 15 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 2 [TECH DATA LETTERHEAD]
DEST. FL GA NJ IN TX CA ORIGIN --------------------------------------------------------------------------------- AL Con-Way S Con-Way S Watkins Watkins Watkins Watkins AR Watkins Watkins Watkins Watkins Con-Way S Watkins AZ Watkins Watkins Watkins Watkins Watkins Viking CA Watkins Watkins Watkins Watkins Watkins Viking CO Roadway Roadway Roadway Roadway Roadway Viking CT Watkins Watkins G.O.D. Watkins Watkins Watkins DC Watkins Watkins G.O.D. Watkins Watkins Watkins DE Watkins Watkins G.O.D. Watkins Watkins Watkins FL Con-Way S Con-Way S Watkins Watkins Watkins Watkins GA Con-Way S Con-Way S Watkins Watkins Watkins Watkins IA Roadway Roadway Roadway ConWay C Roadway Roadway ID Roadway Roadway Roadway Roadway Roadway Viking IL Watkins Watkins Watkins ConWay C Watkins Watkins IN Watkins Watkins Watkins ConWay C Watkins Watkins KS Watkins Watkins Watkins Watkins Watkins Watkins KY Watkins Watkins Watkins ConWay C Watkins Watkins LA Watkins Watkins Watkins Watkins Central Watkins MA Watkins Watkins G.O.D. Watkins Watkins Watkins MD Watkins Watkins G.O.D. Watkins Watkins Watkins ME Roadway Roadway G.O.D. Roadway Roadway Roadway MI Watkins Watkins Watkins ConWay C Watkins Watkins MN Watkins Watkins Watkins Roadway Watkins Watkins MO Watkins Watkins Watkins ConWay C Watkins Watkins MS Con-Way S Con-Way S Watkins Watkins Watkins Watkins MT Roadway Roadway Roadway Roadway Roadway Roadway NC Con-Way S Con-Way S Watkins Watkins Watkins Watkins ND Roadway Roadway Roadway Roadway Roadway Roadway NE Roadway Roadway Roadway Roadway Roadway Roadway NH Watkins Watkins G.O.D. Watkins Watkins Watkins NJ Watkins Watkins G.O.D. Watkins Watkins Watkins NM Roadway Roadway Roadway Roadway Roadway Viking NV Watkins Watkins Watkins Watkins Watkins Viking NY Watkins Watkins G.O.D. Watkins Watkins Watkins OH Watkins Watkins Roadway ConWay C Watkins Watkins OK Watkins Watkins Watkins Watkins Central Watkins OR Watkins Watkins Watkins Watkins Watkins Viking PA Watkins Watkins G.O.D. Watkins Watkins Watkins RI Watkins Watkins G.O.D. Watkins Watkins Watkins SC Con-Way S Con-Way S Watkins Watkins Watkins Watkins SD Roadway Roadway Roadway Roadway Roadway Roadway TN Con-Way S Con-Way S Watkins Watkins Watkins Watkins TX Watkins Watkins Watkins Watkins Con-Way S Watkins UT Roadway Roadway Roadway Roadway Roadway Viking VA Watkins Watkins G.O.D. Watkins Watkins Watkins VT Roadway Roadway G.O.D. Roadway Roadway Roadway WA Watkins Watkins Watkins Watkins Watkins Viking WV Roadway Roadway G.O.D. Roadway Roadway Roadway WI Watkins Watkins Watkins ConWay C Watkins Watkins WY Roadway Roadway Roadway Roadway Roadway Roadway
16 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 3 NAMED ACCOUNTS 15 17 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4 MARKETING PLAN 16 18 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 4 [*] 19 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. [*] 20 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. [*] 21 * Portions denoted with an CONFIDENTIAL TREATMENT REQUESTED asterisk have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. [*] -----END PRIVACY-ENHANCED MESSAGE-----