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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER
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CRITICAL PATH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 911788300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
320 FIRST STREET, 94105
SAN FRANCISCO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 808-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $3,757,912,930 as of March 15, 2000 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 57,932,617 shares of the Registrant's Common Stock issued
and outstanding on March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Critical Path, Inc.'s definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders anticipated to be held on June 6, 2000
are incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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CRITICAL PATH, INC.
INDEX
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PAGE
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PART I
Item 1. Business.......................................... 3
Risk Factors.................................... 21
Item 2. Properties........................................ 30
Item 3. Legal............................................. 30
Item 4. Submission of Notes to a Vote of Security 31
Holders...................................................
PART II
Item 5. Market for Registrant's Common Equity and Related 32
Stockholder Matters...............................
Item 6. Selected Financial Data........................... 34
Item 7. Management's Discussion and Analysis of Financial 35
Condition and Results of Operations...............
Item 7A. Quantitative and Qualitative Disclosures About 51
Market Risk.......................................
Item 8. Financial Statements and Supplemental Data........ 51
Item 9. Changes in and Disagreements with Accountants on 51
Accounting and Financial Disclosure...............
PART III
Item 10. Directors and Executive Officers of the 52
Registrant................................................
Item 11. Executive Compensation............................ 56
Item 12. Security Ownership of Certain Beneficial Owners 57
and Management....................................
Item 13. Certain Relationships and Related Party 59
Transactions..............................................
PART IV
Item 14. Exhibits and Reports on Form 8-K..................
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks" and "estimates" and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and actual actions or results may differ materially. These
statements are subject to certain risks, uncertainties and assumptions that are
difficult to predict, including those noted in the documents incorporated herein
by reference. We undertake no obligation to update publicly any forward-looking
statements as a result of new information, future events or otherwise, unless
required by law. Readers should, however, carefully review the risk factors
included in other reports or documents filed by us from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q.
COMPANY OVERVIEW
We are a leading provider of complete end-to-end Internet messaging and
collaboration solutions for Internet service providers or ISPs,
telecommunications providers, web hosting companies, web portals and
corporations. We provide services and products, both on a hosted and licensed
basis, that enable our customers to provide feature-rich email, messaging,
collaboration and directory services to their customers and employees. Our
allsourcing strategy provides flexibility to our customers by giving them the
option of using our Critical Path hosted services, licensing our software to run
on their own hardware, or selecting a combination of both. Our solutions enable
customers to improve messaging performance, reduce the cost of providing
messaging services and focus on other aspects of their businesses.
We have over 2,000 customers and reach over 55 million end-users and 20
million wireless devices through our customer relationships. Our customers
include leading Internet companies such as AltaVista, E*TRADE, ICQ (a subsidiary
of America Online) and Netscape as well traditional enterprises such as General
Electric, Proctor & Gamble and Promus Hotel Corporation. International customers
include Avantel, British Telecommunications, Cable and Wireless, Eircell, Global
Telesystems Group, Korea Telecom, Sina and Starmedia. In addition, we have a
number of relationships to expand our distribution channels with companies such
as British Telecommunications, Compuserve (a subsidiary of American Online),
France Telecom, MCI Worldcom, Mitsui, Network Solutions, NTT, Qwest
Communications, Sprint, US West and VeriSign.
There are a number of trends that are driving demand for messaging and
collaboration solutions. Email has broadened from a simple messaging tool to a
widely accepted form of communication. At the same time, the complexity of
individual messages and the scale of the supporting applications and hardware
are growing dramatically, forcing businesses to dedicate significant resources
to the operation and maintenance of their messaging systems. In addition,
customers are increasingly demanding reliable and scalable service and enhanced
product offerings. Accordingly, it is important for businesses to adopt more
effective approaches to the management of their messaging and collaboration
needs.
Our end-to-end solutions complement our core email hosting services and
support the growing demands of our rapidly expanding worldwide customer base. We
provide a full spectrum of messaging and collaboration solutions, such as
calendaring, document archival, Internet fax, secure document delivery, resource
management and wireless access. Our solutions are supported by our global
infrastructure with data centers located worldwide connected to key Internet
exchange points.
In recent months, we have significantly expanded our range of products and
services and the delivery options we offer our domestic and international
customers. Our extended messaging solutions include support for wireless devices
through relationships with American Mobile Satellite, Arch Communications,
Cellnet, VAST and other international wireless carriers; integrated calendaring
and resource scheduling; bi-directional
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fax to email; and security measures and directory services. In addition to our
outsourced hosted services, we now offer midsourcing, where a customer selects
which products and services to outsource to augment their existing messaging
infrastructure, and insourcing, where a customer installs and maintains our
software.
Our objective is to be the premier provider of comprehensive, advanced
messaging and collaboration services. We plan to attain this goal by:
- Extending our technology leadership in messaging applications;
- Acquiring new businesses and technologies that could expand our product
and service offerings;
- Developing and leveraging strategic relationships;
- Increasing our sales and marketing efforts;
- Offering value-added products and services such as secure guaranteed
delivery, collaborative messaging and calendaring; and
- Expanding our international presence.
RECENT DEVELOPMENTS
To achieve our objectives, we have announced several recent acquisitions
and strategic relationships that have expanded our range of products and
customers and broadened our global reach, including:
docSpace Acquisition. On March 8, 2000, we acquired The docSpace Company, a
provider of Web-based enhanced delivery services. The total purchase price was
valued at approximately $300 million in our common stock and cash. docSpace
provides services for businesses to send, store and collaborate on their
important files securely via encryption technologies from anywhere in the world.
ISOCOR Acquisition. On January 19, 2000, we acquired ISOCOR for common
stock valued at approximately $274 million. The acquisition enables us to
provide directory and meta-directory services to connect disparate database
applications and to overcome incompatibilities across the corporate enterprise.
Customers such as IBM, Proctor & Gamble and Netscape use our directory products
to connect databases, email directories, online ordering systems and proprietary
groupware systems, enabling the organizations to provide accurate, up-to-date
information to employees, customers and trading partners.
FaxNet Acquisition. On December 6, 1999, we acquired FaxNet Corporation, a
provider of Internet fax and messaging solutions and a leading outsource
supplier of enhanced fax and integrated messaging solutions. The total purchase
price was approximately $199 million, and consisted of shares of our common
stock and cash. FaxNet has attracted customers such as Ameritech, Ariba, Bell
Atlantic, Bell South, MediaOne Group, Qwest, Time Warner's Road Runner and US
West, by providing branded, private label, turnkey solutions.
RemarQ Acquisition. On February 7, 2000, we announced the signing of a
definitive agreement to acquire RemarQ Communities Inc., a provider of
customized, collaborative message boards for business use. The total purchase
price will be approximately $267 million in our common stock. The acquisition,
which is expected to close on or before March 31, 2000, will enable us to offer
products that allow customers to hold online discussions over extranets,
intranets, or the Internet. Message boards are an ideal environment for
knowledge exchange and team collaboration.
Critical Path Pacific Alliance. We have signed a memorandum of
understanding to enter into a joint venture with Mitsui and Co, Ltd. and NTT
Communications Corp. to bring our messaging solutions to Japan. The joint
venture will leverage our technology, infrastructure and services; Mitsui's
extensive partnerships in Japan and throughout Asia; and NTT's Data Centers and
technical backbone to deliver advanced Internet messaging services to the
Japanese business and wireless markets.
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INDUSTRY BACKGROUND
Growth of Messaging. Email has broadened from a simple personal messaging
tool to a strategic business tool. According to International Data Corporation,
or IDC, there were approximately 315 million electronic mailboxes worldwide as
of July 1999, and this number is expected to grow to over 750 million electronic
mailboxes by 2005. IDC estimates that 1.4 trillion emails are sent annually.
Email messages have increased in volume and functionality, and this trend is
expected to continue. For example, email is expected to become a major vehicle
for e-commerce transactions. Forrester Research predicts that the typical online
consumer will participate in eight to ten commerce-related exchanges via email
per week by 2001. Furthermore, the electronic mailbox as a locating and
delivering device has enabled additional applications such as directory
services, scheduling, document sharing, work-flow and unified messaging. This
increased functionality, along with the widespread acceptance of email,
positions the electronic mailbox as a platform for other forms of electronic
messaging.
Growth of Wireless Messaging. The number of devices on which people can
access Internet messaging is growing sharply. Many wireless phones, pagers,
Personal Digital Assistants and other devices now have access to email and other
forms of Internet messaging. IDC forecasts that there will be approximately one
billion wireless handsets in 2003, roughly double the number of Internet-enabled
computers expected to be in use. Nokia and Ericsson both assert that all new
wireless phones manufactured in 2001 and later will provide Internet access.
Current Trends in Messaging. As the importance of messaging grows,
customers increasingly expect their messaging service to meet the same standards
of carrier-class reliability and availability that consumers have traditionally
received from their telephone service providers. For example, customers expect
reliability from their messaging service similar to the dial tone they hear when
they pick up the telephone. Similarly, customers want access to their messages
to be as ubiquitous as their telephone access by being able to download their
email from anywhere in the world, at anytime and through a variety of devices.
Just as many individuals have multiple phone numbers for home and business use,
a growing number of people have multiple email accounts. As a result, domain
names, which are the Internet identities that correlate to unique electronic
addresses, such as [email protected], are proliferating. Companies use multiple
domains to build awareness of their brands in electronic communication, and
individuals increasingly use domains to express personal identity.
To address this growth, a wide range of businesses, including ISPs,
telecommunications providers, web hosting companies, web portals and
corporations, are finding that providing their customers or employees with email
access is a necessity. ISPs, web hosting companies and telecommunications
providers offer email to enhance their services offerings and to maintain
competitiveness with other companies in their industry. Many web portals offer
email service to increase web traffic on their sites and strengthen their brand
due to repeat traffic from users checking for messages. In addition,
corporations increasingly view email as a means to decrease costs and increase
productivity.
Email messages have increased not only in volume but also in complexity and
functionality. The use of enhanced messaging services such as graphics,
multimedia elements, fax attachments and secure delivery is becoming more common
and requires greater functionality on the part of the messaging service to
process and deliver these messages. As organizations and the numbers of users
grow, the ability to accommodate thousands, or millions, of additional mailboxes
in a single domain requires substantial investments in hardware, software and
personnel. Further, in the largest email implementations, such as ISPs or web
portals, the design architecture must handle complex networking and scale issues
across many domains. Web organizations that implement and host multiple domains
for customers incur substantial additional expenses because of the complexity
associated with hosting multiple domains. There is no unified email service
standard, and online service providers must continually enhance and maintain
email applications for existing standards, as well as seek to develop new
features and functionality for emerging standards. For example, LDAP is an
emerging standard that is the foundation for adding additional applications to
login and access features of email service. Moreover, ISPs and corporations
running their own email must make substantial
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investments in backup systems and networking equipment if they are to meet the
growing expectation of email service with carrier-class access, availability and
reliability.
Today, most organizations are using internal hardware and software
solutions to address their email needs. Many companies attempting to manage
expanding and increasingly sophisticated email systems lack the resources and
expertise to cost-effectively implement, maintain, scale, enhance and service
the hardware and software components of an email system. Businesses often find
it difficult to implement state-of-the-art technology in their own
infrastructure and individuals with the expertise to maintain a sophisticated
email system can be scarce and costly to hire, train and retain. As a result,
organizations seeking to lower their costs and to quicken time to market with
complex technologies are increasingly looking to outsource non-core competencies
to maintain competitiveness.
Another trend in messaging is the growing diversity and importance of
sourcing options. Gartner Group forecasts that 65% of corporations will
outsource some or all of their messaging by 2001. The Radicatti Group estimates
the market size for outsourced messaging will exceed $6 billion in 2003.
Outsourced messaging services require specialized technology that can handle
additional functionality, such as directory synchronization.
THE CRITICAL PATH SOLUTION
Critical Path delivers advanced messaging and collaboration solutions to
ISPs, telecommunications providers, web hosting companies, web portals and
corporations, giving them the ability to provide feature-rich email, messaging
and directory services to their customers and employees. Critical Path's
products and services are designed to provide the following key benefits:
Focus. Critical Path's customers benefit from the company's depth of
expertise in many areas of advanced Internet messaging. Messaging has become the
number one business communication tool, making it mission-critical for many
companies. Yet messaging technology and the demands of users have become more
complex with the advent of integrated email, fax, voice and calendaring.
Critical Path delivers access to industry-leading solutions regardless of
whether a customer chooses to outsource their messaging needs to Critical Path
or license its software to manage their messaging needs in-house.
Lower total cost of ownership. Critical Path's outsourcing customers do not
need to lease, buy or continually upgrade existing hardware and software, or
recruit and retain systems engineers and administrative personnel for their
messaging services. Critical Path's service is designed to reduce customers'
administrative burden by eliminating the cycle of purchasing, installing,
testing, debugging and deploying messaging systems. The software is maintained
at Critical Path's facilities, not at customers' facilities, and Critical Path
employs a team of systems administrators to monitor the service 24 hours a day,
seven days a week. By having the capability to host millions of mailboxes,
Critical Path's hosted service provides customers with cost savings over
in-house messaging solutions through economies of scale.
Scalability; reliability. Critical Path's hosted and licensed systems are
designed to facilitate scalability and reliability. While existing competitive
email software solutions can scale to support millions of users at a single
domain ([email protected]), Critical Path has designed its hosted architecture to
support its service over hundreds of millions of mailboxes across millions of
domains ([email protected], [email protected], [email protected], etc.), allowing
each customer to create email addresses at his or her own domain. Critical
Path's hardware and software infrastructure consists of multiple servers running
software in a manner that balances the use of the servers without dedicating any
server to a specific domain or mailbox. This infrastructure allows multiple
domain hosting while reducing the amount of required equipment and capacity.
Critical Path has created a global network strategy to provide the type of
continuous service that individuals have come to expect from their telephone and
other utility service providers. Critical Path provides its customers improved
performance through its multiple peering relationships, agreements with
companies with existing peering relationships and the purchase of additional
access to telecommunication paths from national Internet access providers.
Critical Path maintains six data centers in the United States and two data
centers in Europe. Critical Path plans to open an additional data center in
Asia.
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Leading-edge technology. Critical Path provides customers with access to
advanced technologies through both outsourced, midsourced and insourced delivery
mechanisms. Critical Path's outsourced messaging solutions eliminate the need
for customers and partners to maintain a core competency in advanced messaging
by having experts with experience in rapidly deploying new technologies,
combating system failures due to unsolicited commercial email traffic and
maintaining network and system security. Critical Path's products and services
include webmail, POP3, IMAP4 and hosted groupware, fax and directory systems,
which enable customers to choose messaging solutions that meet their needs.
Critical Path also delivers wireless access, integrated calendars, security and
other complex features. Critical Path's technological capabilities enable it to
quickly implement competitive new technologies for its customers and end-users,
reducing their time to market for leading technologies.
Critical Path's server software has been designed to provide high
performance while reducing hardware requirements. This has been achieved through
a design methodology that eliminates the overhead of protocol layering and
reduces the number of computer instructions required to perform common
operations. The design also reduces the risk that messages will be lost or will
not be duplicated in the event of external system breakdowns, such as loss of
power or hardware failures. This promotes high reliability of the electronic
information exchange and allows Internet service providers to utilize the
software to offer email services to their customers.
Anytime, anywhere accessibility. Critical Path has designed its services to
allow easy access by customers and end-users. Designed and built on open
Internet-based standards, Critical Path's services are compatible with leading
desktop software such as Microsoft Outlook, Netscape Messenger and Qualcomm's
Eudora. In addition, it has developed a web-based email interface that is
compatible with leading web browsers, including Microsoft Internet Explorer and
Netscape Navigator. Critical Path's services are designed to allow
administrators and end-users to access their email system anywhere at any time,
providing end-users with the means to send and receive messages to and from
mobile phones, pagers and other wireless devices. Critical Path has recently
entered into relationships with wireless service providers to deliver email and
messaging access to digital wireless phones and pagers.
Enhanced security. Critical Path has created a custom firewall solution to
enhance network and data center security for its hosted services. Using a
combination of licensed software technology, internally developed software and
sophisticated third-party hardware, Critical Path reduces the potential for
network breaches. Critical Path has network and data center surveillance 24
hours a day, seven days a week to identify and curtail potential security
breaches. In addition, Critical Path provides secure document delivery services
and digital certificates for greater messaging security. For its hosted
services, Critical Path also provides a secure software interface to mailbox
account provisioning that allows customers to integrate their existing
functionality with Critical Path's email system. This enables customers to add
and delete accounts and functionality either at the domain level or at the
individual end-user level over an encrypted connection.
Branding; customer control. Critical Path's messaging service solution
enables its customers to maintain brand control by allowing graphical user
interfaces to be branded uniquely for each customer. Critical Path is, and will
continue to be, the brand behind the brand. Critical Path's fully customized
web-based "brandable" email product interface includes customer logos and
preserves the existing "look and feel" of the customers' brands. Critical Path's
web-based, brandable, mail administration center is designed to give customers
control of their mail accounts via a secure web-based interface.
STRATEGY
Critical Path's objective is to be the premier provider of comprehensive,
advanced Internet messaging and collaborative services. Critical Path plans to
attain this goal by pursuing the following key strategies:
Extend Technology Leadership in Messaging Applications. Critical Path
intends to continue expanding its ability to deliver industry-leading
functionality in all areas of electronic messaging. Building upon its
Internet-based messaging architecture, Critical Path plans to continue to
deliver industry-leading functionality, capabilities and new applications that
will extend the core functionality of email and Internet messaging, support
wireless devices, and provide secure delivery and cost-effective resource
management. Critical Path's
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development team regularly meets with customers and participates in research
projects with leading industry groups and analysts to anticipate future customer
needs. Critical Path also participates in open standards organizations and
Internet technology leadership groups, such as the Internet Engineering Task
Force.
Acquire New Businesses and Technologies. Critical Path evaluates
opportunities with respect to possible acquisitions of businesses or
technologies on an ongoing basis. Critical Path will continue to seek
acquisitions that will complement its current and planned business activities.
Critical Path has a dual strategy in pursuing acquisitions. First, Critical Path
plans to focus on target companies in its market with large numbers of customers
which will enable it to expand its customer base. Second, Critical Path will
evaluate companies that help it augment its service and product offerings for
customers. In addition, these value-added services and products may be used by
customers not using Critical Path's messaging service to enhance the
functionality of their messaging solutions.
Develop and Leverage Strategic Relationships. Critical Path intends to
expand its marketing and distribution channels through strategic relationships
with key ISPs, telecommunications providers, web hosting companies, web portals
and corporations to increase quickly the number of its end-users. Critical
Path's strategic partners include British Telecommunications, Compuserve,
E*TRADE, France Telecom, ICQ (a subsidiary of America Online), MCI Worldcom,
Mitsui, Netscape, Network Solutions, NTT, Quest Communications, Sprint, US West
and VeriSign. Critical Path intends to further develop new and existing
strategic relationships to expand its distribution channels and to undertake
joint product development and marketing efforts, such as integrating its
messaging services into e-commerce applications.
Increase Sales and Marketing Efforts. Critical Path intends to continue to
expand its sales and marketing activities while focusing on five target markets:
ISPs, telecommunications providers, web hosting companies, web portals and
corporations. In this expansion, Critical Path plans to target and hire seasoned
sales professionals with specific expertise and contacts within its focused
markets. Critical Path also intends to expand its indirect sales channel by
teaming with additional leading distributors, resellers and system integrators
with strong backgrounds and market presence. As of March 15, 2000, Critical Path
had 243 sales and marketing personnel.
Offer Value-Added Services. Critical Path intends to continue to extend its
messaging services by offering additional value-added services. These services
are intended to extend Critical Path's relationships with current customers, to
attract new customers and to allow it to differentiate itself in the messaging
market. Critical Path believes that its messaging technology can continue to
form the foundation of a wide range of Internet messaging applications for which
it intends to provide solutions.
Expand International Presence. In addition to expanding its U.S. presence,
Critical Path believes there is substantial opportunity for outsourcing
messaging services in non-U.S. markets. Critical Path intends to further develop
its worldwide sales offices, data centers and strategic relationships. Critical
Path currently has operations in Argentina, Brazil, Denmark, France, Germany,
Ireland, Italy, Switzerland and the United Kingdom. In addition, Critical Path
supports its worldwide operations by offering localized web-based application
interfaces. For example, Critical Path has already developed web-based
application interfaces in 15 languages and dialects and has recently signed a
memorandum of understanding for a joint venture in Japan.
SERVICES AND PRODUCTS
Critical Path offers its messaging solutions through both outsourced
services, where Critical Path hosts the software on its servers, and insourced
server software packages, where the customer licenses software to run on its own
servers. In addition, a customer may choose to midsource, a combination of
outsourced and insourced solutions. Critical Path believes its combination of
outsourcing and insourcing options delivers unique value to customers by
providing continuity of relationship and technology across a variety of
offerings and user populations.
Messaging Services. Critical Path offers many messaging services to ISPs,
telecommunications providers, web hosting companies, web portals and
corporations. Its "all-in" service model pricing includes all
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enhancements, upgrades and new standard features. Pricing for email and other
hosted messaging services generally is based on a per mailbox, per month charge
that varies depending on functionality and volume. Web portal market pricing
also may include a share of revenue generated by advertising on the web-based
email interface. Critical Path offers a flexible suite of messaging services.
The standard email service offering includes its basic services such as POP3 and
webmail as part of the monthly mailbox fee. The premium services are optional
add-ons to the basic mailbox charge and are offered for an additional fee.
Critical Path's service offerings includes web-based end-user support.
Additional support through customer help desks is provided 24 hours a day, seven
days a week by contractual agreement. Professional implementation and
transitioning support for new customers is also included in the basic offering.
Critical Path has introduced to market a variety of messaging services.
Information concerning Critical Path's current products and services is
summarized in the following table:
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TARGET
SERVICE DESCRIPTION BENEFITS MARKETS
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CORE MAIL SERVICES
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Web-Based - Hosting service based on a web - Requires no software downloads All
Email mail interface or configurations
- End-users simply point any
browser to
http://mail.userdomain.com and
enter account name and password
for full email access
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POP3 Hosting - Hosting service based on Post - Allows users to connect to a All
Office Protocol shared mail server and download
email to their desktop client
(Microsoft Outlook, Eudora),
which stores the message on the
user's hard drive.
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IMAP4 Hosting - Hosting service that bridges the - Email messages and files hosted All
gap between POP3 functionality and on an IMAP server can be
web based email accessibility manipulated from multiple email
based on Internet mail access environments without the need
protocol to transfer data
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Web-Based - Mail Administration Center (MAC) - Allows email administrators to All
Administration has Secure Socket Layer-based add, delete and modify accounts
brandable web interface online
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Localization - Web mail interface in 15 - Allows display of web-based All
languages, both romance and double email interface in foreign
byte languages and transfer and
storage of messages containing
single-byte and double-byte
message data
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Secure - Secure delivery of documents - Reliably and securely delivers Corporate
Delivery documents to only the intended
recipient
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<TABLE>
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TARGET
SERVICE DESCRIPTION BENEFITS MARKETS
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Spam Blocking/ - Utilizes comprehensive filtering - Protects users from unsolicited All
UBE system bulk email, commonly referred
Filtering to as "spam" or "junk mail"
- Identifies and eliminates spam
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Virus Scanning - Provides virus scanning - Detects and cleans messages Corporate
before they are transmitted or
received
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Directory - Common directory layer to share - Search capabilities All
Services information between various - End-users can update their own
(LDAP) independent software applications directory entries, and domain
- LDAP services allow publishing of administrators can update, add
directory information for user and delete entries
communities - Key component of many
collaborative applications such
as certified delivery and
calendaring
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Directory - Synchronizes multiple messaging - Keeps multiple messaging Corporate
Synchroni- directories systems up-to-date with new or
zation deleted users
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COLLABORATION SERVICES
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Integrated - Online calendars integrated with - Integrates scheduling function All
Calendaring CP Web Mail that allow customers with the ability to access the
to post events to shared calendars user's schedule and those of
for end users colleagues. Provides end users
with sophisticated scheduling
functionality
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Groupware - Off-premises hosting of Microsoft - Delivers full groupware Corporate
Hosting Exchange capabilities for a predictable
monthly fee without
administrative headaches
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Resource - Schedule shared resources and - Increases productivity and Corporate
Management manage utilization return on assets through higher
utilization
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WIRELESS SERVICES
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Wireless Email - Forwarding & filtering - Allows customers to access All
Access capabilities their email messages from any
wireless device
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Wireless SMS - Two way SMS Messaging - Gateway for SMS Messaging All
Messaging
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</TABLE>
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<TABLE>
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TARGET
SERVICE DESCRIPTION BENEFITS MARKETS
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FAX SERVICES
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Never Busy Fax - Similar to call waiting, but for - Faxes are stored on the server Telecom
faxing instead of phoning until the destination fax Providers
machine or line is available
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Fax Mailbox - Receive, redirect, and archive - Remotely access important Telecom
faxes messages, any place, any time Providers
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Broadcast Fax - User sends fax and list of - Disseminate faxes quickly and Telecom
recipients for outsourced delivery easily Providers
by fax
- -----------------------------------------------------------------------------------------------------------------
Fax Request - Outbound demand fax - Users can post a document for Telecom
access by customers or partners Providers
- -----------------------------------------------------------------------------------------------------------------
Fax to Email - Receive faxes in your email - No need for additional hardware All
and never miss a fax
- -----------------------------------------------------------------------------------------------------------------
FaxMission - Print driver allows users to send - User has control of broadcasts All
Desktop Fax faxes from any Windows application from the desktop, never needs
Software to leave the application in
which a document is created
- -----------------------------------------------------------------------------------------------------------------
Email to Fax - Send faxes from any email client - Never leave email and no All
additional software to maintain
- -----------------------------------------------------------------------------------------------------------------
Web Fax - Send faxes from a web interface - Never leave the Internet site, All
no need for email or software
- -----------------------------------------------------------------------------------------------------------------
MESSAGING UTILITIES
- -----------------------------------------------------------------------------------------------------------------
Telex - Enables customers to send and - Provides simplicity, security Corporate
receive Telex messages from their and speed
current LAN-based email system
- -----------------------------------------------------------------------------------------------------------------
X.400 - Enables every user to send and - Savings, simplicity, security Corporate
receive X.400 messages and and speed
attachments
- -----------------------------------------------------------------------------------------------------------------
SMTP Gateway - Gateway to Internet from LAN-based - Provides Internet access to Corporate
Services mail systems users of proprietary systems
who would otherwise not be able
to mail to others outside their
Local Area Network
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Message Server Products. N-PLEX, Critical Path's Internet server product,
provides robust message management, administrative control and secure message
transfer to the SMTP, POP3 and IMAP4 standards.
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Security holes are greatly reduced by the proprietary design, and authenticated
login facilities have been added using encryption technology to prevent
unauthorized access to the mail systems.
The N-PLEX Management Center manages Critical Path's insourced message
server products, providing the high level of service necessary for implementing
mission-critical electronic information exchange. The N-PLEX Management Center
performs remote management of components over TCP/IP, thereby allowing the
administrator to manage multiple sites simultaneously from a central management
station. The management facilities include remote configuration, routing
configuration, fault notification, performance monitoring, system management and
message tracking.
Directory Products. As systems increase in size and complexity,
organizations increasingly need to implement a central repository for the
information required to communicate across systems. The Global Directory Server,
or GDS, Critical Path's directory product, is designed to store and disseminate
information on both a wide area and local area basis. This information may
include email addresses and cryptographic material for digital signatures and
message confidentiality that are used invisibly by client software, as well as
information that users may access directly, such as telephone numbers, fax
numbers, physical mail addresses and pictures. The directory allows efficient
and rapid updating of this information for use at diverse locations, reducing
errors and saving the time and personnel resources required to maintain and
distribute this data. This distributed application architecture allows system
managers to optimize the location of information so that information required
locally is on the local server, while users continue to have transparent access
to information on any other server in the network.
MetaConnect, Critical Path's meta-directory product, is designed to unify
data for effective intranet and Internet use, enabling an organization to
provide employees, customers and trading partners accurate, updated information
from existing data sources. This product manages the connections to disparate
directories and applications databases and joins the information together in one
meta-directory, which can be centrally managed as a unified resource across the
enterprise. The product is designed to use most existing LDAP v3 directory
servers, including Microsoft Active Directory, Netscape Directory Server,
Novell's NDS and Critical Path Global Directory Server.
Calendaring and Scheduling Server Products. Critical Path's EventCenter
calendaring solution is designed for enterprises and portals who need to
communicate many complex events and programs. Using a web browser, managers
create program calendars. Viewers can choose a rolled-up view of multiple
calendars, a single calendar view, or the details of a single event. EventCenter
creates a single source of program and event information for more-informed
planning and streamlined coordination.
Critical Path's resource management solution, Reserve and Mobilize, help
customers reduce costs and increase efficiency through the improved utilization
of resources and workspace. Critical Path's solutions are typically used for
asset management and space utilization by large, Fortune 1000 companies, such as
Arthur Andersen, AT&T, IBM, KPMG, Pitney Bowes and State Farm Insurance. Reserve
automates the scheduling of shared corporate resources. Using a web browser and
corporate intranet, any authorized user can quickly and easily check on
availability and schedule a desired resource. Reserve Services standardizes and
automates the service request process throughout the enterprise. Using a web
browser and corporate intranet, users can place requests for services, which are
then delivered directly to the service provider. Mobilize automates the
reservation and coordination processes for shared workspaces. Using a web
browser and corporate intranet, incoming mobile workers can select and locate
their workspaces, route phone lines and arrange for needed equipment.
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CUSTOMERS
Critical Path currently offers advanced messaging and collaboration
products and services to millions of end users across its target markets. The
following is a list of various representative companies with whom Critical Path
has service or product agreements within their respective categories.
<TABLE>
<CAPTION>
INTERNET SERVICE PROVIDERS WEB PORTALS
-------------------------- -----------
<S> <C>
AGIS Alta Vista
Belgacom Ancestry.com
British Telecom Asia Mail
Compuserve E*TRADE
DSL Networks Raging Bull
France Telecom Sina
Infostrada Starmedia
Isp.net The Password (a division of Password
Korea Telecom Internet Publishing)
NetConX The Zone Network
Satyam Third Age Media
Surfree.com WorldSport
US Online Network
WNC Net CORPORATIONS
TELECOMMUNICATIONS PROVIDERS Bank Law Services
Black & Decker
Ameritech California Family Health Council
AT&T Chevron
Avantel Continental Airlines
Bell Atlantic Deloitte & Touche
BellSouth Dow
British Telecom Ernst & Young
GTS General Electric
MCI Worldcom KPMG Peat Marwick
Qwest Minolta
Sprint Mobil
US West New York Life
PeoplePC
WEB HOSTING COMPANIES Pitney Bowes
Proctor & Gamble
123 India Promus Hotel Corporation
CardSecure Siemens
Data2 Info SmithKline Beecham
Navisite State Farm Insurance
Network Solutions
TABNet
Tonic Domains Corporation
True Media Solutions
Ultima Networks
</TABLE>
TARGET MARKETS
Critical Path targets customers in the following distinct target markets:
ISPs, telecommunications providers, web hosting companies, web portals and
corporations.
Internet Service Providers. ISPs are companies that provide access to the
Internet. Email and other messaging services have become an integral part of ISP
service offerings. ISPs provide service via dial-up and ISDN as well as
dedicated private-line hookups. Many ISPs offer free home-page hosting to
members at the
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<PAGE> 14
ISP's domain name, for example, www.ispname.com/-username. Some ISPs are also
providing commercial web hosting, hosting sites at a domain name registered by
the user. ISPs serve large and small companies by providing a direct connection
from the companies' networks to the Internet.
Telecommunications Providers. Telecommunications providers add advanced
Internet messaging solutions to their connectivity and data management offerings
to increase value and retain customers. Telecommunications providers desire both
a broad set of features and functionality as well as a selection of insourced,
outsourced and midsourced delivery mechanisms.
Web Hosting Companies. Web hosting companies offer corporate customers and
individual consumers hosting of their website on a commercial web server, at a
unique domain registered to the customer. In addition, web hosting companies are
increasingly offering web design, domain name registration service and messaging
services to their customers. Critical Path believes that most business customers
are looking for a full-service web hosting company that can provide domain name
registration, basic website services and enhanced website services including
e-commerce and messaging.
Web Portals. Web portals include online communities, search engines and
applications that offer a one-stop source of information to a broad range of
users and vertical portals, such as E*TRADE, which cater to the needs of a
specific audience. The goal of portal sites is to develop a sense of community
to draw large online audiences, encourage repeat visits, and keep users engaged.
Portals are accomplishing this by providing users with value-rich content and
services such as search engines, access to applications and services, free
individual homepages and email and other forms of advanced messaging.
Corporations. Email and other messaging services have become a
mission-critical application for businesses. In addition, the ability to access
Internet-based email from outside the office has added to its appeal and utility
for corporations. A large percentage of the corporate market's email is supplied
internally by LAN mail systems. Companies are struggling with aging LAN-based
systems designed in the late 1980s and early 1990s when email was used on a much
more casual basis and by a smaller user population.
WIRELESS RELATIONSHIPS
Critical Path's technology supports one-way and two-way messaging services
to up to 20 million wireless devices and is one of the only companies able to
provide end-users with the means to send and receive messages to and from mobile
phones, paging and other wireless devices. Critical Path has established
relationships with companies such as American Mobile Satellite, Arch
Communications, Debitel, FCR (France), Fiat (Italy), Meteor (Ireland), Mitsui
(Japan), Omnitel Pronto Italia (Italy), SwissCom (Switzerland), Tele2 (Sweden)
and TriGem (Korea). It is estimated that the number of world-wide wireless
subscribers will grow from just over 400 million subscribers in 1999 to 1
billion in 2003. Critical Path is aggressively targeting the wireless market
across all major segments including ISPs, portals carriers, wireless original
equipment manufacturers, or OEMs, and other cellular and paging companies.
STRATEGIC RELATIONSHIPS
A key element of Critical Path's strategy is to expand its distribution
channels through strategic relationships with entities that are equity investors
or entities with which it has contractual reseller relationships. Critical Path
believes that these strategic relationships will enable it to expand its
distribution channels. The following are examples of Critical Path's existing
strategic relationships that it believes will position it to increase quickly
the number of electronic mailboxes it hosts.
American Mobile Satellite. In February 2000, Critical Path formed a
marketing alliance with American Mobile Satellite enabling the two companies to
work together to promote a seamless wireless email solution to Critical Path's
customers. Using American Mobile's nationwide ARDIS(R) network and a wireless
handheld email device, Critical Path will enable its customers to provide their
end users with a two-way wireless extension of their desktop email. This allows
the end user to send and receive email from their desktop address, whether in
the office or on the road. In addition to a single address, users can decide how
often their email will be forwarded and, using filters, can selectively
designate which emails are forwarded.
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<PAGE> 15
VAST. In September 1999, Critical Path formed a strategic relationship with
VAST. Through this relationship, VAST will provide Critical Path's carrier-class
Internet messaging solutions to wireless carriers and other businesses that wish
to extend their Internet-based services to wireless users. VAST works with
wireless carriers to provide access to value-added services like web-based email
and information services that can generate additional revenue for carriers.
Through VAST Gateway Services, wireless carriers and other companies can extend
these capabilities to wireless users at a low cost. Critical Path enables VAST
to provide email to wireless devices including pagers and cellular phones. This
relationship will provide two-way communication capabilities to these devices
for Internet messaging, including the ability to read, forward, reply to and
delete email messages. This capability ensures users' messages, folders, and
address books are available anywhere, anytime.
BellSouth. In July 1999, Critical Path entered into an agreement with
BellSouth Telecommunications, Inc., a multi-billion dollar international
communications company, pursuant to which Critical Path will provide Enhanced
Fax Services including Broadcast, Never Busy, Fax Request and Fax Mailbox, as
well as FaxMission Desktop Internet Fax Services.
Road Runner. In June 1999, Critical Path entered into an agreement with
Road Runner, a joint venture among affiliates of Time Warner, MediaOne,
Microsoft, Compaq and Advance/Newhouse. Pursuant to this agreement, Critical
Path provides Road Runner customers with FaxMission Internet Fax services that
are fully branded under the Road Runner name as FaxRunner.
Ameritech. In March 1999, Critical Path entered into a five year agreement
with Ameritech Services, Inc., pursuant to which Critical Path will provide to
Ameritech's customers, Enhanced Fax Services including Never Busy, Fax Mailbox,
Broadcast Fax, Fax Request, as well as Internet Fax Services including Internet
Fax Inbound and Internet Fax Outbound.
America Online/ICQ. In January 1999, Critical Path entered into an
agreement with ICQ, a subsidiary of America Online, pursuant to which Critical
Path provides email hosting services which are integrated with ICQ's instant
messaging service provided to ICQ's customers. The ICQ instant messaging service
allows users to communicate in real time over the Internet. Critical Path's
agreement with ICQ also provides for the integration of features of the ICQ
instant messaging service with Critical Path's standard email services and its
offering of these integrated services to other customers. In April 1999,
Critical Path expanded its relationship with America Online to include AOL Latin
America and AOL Enterprise.
US West. In December 1998, Critical Path entered into an agreement with US
West, pursuant to which it provides email services to US West's telephone
customers. Critical Path believes that US West views web mail as part of its
strategy to offer its telephone customers value-added Internet services. Web
mail is a user-friendly, simple vehicle to transition telephone customers from
dial-tone to web-tone. The agreement also provides for the enhanced email
functionality of US West's enterprise Internet customers through an email
viewer.
In March 1997, Critical Path entered into an agreement with US West,
pursuant to which it will provide Enhanced Fax Services including Broadcast Fax,
Never-Busy, Fax Mail, Fax Request, and SMARTLIST, to US West's customers. In
February 1998, Critical Path expanded its relationship with US West to include
FaxMission and Fax to email.
E*TRADE. In September 1998, Critical Path entered into an agreement with
E*TRADE, an online brokerage services company, pursuant to which each party will
include the other in certain advertising campaigns, including E*TRADE's
international and strategic partner relationships. Critical Path will also
provide email services to users of E*TRADE's Internet access services. E*TRADE
uses Critical Path's email services to extend its brand and value-added services
to its fast-growing customer base. Critical Path is currently renegotiating the
components of the services offered under its agreement with E*TRADE.
Sprint. In September 1998, Critical Path entered into an agreement with
Sprint's IP Business Services pursuant to which Critical Path provides email
services to Sprint's corporate IP customers. Sprint has over 7,000 sales
representatives who can now offer hosted email services to their business
customers at their own domain name. Critical Path provides a dedicated customer
support number and a sales support center to
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<PAGE> 16
support Sprint's sales representatives. In January 2000, Sprint and Critical
Path executed an amendment to this agreement expanding the relationship,
allowing Sprint to provide additional messaging services to its small business
customers.
Bell Atlantic. In August 1998, Critical Path entered into an agreement with
Bell Atlantic. Pursuant to this agreement, Critical Path will provide Enhanced
Fax Services including Fax Broadcast, Fax Request, Never-Busy, Fax Mailbox, and
Internet Fax Services including FaxMission and Fax to email. Critical Path also
provides Bell Atlantic with services for branding under the Bell Atlantic name,
support and telemarketing.
Network Solutions. In May 1998, Critical Path entered into an agreement
with Network Solutions, a registrar of Internet domain names, pursuant to which
Critical Path provides email outsourcing services to users of Network Solutions'
website. In exchange for Critical Path's services, Network Solutions will
provide domain name registration services for Critical Path's customers. Through
this agreement, a Network Solutions customer is able to extend its brand using
its unique domain name for its email address instead of the domain name of its
Internet access provider.
MCI Worldcom. In December 1997, Critical Path entered into an agreement
with MCI Worldcom to provide enterprise messaging integration services. In
February 2000, Critical Path and MCI expanded this relationship to include
additional Critical Path services such as Webmail, POP3, IMAP and Microsoft
Exchange hosting services.
SALES AND MARKETING
Sales Strategy. Critical Path's sales efforts target all market segment
audiences through direct and indirect channels. Critical Path maintains its own
direct sales force to introduce and educate prospective customers and partners
about its service. The direct sales group targets larger ISPs,
telecommunications companies, medium to large corporate customers, large web
hosting companies and high-trafficked web portals. Critical Path currently has
domestic offices in the San Francisco, Irvine, San Jose, New York, Phoenix,
Boston, Seattle, Los Angeles, Chicago, Atlanta, Denver and Washington D.C.
metropolitan areas. Critical Path currently has international offices in
Argentina, Brazil, Denmark, England, France, Germany, Ireland, Italy and
Switzerland. Within Critical Path's direct sales group, a subgroup is
responsible for retaining and increasing use by existing customers. This group
is critical to ensuring customer satisfaction and selling existing customers new
add-on services as they become available in our service offering.
A telesales group is located in Phoenix, Arizona, which conducts sales
activities over the phone. The target markets of the telesales group are smaller
ISPs, web hosting companies and corporations. The majority of the activity
generated through this channel results from phone calls that we initiate to
prospective customers. The telesales group also handles outbound calls to a
specific list of contacts provided by Critical Path's marketing organization. In
addition, the telesales group follows up on leads resulting from web and
telephone communication initiated by prospective customers and qualifies those
leads by placing additional calls or referring them to the direct sales group.
The indirect sales channel will use the sales forces of Critical Path's
partners to offer its services to their end-users. To gain market presence and
market share overseas, Critical Path teams with leading distributors, resellers
and system integrators that have strong industry backgrounds and market presence
in their respective markets and geographic regions. Resellers include:
Ameritech, BellSouth, British Telecommunications, GTS, MCI Worldcom, Peregrine,
Qwest, Sprint and US West.
Marketing Strategy. Critical Path's marketing strategy is focused on media
relations and public relations in order to develop a reputation as an industry
leader for Internet messaging. Critical Path will use focused print and online
advertising campaigns for lead generation. Direct marketing is used to target
customer segments. Co-branded and cooperative direct mail will be the
cornerstone of the direct marketing efforts. Event, forum and trade show
participation will also be used to promote Critical Path's business-to-business
brand presence.
Enhanced Services Development. Critical Path's product management and
marketing organizations focus on marketing and service development. This team
determines Critical Path's application pipeline and
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<PAGE> 17
feature development schedules and provides direction for engineering,
operations, sales and support teams. Critical Path has product marketing
managers for each of its product areas who are responsible for defining
strategies to address specific customer needs within each product category.
These managers work with its technical service managers, who are in turn
responsible for service strategies and development plans.
Critical Path's service management team focuses on developing provisioning
and billing, messaging and directory services and mail center technology. In
addition, Critical Path's products and services management team manages a
cross-departmental service development effort. The development process also
includes quality-control steps such as reviews, walk-throughs and
post-implementation audits. The products and services development process
incorporates input from a variety of sources, including Critical Path's current
and potential customers, and refines this information through a business
prioritization process.
TECHNOLOGY
In offering messaging services, Critical Path employs advanced software and
hardware, combining internal expertise with industry standard technology to
create a proprietary infrastructure.
Mail Center Technology. Critical Path has created a proprietary email
system, Mail Center Technology, or MCT, designed to ensure access to hundreds of
millions of mailboxes across millions of domains. MCT is able to handle
high-volume loads for complex and diverse mail environments such as those
required by ISPs, telecommunications providers, web hosting companies, web
portals and corporations providing email accounts to their end-users for
activities such as trading securities, shopping or participating in online
communities. Critical Path has written proprietary load-balancing and messaging
software, and uses Oracle Corporation databases in account provisioning and
management.
MCT is made up of multiple groups of servers and routers acting as a
single, virtual point of contact to customers for messaging services. MCT
hardware and software consists of Sun Microsystems servers running Solaris,
Cisco routers, EMC redundant storage arrays, Veritas software and rackmounted
Intel processor-based servers running FreeBSD, a free, standards-based operating
system supported by the growing open source engineering community.
All aspects of MCT are deployed in a redundant configuration with the goal
of ensuring that if any process or system goes down, another will be available
to handle customer traffic seamlessly. This behavior is called "transparent
failover" and is designed to increase the availability of messaging services to
the customer. MCT also includes a dynamic load-balancing system that acts as
proxy servers for firewall safety. The load balancers are configured in parallel
to ensure that if one goes down, the load is transferred to the remaining
systems.
Account Provisioning Protocol. Critical Path has created a proprietary
Account Provisioning Protocol, or APP, for account creation and maintenance. APP
enables accounts transitioning from other services or legacy systems to be
bulk-loaded, tested, replicated and deployed on Critical Path's service
automatically. This protocol addresses a critical time to market issue by
enabling organizations to quickly transition to the new standards-based email
service with minimal down-time and degradation to their existing internal
systems. In addition, APP can be used by customers and partners to facilitate
automatic account sign-ups from websites, typically in less than three minutes.
Data Centers and Network Access. Critical Path maintains data centers with
third parties in San Francisco, Sunnyvale and Palo Alto, California; Salt Lake
City, Utah; Sterling, Virginia; London, England; and Munich, Germany. Critical
Path also plans to maintain a data center in Asia. The data centers have private
peering with all major backbones to allow high-bandwidth access to the Internet.
With multiple high-speed connections to different backbone providers, Critical
Path has reduced the likelihood that its customers will suffer downtime as a
result of network outages. Critical Path's backbone architecture and
interconnection strategy consists of clear channel DS-3 connections and direct
100 MB/sec Ethernet connections. Critical Path's data centers feature redundant
systems for power, fire protection, seismic reinforcement, and security
surveillance 24 hours a day, seven days a week by both personnel and video
monitors.
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Critical Path currently has bilateral peering arrangements in place with
the following organizations: aussie.net, AboveNet Communications, Compaq/Digital
Equipment Corporation, Concentric Networks, Dacom, DataResearch Associates,
DIGEX, Direct Network Access, Electric Lightwave, Excite@Home, Exodus
Communications, Frontier GlobalCenter, GTE Internetworking/Genuity, Globix,
Hanaro Telecom, Hurricane Electric, Inet, MAXIM, Paradox Digital, Pilot Network
Services, Route Server Next Generation, Singapore Telecom, Telestra Corporation,
Tycho Internet, Verio, ViaNet Communications, Web Professionals, WebTV Networks,
XMISSION, and Zocalo. In addition to its peering connections, Critical Path
currently purchases additional Internet access from MCI WorldCom and Sprint,
through their relationships with AboveNet Communications Inc.
Network Security. Critical Path has created a custom firewall solution to
reduce the incidence of network security breaches, utilizing Cisco routers for
firewall hardware. To enhance security for the network, Critical Path's staff
members monitor the network and hardware 24 hours a day, seven days a week. Any
suspicious activity is reported and investigated immediately.
Critical Path's operations and engineering staffs include many active
participants in open Internet security groups. Newsgroups and industry
consortium postings are actively monitored for information regarding reported
security flaws. Suspected flaws in software and hardware products that could
compromise security are investigated thoroughly and fixes are implemented, often
within a matter of hours.
The goals of Critical Path's security efforts are to prevent intruders from
gaining access to customers' email messages, passwords or financial information,
to protect server software and design information from being accessed by
intruders, and to prevent malicious individuals from causing service failure or
slowdown. Critical Path accomplishes these goals by ensuring that server
clusters are entirely isolated from the Internet at large except for the
specific services Critical Path provides, continuously monitoring the network to
detect intrusion attempts, staying up to date on current security issues, and
tracking abuse incidents, such as "spamming", blocking such incidents as
necessary, and reporting incidents to the appropriate originating ISPs.
Spam Blocking. Critical Path's basic hosted email and web-based email
services include comprehensive spam (unsolicited commercial email) prevention at
no additional charge. This spam prevention is currently being used to screen
messages for all customers.
Critical Path's engineers have written proprietary software that
automatically screens incoming messages for telltale items in message headers
and subject lines. Critical Path has also developed a comprehensive database of
commonly forged addresses and frequently abused domain names. Most additions to
the "black list" have been reported by Critical Path's end-users, who are
encouraged to notify Critical Path of suspected abuse. The black list is
actively reviewed to ensure that no legitimate domains or individual users are
blocked from accessing the system or sending messages.
In addition to filtering technology at the server level, Critical Path's
personnel monitor incoming messages 24 hours a day, seven days a week. Critical
Path is part of a group of key network operators and ISPs working to develop
technologies and other measures aimed at protecting users from junk email.
Critical Path has representatives serving on the Coalition Against Unsolicited
Commercial email, the leading national organization lobbying for anti-spam
legislation. Critical Path's Acceptable Use Policy explicitly states that
partners and customers may not use its service to send unsolicited bulk email.
Customer Support. Critical Path provides customer support 24 hours a day,
seven days a week by contractual agreement. Critical Path's customer support
service consists of two tiers. Tier 1 includes technical support in response to
end-user inquiries. Although its customers typically provide Tier 1 support
directly to their end-users, they can outsource this function and Critical Path
can provide Tier 1 support to their end-users via email or web-based support.
Critical Path also provides support information on its website.
Tier 2 support includes technical support for customers' systems
administrators. Critical Path's technical support representatives include pooled
and dedicated representatives. Pooled representatives are trained to resolve the
majority of inquiries and, where necessary, to escalate and manage inquiries
through to resolution. Dedicated representatives must meet stringent technical
criteria, are assigned to strategic accounts and assist in identifying and
qualifying new features and functionality in addition to advanced problem
solving.
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In an effort to further improve customer satisfaction, Critical Path has
deployed customer relationship management tools designed to allow customers to
track the status of their open tickets and access standard reported metrics
through a secure web interface. These tools will also facilitate Critical Path's
ability to track recurring customer issues that will identify opportunities for
service improvements. Critical Path's staff of trained technical
representatives, coupled with leading edge monitoring and tracking tools allows
it to successfully serve the needs of its clients.
Research and Development
The Company's products and services are based on internally developed
systems. The Company must continually improve these systems to accommodate the
level of use of its products and services. In addition, the Company may add new
features and functionality to its products and that could result in the need to
develop or license additional technologies. The Company's inability to add
additional software and hardware or to upgrade its technology or network
infrastructure could have adverse consequences. These consequences include
service interruptions, impaired quality of the users' experience and the
diversion of development resources. The Company's failure to provide new
features or functionality also could result in these consequences. The Company
may not be able to effectively upgrade and expand its systems in a timely manner
or to integrate smoothly any newly developed or purchased technologies with its
existing systems. These difficulties could harm or limit its ability to expand
its business. See "Risk Factors -- The inability to expand our systems may limit
our growth" and "-- System failures could harm our business."
The Company incurred $454,000, $2.1 million and $7.7 million in research
and development expenses in 1997, 1998 and 1999, respectively. The Company
anticipates that it will continue to devote significant resources to product
development in the future as it adds new features and functionality to its
products and services. The market in which the Company competes is characterized
by rapidly changing technology, evolving industry standards, frequent new
service and product announcements, introductions and enhancements and changing
customer demands. Accordingly, the Company's future success will depend on its
ability to adapt to rapidly changing technologies, to adapt its services to
evolving industry standards and to continually improve the performance, features
and reliability of its products and services and service offerings and evolving
demands of the marketplace. The failure of the Company to adapt to such changes
would harm the Company's business. In addition, the widespread adoption of new
Internet, networking or telecommunications technologies or other technological
changes could require substantial expenditures by the Company to modify or adapt
its services or infrastructure. See "Risk Factors -- Our failure to manage
growth could harm us;" "-- We must keep pace with rapid technological change to
remain competitive" and "-- We need to develop new services, features and
functions in order to expand."
COMPETITION
The market for Internet-based messaging services is characterized by
companies that elect to develop and maintain in-house solutions and companies
that seek outsourcing arrangements for their messaging service. For customers
seeking outsourcing arrangements, Critical Path competes with email service
providers, such as USA.NET, mail.com and Commtouch. For those seeking
product-based solutions Critical Path competes with Sun/Netscape Alliance,
Microsoft, Software.com and Lotus Development Corporation. These companies could
potentially leverage their existing capabilities and relationships to enter the
hosted messaging and collaboration industry by redesigning their system
architecture, pricing and marketing strategies to sell through to the entire
market. In the future, ISPs, web hosting companies and outsourced application
companies may broaden their service offerings to include outsourced messaging
solutions.
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as Critical Path expands its service offerings, Critical
Path expects to encounter increased competition in the development and delivery
of these services. Many of Critical Path's current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than it does and may enter into strategic or commercial relationships with
larger, more established and well-financed companies. Certain competitors may be
able to enter into such strategic or commercial relationships on more
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favorable terms. Further, certain competitors may offer services at or below
cost. In addition, new technologies and the expansion of existing technologies
may increase competitive pressures on Critical Path. Increased competition may
result in reduced operating margins and loss of market share.
Critical Path believes that its solution competes favorably with that of
other providers with respect to the following:
- providing cost savings over in-house solutions by relieving customers of
expenses associated with acquiring and maintaining hardware and software
and the expense and effort associated with attracting and retaining
qualified technical personnel to manage them;
- providing greater functionality and access to leading technologies,
services and products, which in turn enables customers to choose the
solution that best suits their end-users' needs;
- enabling customers to maintain brand control, thereby enhancing their
brand identity; and
- facilitating scalability through an infrastructure designed to support
hundreds of millions of mailboxes across millions of domains.
However, despite Critical Path's competitive positioning, it may not be
able to compete successfully against current and future competitors, and
competitive pressures Critical Path faces could have a material adverse effect
on its business, operating results and financial condition.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable
to the Internet and commercial email services, it is possible that a number of
laws and regulations may be adopted with respect to the Internet or commercial
email services covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. Further, the growth and development of the market for online email
may prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations may impair the growth of the Internet or
commercial online services, which could, in turn, decrease the demand for our
products and services and increase our cost of doing business, or otherwise have
a material adverse effect on our business, operating results and financial
condition. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the application of existing laws and regulations to the Internet could have a
material adverse effect on our business, operating results and financial
condition.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
FACE RISKS ASSOCIATED WITH EARLY STAGE COMPANIES THAT MAY ADVERSELY AFFECT OUR
BUSINESS.
Because we have had a limited operating history, it is difficult to
evaluate our business and we may face various risks, expenses and difficulties
associated with early stage companies. You should consider the risks, expenses
and difficulties that we may encounter when making your investment decision.
These risks include our ability to:
- Acquire businesses and technologies;
- Integrate the operations of the companies that we have recently acquired;
- Manage growing domestic and international operations;
- Create and maintain strategic relationships;
- Expand sales and marketing activities;
- Expand our customer base and retain key clients;
- Introduce new services;
- Compete in a highly competitive market;
- Upgrade our systems and infrastructure to handle any increases in
messaging traffic;
- Reduce service interruptions; and
- Recruit and retain key personnel.
WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND WE MAY NEVER ACHIEVE
PROFITABILITY.
As of December 31, 1999, we had an accumulated deficit of approximately
$129.5 million. We have not achieved profitability in any period, and expect to
continue to incur net losses for the foreseeable future. We expect that our
operating expenses will increase as we spend resources on building our business
and that this increase may have a negative effect on operating results and
financial condition in the near term.
We have spent heavily on technology and infrastructure development. We
expect to continue to spend substantial financial and other resources on
developing and introducing new end-to-end Internet messaging and collaboration
solutions, and expanding our sales and marketing organizations, strategic
relationships and operating infrastructure. We expect that our cost of revenues,
sales and marketing expenses, general and administrative expenses, operations
and customer support expenses, and depreciation and amortization expenses will
continue to increase in absolute dollars and may increase as a percent of
revenues. If revenues do not correspondingly increase, our operating results and
financial condition could be negatively affected.
Should we continue to incur net losses in future periods, we may not be
able to increase the number of employees or investment in capital equipment,
sales and marketing programs, and research and development in accordance with
our present plans. We may never obtain sufficient revenues to achieve
profitability. If we do achieve profitability, we may not sustain or increase
profitability in the future. This may, in turn, cause our stock price to
decline.
DUE TO OUR LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE INTERNET
MESSAGING AND COLLABORATION SOLUTIONS MARKET, FUTURE REVENUES ARE UNPREDICTABLE,
AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We cannot accurately forecast our revenues as a result of our limited
operating history and the emerging nature of the Internet messaging and
collaboration solutions market. Our revenues could fall short of expectations if
we experience delays or cancellations of even a small number of orders. We often
offer volume-
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based pricing, which may affect operating margins. A number of factors are
likely to cause fluctuations in operating results, including, but not limited
to:
- Continued growth of the Internet in general and of messaging and
collaboration usage in particular;
- Demand for outsourced email services;
- Our ability to attract and retain customers and maintain customer
satisfaction;
- Our ability to upgrade, develop and maintain our systems and
infrastructure;
- The amount and timing of operating costs and capital expenditures
relating to expansion of business and infrastructure;
- Technical difficulties or system outages;
- The announcement or introduction of new or enhanced services by
competitors;
- Our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;
- The pricing policies of competitors;
- Failure to increase international sales; and
- Governmental regulation surrounding the Internet and messaging in
particular.
In addition to the factors set forth above, operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees. In particular, we
have incurred and expect to continue to incur substantial non-cash charges
associated with the grant of warrants to our customers and other parties with
which we have commercial relationships. For example, we recognized a $27.4
million non-cash charge to advertising expense during 1999 in connection with
the amortization of a warrant to America Online.
Period-to-period comparisons of operating results are not a good indication
of future performance. It is likely that operating results in some quarters will
be below market expectations. In this event, the price of our common stock is
likely to decline.
FURTHER ACQUISITIONS COULD RESULT IN DILUTION, OPERATING DIFFICULTIES AND OTHER
HARMFUL CONSEQUENCES.
We expect to acquire or invest in additional businesses, products, services
and technologies that complement or augment our service offerings and customer
base. Since January 1999, we have completed the acquisition of seven companies
for an aggregate consideration consisting of cash, common stock and the
assumption of stock options and warrants totaling approximately $1.1 billion. In
addition, in February 2000, we agreed to acquire RemarQ for common stock valued
at approximately $267.0 million.
We are currently engaged in discussions with a number of companies
regarding strategic acquisitions or investments. Although these discussions are
ongoing, we have not signed any definitive agreements, other than our agreement
with RemarQ as described above, and cannot assure you that any of these
discussions or the RemarQ agreement will result in actual acquisitions. To be
successful, we will need to identify suitable acquisition candidates, integrate
disparate technologies and corporate cultures and manage a geographically
dispersed company. We cannot assure you that we will be able to do this
successfully. Acquisitions could divert attention from other business concerns
and could expose us to unforeseen liabilities. In addition, we may lose key
employees while integrating any new companies.
We expect to pay for some acquisitions by issuing additional common stock,
which would dilute current shareholders. We may also use cash to make
acquisitions. It may be necessary for us to raise additional funds through
public or private financings. We cannot assure you that we will be able to raise
additional funds at any particular point in the future or on favorable terms. In
addition, we may be required to amortize significant amounts of goodwill and
other intangible assets in connection with future acquisitions, which would
materially increase operating expenses.
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WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US
FROM SUCCESSFULLY INTEGRATING DOCSPACE, ISOCOR, FAXNET, XETI, AMPLITUDE, DOTONE
FABRIK COMMUNICATIONS AND REMARQ.
Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of docSpace,
ISOCOR, FaxNet, Xeti, Amplitude, dotOne, Fabrik Communications and RemarQ into
our business has been and will be a complex, time consuming and expensive
process and may disrupt our business if not completed in a timely and efficient
manner. We must operate as a combined organization utilizing, common information
and communication systems, operating procedures, financial controls and human
resources practices. In particular, we are currently evaluating, upgrading or
replacing our financial information systems and establishing uniformity among
the systems of the acquired businesses. We may encounter substantial
difficulties, costs and delays involved in integrating the operations of our
subsidiaries, including:
- potential incompatibility of business cultures;
- perceived adverse changes in business focus;
- potential conflicts in sponsor, advertising or strategic relationships;
and
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
Consequently, we may not be successful in integrating acquired businesses
or technologies and may not achieve anticipated revenue and cost benefits. We
also cannot guarantee that these acquisitions will result in sufficient revenues
or earnings to justify our investment in, or expenses related to, these
acquisitions or that any synergies will develop. If we fail to execute our
acquisition strategy successfully for any reason, our business will suffer
significantly.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON RESOURCES AND OUR
FAILURE TO MANAGE GROWTH COULD CAUSE OUR BUSINESS TO SUFFER.
We have expanded our operations rapidly and intend to continue this
expansion. The number of our employees increased from 93 on December 31, 1998 to
840 on March 15, 2000. This expansion has placed, and is expected to continue to
place, a significant strain on managerial, operational and financial resources.
To manage any further growth, we will need to improve or replace our existing
operational, customer service and financial systems, procedures and controls.
Any failure to properly manage these systems and procedural transitions could
impair our ability to attract and service customers, and could cause us to incur
higher operating costs and delays in the execution of our business plan. We will
also need to continue the expansion of our operations and employee base. Our
management may not be able to hire, train, retain, motivate and manage required
personnel. In addition, our management may not be able to successfully identify,
manage and exploit existing and potential market opportunities. If we cannot
manage growth effectively, our business and operating results could suffer.
IF WE FAIL TO EXPAND SALES AND MARKETING ACTIVITIES, WE MAY BE UNABLE TO EXPAND
OUR BUSINESS.
Our ability to increase revenues will depend on our ability to successfully
recruit, train and retain sales and marketing personnel. We plan to continue to
invest significant resources to expand our sales and marketing organizations.
Competition for additional qualified personnel is intense and we may not be able
to hire and retain personnel with relevant experience.
The complexity and implementation of our Internet messaging services
require highly trained sales and marketing personnel to educate prospective
customers regarding the use and benefits of our services. Current and
prospective customers, in turn, must be able to educate their end-users. With
our relatively brief operating history and our plans for expansion, we have
considerable need to recruit, train and retain qualified staff. Any delays or
difficulties encountered in these staffing efforts would impair our ability to
attract new customers and to enhance our relationships with existing customers.
This in turn would adversely impact the timing and extent of revenues. Because
the majority of our sales and marketing personnel have recently joined us and
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have limited experience working together, our sales and marketing organizations
may not be able to compete successfully against the larger and more experienced
sales and marketing organizations of our competitors. If we do not successfully
expand sales and marketing activities, our business could suffer and our stock
price could decline.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY
TO PROVIDE MESSAGING AND COLLABORATION SERVICES AND COULD HARM OUR BUSINESS AND
REPUTATION.
Our customers have in the past experienced some interruptions in our
messaging service. We believe that these interruptions will continue to occur
from time to time. These interruptions are due to hardware failures, unsolicited
bulk email, or "spam," attacks and operating system failures. For example, in
January 2000, our customers experienced a service interruption due to an
operating system failure. Our revenues depend on the number of end-users who use
our messaging services. Our business will suffer if we experience frequent or
long system interruptions that result in the unavailability or reduced
performance of systems or networks or reduce our ability to provide email
services. We expect to experience occasional temporary capacity constraints due
to sharply increased traffic, which may cause unanticipated system disruptions,
slower response times, impaired quality and degradation in levels of customer
service. If this were to continue to happen, our business and reputation could
suffer dramatically.
We have entered into service agreements with some customers that require
minimum performance standards, including standards regarding the availability
and response time of messaging services. If we fail to meet these standards, our
customers could terminate their relationships with us and we could be subject to
contractual monetary penalties. Any unplanned interruption of services may
adversely affect our ability to attract and retain customers.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER.
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. If revenues from
international operations do not exceed the expense of establishing and
maintaining these operations, our business, financial condition and operating
results will suffer. At present, we have international operations in Argentina,
Brazil, Denmark, France, Germany, Ireland, Italy, Switzerland and the United
Kingdom and as of December 31, 1999 we derived 24.8% of our revenues from
international sales on a pro forma basis. We have limited experience in
international operations and may not be able to compete effectively in
international markets. We face certain risks inherent in conducting business
internationally, such as:
- Unexpected changes in regulatory requirements including U.S. export
restrictions on encryption technologies;
- Difficulties and costs of staffing and managing international operations;
- Differing technology standards;
- Difficulties in collecting accounts receivable and longer collection
periods;
- Political and economic instability;
- Fluctuations in currency exchange rates;
- Imposition of currency exchange controls;
- Potentially adverse tax consequences; and
- Reduced protection for intellectual property rights in some countries.
Any of these factors could adversely affect international operations and,
consequently, business and operating results. Specifically, failure to
successfully manage international growth could result in higher operating costs
than anticipated, or could delay or preclude altogether our ability to generate
revenues in key international markets.
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WE DEPEND ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND THE LOSS OF
ANY STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS AND HAVE AN ADVERSE IMPACT
ON REVENUES.
We depend on strategic relationships to expand distribution channels and to
undertake joint product development and marketing efforts. Our ability to
increase revenues depends upon marketing services through new and existing
strategic relationships. We have entered into written agreements with ICQ (a
subsidiary of America Online), E*TRADE, Network Solutions, Sprint and US West,
among others. We depend on a broad acceptance of outsourced messaging services
on the part of potential partners and acceptance of our company as the supplier
for these outsourced messaging services. We also depend on joint marketing and
product development through strategic relationships to achieve market acceptance
and brand recognition. For example, through our relationship with E*TRADE, we
can conduct shared advertising campaigns and include messaging services in
E*TRADE's international strategic relationships. Our agreements with strategic
partners typically do not restrict them from introducing competing services.
These agreements typically are for terms of one to three years, and
automatically renew for additional one-year periods unless either party gives
prior notice of its intention to terminate the agreement. In addition, these
agreements are terminable by our partners without cause, and some agreements are
terminable by us, upon 30-120 days' notice. Most of the agreements also provide
for the partial refund of fees paid or other monetary penalties in the event
that our services fail to meet defined minimum performance standards.
Distribution partners may choose not to renew existing arrangements on
commercially acceptable terms, or at all. If we lose any strategic
relationships, fail to renew these agreements or relationships or fail to
develop new strategic relationships, business will suffer. The loss of any key
strategic relationships would have an adverse impact on current and future
revenue. For example, for the year ended December 31, 1999, E*TRADE accounted
for approximately 15% of our net revenues, excluding the value of stock purchase
rights received by customers. In addition to strategic relationships, we also
depend on the ability of our customers to sell and market our services to their
end-users.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE OF THE INTERNET
MESSAGING AND COLLABORATION INDUSTRY.
The Internet messaging industry is characterized by rapid technological
change, changes in user and customer requirements and preferences, and the
emergence of new industry standards and practices that could render our existing
services, proprietary technology and systems obsolete. We must continually
improve the performance, features and reliability of our services, particularly
in response to competitive offerings. Our success depends, in part, on our
ability to enhance our existing email and messaging services and to develop new
services, functionality and technology that address the increasingly
sophisticated and varied needs of prospective customers. If we don't properly
identify the feature preferences of prospective customers, or if we fail to
deliver email features which meet the standards of these customers, our ability
to market our service successfully and to increase revenues could be impaired.
The development of proprietary technology and necessary service enhancements
entail significant technical and business risks and require substantial
expenditures and lead-time. We may not be able to keep pace with the latest
technological developments. We may also be unable to use new technologies
effectively or adapt services to customer requirements or emerging industry
standards.
IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Third parties may
attempt to breach our security or that of our customers. If these attempts are
successful, customers' confidential information, including customers' profiles,
passwords, financial account information, credit card numbers or other personal
information could be breached. We may be liable to our customers for any breach
in security and a breach could harm our reputation. We rely on encryption
technology licensed from third parties. Although we have implemented network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or
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to alleviate problems caused by any breach. Failure to prevent security breaches
may have a material adverse effect on business and operating results.
WE WILL CONTINUE TO DEPEND ON BROAD MARKET ACCEPTANCE FOR OUTSOURCED
INTERNET-BASED EMAIL SERVICE.
The market for outsourced Internet-based email service is new and rapidly
evolving. Concerns over the security of online services and the privacy of users
may inhibit the growth of the Internet and commercial online services. We cannot
estimate the size or growth rate of the potential market for our service
offerings, and we do not know whether our service will achieve broad market
acceptance. To date a substantial portion of our revenues have been derived from
sales of email service offerings and we currently expect that email service
offerings will account for a substantial portion of our revenues for the
foreseeable future. We depend on the widespread acceptance and use of
outsourcing as an effective solution for email. If the market for outsourced
email fails to grow or grows more slowly than we currently anticipate, our
business would suffer dramatically.
WE EXPECT THE MESSAGING SERVICES MARKET WILL BE VERY COMPETITIVE AND WE WILL
NEED TO COMPETE SUCCESSFULLY IN THIS MARKET.
We expect that the market for Internet-based email service will be
intensely competitive. In addition to competing with companies that develop and
maintain in-house solutions, we compete with email service providers, such as
USA.NET, Inc. and mail.com, and with product-based companies, such as
Software.com, Inc. and Lotus Development Corporation. We believe that
competition will increase and that companies such as Microsoft, which currently
offers email products primarily to Internet service providers that provide
access to the Internet; web hosting companies; web sites intended to be major
starting sites for users when they connect to the Internet, commonly referred to
as web portals; and corporations may leverage their existing relationships and
capabilities to offer email services.
We believe competition will increase as current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships with larger, more established and better-financed
companies. Further, any delays in the general market acceptance of the email
hosting concept would likely harm our competitive position. Any delay would also
allow competitors additional time to improve their service or product offerings,
and provide time for new competitors to develop email service solutions and
solicit prospective customers within our target markets. Increased competition
could result in pricing pressures, reduced operating margins and loss of market
share, any of which could cause our business to suffer.
IF WE DO NOT SUCCESSFULLY ADDRESS SERVICE DESIGN RISKS, OUR REPUTATION COULD BE
DAMAGED AND OUR BUSINESS AND OPERATING RESULTS COULD SUFFER.
We must accurately forecast the features and functionality required by
target customers. In addition, we must design and implement service enhancements
that meet customer requirements in a timely and efficient manner. We may not
successfully determine customer requirements and may be unable to satisfy
customer demands. Furthermore, we may not be able to design and implement a
service incorporating desired features in a timely and efficient manner. In
addition, if any new service we launch is not favorably received by customers
and end-users, our reputation could be damaged. If we fail to accurately
determine customer feature requirements or service enhancements or to market
services containing such features or enhancements in a timely and efficient
manner, our business and operating results could suffer materially.
WE NEED TO UPGRADE OUR SYSTEMS AND INFRASTRUCTURE TO ACCOMMODATE INCREASES IN
MESSAGING TRAFFIC.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information we wish to transmit increases, and
as their requirements change. The expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. Due to the limited deployment of services to date, the ability of our
network to connect and manage a substantially
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larger number of customers at high transmission speeds is unknown, and we face
risks related to the network's ability to operate with higher customer levels
while maintaining expected performance.
As the frequency and complexity of messaging increases, we will need to
make additional investments in our infrastructure, which may be expensive. In
addition, we may not be able to accurately project the rate or timing of
messaging traffic increases or upgrade our systems and infrastructure to
accommodate future traffic levels, which may cause service degradation or
outages. We may also not be able to achieve or maintain a sufficiently high
capacity of data transmission as customer usage increases. Customer demand for
our services could be greatly reduced if we fail to maintain high capacity data
transmission. In addition, as we upgrade our network infrastructure to increase
capacity available to customers, we are likely to encounter equipment or
software incompatibility which may cause delays in implementations. We may not
be able to expand or adapt our network infrastructure to meet additional demand
or customers' changing requirements in a timely manner or at all.
BECAUSE WE PROVIDE MESSAGING AND COLLABORATION SERVICES OVER THE INTERNET, OUR
BUSINESS COULD SUFFER IF EFFICIENT TRANSMISSION OF DATA OVER THE INTERNET IS
INTERRUPTED.
The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data. To
date we have not experienced a significant adverse effect from these
interruptions. However, because we provide messaging and collaboration services
over the Internet, interruptions or delays in Internet transmissions will
adversely affect customers' ability to send or receive their messages. We rely
on the speed and reliability of the networks operated by third parties.
Therefore, our market depends on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion.
We depend on telecommunications network suppliers such as Level 3, Qwest,
Exodus and TeleHouse to transmit messages across their networks. In addition, to
deliver our services, we rely on a number of public and private peering
interconnections, which are arrangements among access providers to carry one
another's traffic. If these providers were to discontinue these arrangements,
and alternative providers did not emerge or were to increase the cost of
providing access, our ability to transmit messaging traffic would be reduced. If
we were to increase our current prices to accommodate any increase in the cost
of providing access, it could negatively impact sales. If we did not increase
prices in response to rising access costs, margins would be negatively affected.
Furthermore, if additional capacity is not added as traffic increases, our
ability to distribute content rapidly and reliably through these networks will
be adversely affected.
IF WE ENCOUNTER SYSTEM FAILURES, WE MAY NOT BE ABLE TO PROVIDE ADEQUATE SERVICE
AND OUR BUSINESS AND REPUTATION COULD BE DAMAGED.
Our ability to successfully receive and send messages and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of computer and communications hardware and network
systems. Our systems and operations are vulnerable to damage or interruption
from fire, flood, earthquake, power loss, telecommunications failure and similar
events. The occurrence of any of the foregoing risks could subject us to
contractual monetary penalties if we fail to meet minimum performance standards,
and could have a material adverse effect on business and operating results and
damage our reputation.
WE MUST RECRUIT AND RETAIN OUR KEY EMPLOYEES TO EXPAND OUR BUSINESS.
Our success depends on the skills, experience and performance of senior
management and other key personnel, many of whom have worked together for only a
short period of time. For example, our Chief Operating Officer and Chief
Financial Officer have joined us within the past three months. The loss of the
services of any senior management or other key personnel, including the
President, David Thatcher, and Chief Executive Officer, Douglas Hickey, could
materially and adversely affect business results. We do not have long-term
employment agreements with any executive officers and other key personnel. Our
success also depends on our ability to recruit, retain and motivate other highly
skilled sales and marketing, technical and managerial personnel. Competition for
these people is intense, and we may not be able to successfully recruit,
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train or retain qualified personnel. In particular, we may not be able to hire a
sufficient number of qualified software developers.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT SERVICES, WHICH COULD HARM OUR BUSINESS
AND REPUTATION.
Our service offerings depend on complex software, both internally developed
and licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are released. We may not
discover software defects that affect new or current services or enhancements
until after they are deployed. Although we have not experienced any material
software defects to date, it is possible that, despite testing, defects may
occur in the software. These defects could cause service interruptions, which
could damage our reputation or increase service costs, cause us to lose revenue,
delay market acceptance or divert development resources, any of which could
cause business to suffer.
WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING SHAREHOLDERS.
We believe that existing capital resources will enable us to maintain
current and planned operations for at least the next 12 months. However, we may
be required to raise additional funds due to unforeseen circumstances. If
capital requirements vary materially from those current planned, we may require
additional financing sooner than anticipated. Such financing may not be
available in sufficient amounts or on terms acceptable to us and may be dilutive
to existing shareholders.
WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and we rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with employees, customers and partners to protect proprietary
rights. Despite these precautions, unauthorized third parties may infringe or
copy portions of our services or reverse engineer or obtain and use information
that we regard as proprietary. End-user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
The status of United States patent protection in the software industry is not
well defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. We have several patents pending in the United States and may
seek additional patents in the future. We do not know if the patent application
or any future patent application will be issued with the scope of the claims
sought, if at all, or whether any patents received will be challenged or
invalidated. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting proprietary rights in the United States or abroad may not be
adequate and competitors may independently develop similar technology.
Third parties may infringe or misappropriate copyrights, trademarks and
similar proprietary rights belonging to us. In addition, other parties have
asserted and may assert infringement claims against us. For example, a company
that we acquired is a party to a lawsuit involving alleged infringement of a
third party's patent. The recently acquired company has denied the allegations
of infringement and has made counterclaims. Although we have not received notice
of any other alleged patent infringement, we cannot be certain that our products
do not infringe issued patents that may relate to our products. In addition,
because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which relate to our
software products. We may be subject to legal proceedings and claims from time
to time in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights of third
parties. Intellectual property litigation is expensive and time-consuming and
could divert management's attention away from operating our business.
WE MAY NEED TO LICENSE THIRD-PARTY TECHNOLOGIES AND WE FACE RISKS IN DOING SO.
We intend to continue to license certain technology from third parties,
including web server and encryption technology. The market is evolving and we
may need to license additional technologies to remain competitive. We may not be
able to license these technologies on commercially reasonable terms or at all.
In
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addition, we may fail to successfully integrate any licensed technology into our
services. These third-party in-licenses may expose us to increased risks,
including risks related to the integration of new technology, the diversion of
resources from the development of proprietary technology, and an inability to
generate revenues from new technology sufficient to offset associated
acquisition and maintenance costs. An inability to obtain any of these licenses
could delay product and service development until equivalent technology can be
identified, licensed and integrated. Any such delays in services could cause our
business and operating results to suffer.
THE TRADING PRICES AND VOLUMES OF OUR STOCK HAVE BEEN VOLATILE AND WE EXPECT
THAT THIS VOLATILITY WILL CONTINUE.
Our stock price and trading volumes have been highly volatile since our
initial public offering on March 29, 1999. We expect that this volatility will
continue in the future due to factors such as:
- Actual or anticipated fluctuations in results of operations;
- Changes in or failure to meet securities analysts' expectations;
- Announcements of technological innovations and acquisitions;
- Introduction of new services by us or our competitors;
- Developments with respect to intellectual property rights;
- Conditions and trends in the Internet and other technology industries;
and
- General market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this type
of litigation in the future. Litigation is often expensive and diverts
management's attention and resources, which could have a material adverse effect
on our business and operating results.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF DOING
BUSINESS.
Although there are currently few laws and regulations directly applicable
to the Internet and messaging services, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
messaging services may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may impair the growth
of the Internet or commercial online services which could decrease the demand
for our services and increase our cost of doing business, or otherwise harm
business and operating results. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE.
As a provider of messaging services, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials transmitted via our
services. We do not and cannot screen all of the content generated by our users,
and we could be exposed to liability with respect to this content. Furthermore,
some foreign governments, such as Germany, have enforced laws and regulations
related to content distributed over the Internet that are more strict than those
currently in place in the United States.
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<PAGE> 30
Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that single claim
or multiple claims asserted against us may not qualify for coverage under our
insurance policies as a result of coverage exclusions that are contained within
these policies. Should either of these risks occur, capital contributed by our
stockholders may need to be used to settle claims. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our reputation and
business and operating results, or could result in the imposition of criminal
penalties.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF OUR COMMON STOCK.
As of March 15, 2000, we had approximately 57.9 million shares of common
stock outstanding. Sales of a substantial number of shares of common stock in
the public market could cause the market price of our common stock to decline.
In the near future, 7.6 million shares will become eligible for sale under an
S-3 registration statement that we will file to meet our registration rights
obligations in connection with recent acquisitions. In addition, we expect the
RemarQ acquisition to close in late March. Approximately 4.0 million shares of
our common stock will be freely tradeable upon the closing of this transaction.
Certain of our shareholders and warrantholders have registration rights with
respect to the common stock and common stock issuable under the warrants. See
"Description of Capital Stock -- Registration Rights".
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS WILL BE ABLE TO
EXERT SIGNIFICANT INFLUENCE OVER US.
After this offering, our directors, executive officers and principal
shareholders will beneficially own a substantial portion of our outstanding
common stock. These shareholders, if they vote together, will be able to
exercise significant influence over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a change
in control of our company.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS WHICH COULD DELAY OR
PREVENT A CHANGE IN CONTROL.
Our Articles of Incorporation and Bylaws contain provisions that could
delay or prevent a change in control of our company. These provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock. Some of these provisions:
- Authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
- Prohibit shareholder action by written consent; and
- Establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
ITEM 2. PROPERTIES
Our principal executive offices are located in San Francisco, California,
in a 31,500 square foot facility under a lease expiring on June 30, 2002, with a
five-year renewal option and a sublease expiring on March 31, 2002. In addition,
in January 2000, we entered into a lease for an additional 40,000 square feet of
office space in San Francisco, California. In addition, we lease facilities in
Argentina, Canada, Denmark, France, Germany, Ireland, Italy, Switzerland and the
United Kingdom. We believe that our facilities will be adequate for the next 12
months. However, we may not be able to lease additional space on commercially
reasonable terms or at all.
ITEM 3. LEGAL
The Company recently acquired The docSpace Company, which is involved in a
patent infringement action with Tumbleweed Communications Corp. The lawsuit
relates to a Tumbleweed patent that describes
30
<PAGE> 31
an apparatus for delivering documents via the Internet. docSpace has denied the
allegations of infringement, and has counterclaimed for violations of the
antitrust laws and related state law claims. This case is in the preliminary
phase and the Company is not currently able to assess the impact, if any, on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the quarter ended December 31, 1999.
31
<PAGE> 32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been quoted on the Nasdaq National Market under the
symbol "CPTH" since March 29, 1999. The following table presents, for the
periods indicated, the high and low closing prices per share of the common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
First Quarter (from March 29, 1999 to March 31, 1999)....... $ 77.00 $65.88
Second Quarter (from April 1, 1999 to June 30, 1999)........ $134.88 $36.88
Third Quarter (from July 1, 1999 to September 30, 1999)..... $ 53.88 $30.94
Fourth Quarter (from October 1, 1999 to December 31,
1999)..................................................... $ 94.38 $38.32
</TABLE>
As of February 29, 2000, there were approximately 1,061 holders of record
of the our Common Stock. Most shares of our Common Stock are held by brokers and
other institutions on behalf of shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
1. From February 1997 to February 1998, the Company issued and sold 6,258,251
shares of common stock to 5 investors at a purchase price of $0.02 per
share.
2. From February 1997 to February 26, 1999, the Company issued and sold
8,486,398 shares of common stock to employees, directors and consultants at
prices ranging from $0.02 to $2.20 per share.
3. On April 1, 1998, the Company issued and sold 12,707,869 shares of Series A
Preferred Stock to a total of 29 investors for an aggregate purchase price
of $9,170,002.
4. On September 11, 1998 and January 13, 1999, the Company issued and sold
6,863,991 shares of Series B Preferred Stock to a total of 19 investors for
an aggregate purchase price of $29,061,014.
5. On January 13, 1999, the Company issued and sold 1,090,909 shares of common
stock to one investor for an aggregate purchase price of $2,400,000.
6. In January 1999 the Company issued a warrant to purchase up to 2,442,766
shares of Series B Preferred Stock to one investor in connection with the
Company's entering into a commercial agreement with a subsidiary of such
investor.
7. On May 26, 1999 and in connection with the acquisition of substantially all
of the operating assets of the Connect Service business of Fabrik, the
Company issued 109,091 shares of common stock to Fabrik.
8. On July 21, 1999 and in connection with the acquisition of all of the
outstanding capital stock of dotOne Corporation, the Company issued 640,623
shares of common stock to the former shareholders of dotOne.
9. On September 17, 1999 the Company issued 95,104 shares of common stock to
one warrantholder in connection with the net exercise of a warrant held by
the warrantholder.
10. On October 1, 1999 the Company issued 237,703 shares of common stock to one
warrantholder in connection with the net exercise of a warrant held by the
warrantholder.
11. On November 22, 1999 and in connection with all of the outstanding capital
stock of Xeti, Inc., the Company issued 274,048 shares of common stock to
the former shareholders of Xeti.
12. On December 6, 1999 and in connection with the acquisition of all of the
outstanding capital stock of the FaxNet Corporation, the Company issued
2,845,282 shares of common stock to the former shareholders of FaxNet.
13. On March 8, 2000 and in connection with the acquisition of all of the
outstanding capital stock of the docSpace Company, the Company issued
3,805,826 shares of common stock to the former shareholders of docSpace.
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<PAGE> 33
The foregoing transactions were made in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701.
14. On August 31, 1999 and in connection with the acquisition of all the
outstanding capital stock of Amplitude Software Corporation, the Company
issued 4,107,250 shares of common stock to the former shareholders of
Amplitude.
The foregoing transaction was made in reliance on Section 3(a)(10) of the
Securities Act as an exchange of securities that has been approved after a
fairness hearing by a government agency.
USE OF PROCEEDS
The Company raised aggregate net proceeds of $255.0 million in connection
with its initial and secondary public equity offerings in March and June of
1999, respectively. As of December 31, 1999, approximately $75.9 million of
these net proceeds remain. During the latter half of 1999, the Company used
approximately $23.9 million to fund operations and approximately $117.9 million
in connection with acquisitions. The remaining proceeds were utilized for
purchase of equipment and strategic investments.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant.
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<PAGE> 34
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated balance sheet data as of December 31, 1998 and
1999, and the selected consolidated statement of operations data for the period
from February 19, 1997 (our inception) to December 31, 1997, for the years ended
December 31, 1998 and 1999, have been derived from the Consolidated Financial
Statements of Critical Path. The data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this document.
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1999, reflects the effect of the acquisition of certain
assets and customer relationships from Fabrik Communications, the acquisitions
of dotOne Corporation, Amplitude Software Corporation, FaxNet Corporation,
ISOCOR Corporation and The docSpace Company, and the probable acquisition of
RemarQ Communities Inc. as if the acquisitions had occurred on January 1, 1999.
The unaudited pro forma balance sheet data reflects the acquisition of ISOCOR
Corporation and The docSpace Company and the probable acquisition of RemarQ
Communities Inc. as if the acquisitions had occurred on December 31, 1999.
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
------------------------------ PRO FORMA
1997 1998 1999 1999
------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $ -- $ 897 $ 16,157 $ 83,544
Cost of net revenues................................. -- (2,346) (21,557) (53,366)
------- -------- --------- ---------
Gross profit (loss).................................. -- (1,449) (5,400) 30,178
------- -------- --------- ---------
Operating expenses:
Sales and marketing................................ 244 1,687 13,811 52,123
Research and development........................... 454 2,098 7,682 22,820
General and administrative......................... 358 3,814 14,051 40,344
Acquisition-related retention bonus................ -- -- 3,587 22,422
Amortization of intangible assets.................. -- -- 32,259 383,991
Stock-based expenses............................... -- 2,400 46,450 47,522
------- -------- --------- ---------
Total operating expenses................... 1,056 9,999 117,850 569,222
------- -------- --------- ---------
Loss from operations................................. (1,056) (11,448) (123,250) (539,044)
Interest and other income, net....................... -- 375 7,061 7,256
Interest expense..................................... (18) (388) (752) (1,561)
------- -------- --------- ---------
Net loss............................................. $(1,074) $(11,461) $(116,941) $(533,349)
======= ======== ========= =========
Net loss per share -- basic and diluted.............. $ (0.54) $ (2.94) $ (3.93) $ (10.98)
======= ======== ========= =========
Weighted average shares -- basic and diluted......... 1,994 3,899 29,770 48,577
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- PRO FORMA
1997 1998 1999 1999
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1 $14,791 $ 75,932 $ 52,935
Working capital....................................... (1,524) 12,524 76,275 42,331
Total assets.......................................... 550 20,663 673,805 1,498,034
Capital lease obligations, long term portion.......... 42 2,454 5,669 7,844
Shareholders' equity.................................. (1,021) 15,358 616,992 1,403,271
</TABLE>
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<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of Critical Path, Inc.
appearing elsewhere in this Information Statement. The following discussion
contains forward-looking statements. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause
future results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in this Information Statement.
OVERVIEW
Critical Path was founded in February 1997 to deliver email hosting
solutions to Internet service providers, telecommunications providers, Web
hosting companies, Web portals and corporations. From inception to October 1997,
the Company's operating activities related primarily to the planning and
development of our proprietary technological solution, recruitment of personnel,
raising of capital and purchase of operating assets. The Company initiated its
email hosting service in October 1997 and has continued to make investments to
improve the quality of its service. In December 1997, the Company enhanced its
initial service offering, a hosting service based on Post Office Protocol 3,
with the addition of a Web mail interface. Post Office Protocol 3 is a standard
protocol for receiving email commonly referred to as "POP3". In January 1999,
the Company further enhanced its service with the addition of an offering based
on the Lightweight Directory Access Protocol, or "LDAP," a directory software
protocol.
Operations
The Company continues to derive most of its revenues through the sale of
electronic messaging services and products. The Company's service revenues are
derived primarily from contractual relationships that provide for revenues based
either on contractual rates per mailbox or per message, non-refundable fixed
payments or as a percentage of customer-generated email advertising revenues.
These contracts are typically one to three years in length. Revenues from
contracts specifying a contractual rate per active mailbox per month are
recognized monthly for each active mailbox covered by the respective contract.
Revenues from contracts that provide non-refundable fixed payments are not
dependent upon the active number of mailboxes and are therefore recognized
ratably over the contract term. Revenues based upon a percentage of the email
advertising revenues generated by customers are recognized when those revenues
are earned and reported by the customer.
Revenues for software licenses for which collection of the resulting
receivable is deemed probable are recognized upon delivery of the licensed
software. Revenues from software maintenance are recognized ratably over the
maintenance term. Agreements with some of the Company's customers require
minimum performance standards regarding the availability and response time of
the Company's messaging services. If the Company fails to meet these standards,
customers could terminate their relationships and the Company could be subject
to contractual monetary penalties.
Revenues from the Company's enhanced facsimile, long distance and other
services are recognized as the services are performed. Amounts billed or
received in advance of service delivery are recorded as deferred revenue.
The Company expects to expand its operations and employee base, including
its sales, marketing, technical, operational and customer support resources. In
particular, the Company intends to expand its sales force to deliver its
complete end-to-end Internet messaging and collaboration solutions to customers
in its five target markets: ISPs, telecommunication providers, Web hosting
companies, Web portals and corporations. The Company also intends to further
develop new and existing strategic relationships to expand its distribution
channels and to undertake joint product development and marketing efforts.
The Company intends to increase the number of worldwide sales offices and
data centers. There are currently sales offices in Argentina, Brazil, Denmark,
England, France, Ireland, Italy, Switzerland, and the
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<PAGE> 36
United States and data centers in the United States, Germany, and the United
Kingdom. The Company expects to open an additional data center in Asia.
Future investments in technology may involve the development, acquisition
or licensing of technologies that complement or augment the Company's existing
services and technologies.
During 1998, the Company recorded aggregate unearned compensation totaling
approximately $19.9 million in connection with certain sales of stock and the
grant of certain stock options to employees, directors and consultants. This
amount is being amortized over the four-year vesting period of the related
options. These options were issued to create incentives for continued
performance. Of the total unearned compensation, approximately $448,000,
$217,000, $269,000 and $1.7 million was amortized in the quarters ended March
31, June 30, September 30 and December 31, 1998, respectively. In January and
March 1999, the Company granted options resulting in an additional $18.1 million
of unearned compensation. Amortization of unearned compensation was
approximately $3.7 million, $4.9 million, $4.8 million and $4.3 million during
the quarters ended March 31, June 30, September 30 and December 31, 1999,
respectively. The Company expects aggregate per quarter amortization related to
unearned compensation of between $3.4 million and $2.4 million during 2000,
between $2.0 million and $1.3 million during 2001, and between $1.0 million and
$634,000 during 2002.
Acquisitions
In May of 1999, the Company acquired substantially all the operating assets
of the Connect Service business of Fabrik Communications, Inc. The Company
purchased the ongoing business operations as well as nearly 500 customer
relationships of Fabrik. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
net assets acquired on the basis of their respective fair values on the date of
acquisition. The total purchase price of $20.1 million consisted of $12.0
million cash, Common Stock valued at $8.0 million, and other acquisition costs
of approximately $100,000. Of the total purchase price, approximately $500,000
was allocated to property and equipment, and the remainder was allocated to
intangible assets, including customer base ($2.1 million), assembled workforce
($400,000), and goodwill ($17.1 million). The acquired intangible assets,
excluding goodwill, are being amortized over their estimated useful lives of two
to three years. Goodwill will be amortized using the straight-line method over
three years, resulting in an aggregate quarterly charge of $1.4 million during
the amortization period. At December 31, 1999, cumulative amortization of
intangible assets totaled $3.9 million.
In July of 1999, the Company acquired all outstanding shares of dotOne
Corporation, a leading provider of corporate email and messaging services. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible net liabilities
and intangible net assets acquired on the basis of their respective fair values
on the date of the acquisition. The total purchase price of $57.0 million
consisted of $17.5 million cash, Common Stock valued at $35.0 million, assumed
stock options with an estimated fair market value of $3.2 million, and other
acquisition costs of approximately $1.3 million. Of the total purchase price,
approximately $1.7 million was allocated to net tangible liabilities, and the
remainder was allocated to intangible assets, including customer base ($4.6
million), assembled workforce ($1.5 million), existing technology ($600,000),
and goodwill ($52.0 million). The acquired intangible assets, excluding
goodwill, are being amortized over their estimated useful lives of three to five
years. Goodwill is being amortized using the straight-line method over three
years, resulting in an aggregate quarterly charge of $4.3 million during the
amortization period. At December 31, 1999, cumulative amortization of intangible
assets totaled $7.9 million.
In August of 1999, the Company acquired all outstanding shares of Amplitude
Software Corporation, a leading provider of Internet calendaring and resource
scheduling solutions. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
tangible and intangible assets acquired on the basis of their respective fair
values on the date of the acquisition. The total purchase price of $214.4
million consisted of $45.0 million cash, Common Stock valued at $141.3 million,
assumed stock options with an estimated fair market value of $22.0 million, and
other acquisition costs of approximately $6.1 million. Of the total purchase
price, approximately $4.4 million was allocated to net
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<PAGE> 37
tangible assets and the remainder was allocated to intangible assets, including
customer base ($600,000), assembled workforce ($12.6 million), existing
technology ($4.1 million), and goodwill ($201.5 million). The acquired
intangible assets, excluding goodwill, are being amortized over their estimated
useful lives of two to four years. Goodwill is being amortized using the
straight-line method over four years, resulting in an aggregate quarterly charge
of $12.6 million during the amortization period. At December 31, 1999,
cumulative amortization of intangible assets totaled $17.8 million.
In November of 1999, the Company acquired all outstanding shares of Xeti,
Inc., a leading developer of standards-based public key infrastructure
solutions. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the tangible and
intangible net assets acquired on the basis of their respective fair values on
the acquisition date. The total purchase price of approximately $23.8 million
consisted of $2.0 million in cash, Common Stock valued at $18.5 million, assumed
stock options of $3.1 million and other acquisition costs of approximately
$200,000. The Company also assumed the stock option plans of Xeti, Inc. Of the
total purchase price, approximately $200,000 was allocated to net tangible
assets and the remainder was allocated to intangible assets, including assembled
workforce ($360,000), existing technology ($540,000) and goodwill ($22.7
million). The acquired intangible assets, excluding goodwill, are being
amortized over their estimated useful lives of two to three years. Goodwill is
being amortized using the straight-line method over three years, resulting in an
aggregate quarterly charge of $1.7 million during the amortization period. At
December 31, 1999, cumulative amortization of intangible assets totaled
$574,400.
In December of 1999, the Company acquired all outstanding shares of FaxNet
Corporation, a leading outsource supplier of enhanced fax and integrated
messaging solutions. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to the tangible
and intangible assets acquired on the basis of their respective fair values on
the date of the acquisition. The total purchase price of $199.3 million
consisted of $20.0 million cash, Common Stock valued at $152.4 million, assumed
stock options with an estimated fair market value of $7.3 million assumed
subordinated notes of $4.2 million and other liabilities of $7.5 million, and
other acquisition costs of approximately $7.9 million. Of the total purchase
price, approximately $1.6 million was allocated to net tangible assets and the
remainder was allocated to intangible assets, including customer base ($5.5
million), assembled workforce ($900,000), existing technology ($6.1 million),
and goodwill ($185.2 million). The acquired intangible assets, excluding
goodwill, are being amortized over their estimated useful lives of three to
eight years. Goodwill is being amortized using the straight-line method over
eight years, resulting in an aggregate quarterly charge of $6.4 million during
the amortization period at December 31, 1999.
In January of 2000, the Company acquired all outstanding shares of ISOCOR
Corporation, a leading supplier of Internet messaging, directory and directory
software solutions. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired on the basis of their respective
fair values on the date of the acquisition. The total purchase price of $274.0
million consisted of Common Stock valued at $225.7 million, assumed stock
options with an estimated fair market value of $37.2 million, and other
acquisition costs of approximately $11.1 million. Of the total purchase price,
approximately $19.2 million was allocated to net tangible assets and the
remainder was allocated to intangible assets, including customer base ($9.8
million), assembled workforce ($3.4 million), in-process technology ($200,000),
existing technology ($18.3 million), and goodwill ($223.1 million). The acquired
in-process technology was expensed in the period of acquisition. The other
acquired intangible assets, excluding goodwill, will be amortized over their
estimated useful lives of three years. Goodwill will be amortized using the
straight-line method over three years, resulting in an aggregate quarterly
charge of $22.3 million during the amortization period.
In January of 2000, the Company signed a definitive agreement to acquire
RemarQ Communities Inc., a provider of Internet collaboration services for
corporations, Web portals and Internet service providers. The acquisition, which
is subject to the approval of RemarQ's stockholders and is expected to close on
or before March 31, 2000, will be accounted for using the purchase method of
accounting and, accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired on the basis of their respective fair
values on the date of the acquisition. The total estimated purchase price of
approximately $267.5 million
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<PAGE> 38
will consist of Common Stock and assumed stock options valued at approximately
$267.0 million, and other estimated acquisition costs of approximately $500,000.
Of the total purchase price, the Company anticipates that approximately $8.7
million will be allocated to net tangible assets and the remainder will be
allocated to intangible assets, including assembled workforce ($3.2 million),
customer base ($5.6 million), existing technology ($4.3 million), and goodwill
totaling approximately ($245.7 million). The acquired intangible assets,
excluding goodwill, are expected amortized over their estimated useful lives of
three years. The Company expects to amortize goodwill using the straight-line
method over three years, resulting in an aggregate quarterly charge of $21.3
million during the amortization period.
In March of 2000, the Company acquired all outstanding stock of The
docSpace Company, a leading provider of Web-based services for secure file
delivery, storage and collaboration. The acquisition has been accounted for
using the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired on the basis of
their respective fair values on the date of the acquisition. The total purchase
price of approximately $300.4 million consisted of $30.0 million cash, Common
Stock valued at $234.0 million, assumed warrants for $26.4 million, and other
acquisition costs of approximately $10.0 million. Of the total purchase price,
approximately $5.4 million has been allocated to net tangible liabilities and
the remainder has been allocated to intangible assets, including assembled
workforce ($500,000), existing technology ($21.5 million), and goodwill ($283.8
million). The acquired intangible assets, excluding goodwill, will be amortized
over their estimated useful lives of three years. Goodwill will be amortized
using the straight-line method over three years, resulting in an aggregate
quarterly charge of $[23.9] million during the amortization period.
Warrants
In January 1999, the Company entered into an agreement with ICQ, a
subsidiary of America Online, Inc., pursuant to which the Company provides email
hosting services that are integrated with ICQ's instant messaging service
provided to ICQ's customers. The ICQ instant messaging service is designed to
allow users to communicate in real time over the Internet. As part of the
agreement, ICQ agreed to provide sub-branded advertising for Critical Path in
exchange for a warrant to purchase 2,442,766 shares of Common Stock, issuable
upon attainment of each of five milestones. The Company believes that this
agreement will have a significant current and potential future impact on the
Company's results of operations. The following table summarizes the shares
underlying each milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANT PRICE
---------- --------
<S> <C> <C>
Milestone 1............................................. 814,254 $ 4.26
Milestone 2............................................. 407,128 5.50
Milestone 3............................................. 407,128 6.60
Milestone 4............................................. 407,128 8.80
Milestone 5............................................. 407,128 11.00
---------
Totals........................................ 2,442,766
=========
</TABLE>
In the quarter ended June 30, 1999, the Company amended the vesting terms
of the agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying each of the remaining milestones vest on
the date in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis. The
Company believes it is probable that all milestones will be achieved.
Using the Black-Scholes option-pricing model and assuming a term of seven
years and expected volatility of 90%, the initial fair value of the warrant on
the effective date of the agreement approximated $16.5 million, which is being
amortized to advertising expense using the straight-line method over four years.
The shares underlying the second through fifth milestones are remeasured at each
subsequent reporting date until each
38
<PAGE> 39
sub-branded ICQ mailbox registration threshold is achieved and the related
warrant shares vest, at which time the fair value attributable to that tranche
of the warrant is fixed. In the event such remeasurement results in increases or
decreases from the initial fair value, which could be substantial, these
increases or decreases will be recognized immediately, if the fair value of the
shares underlying the milestone has been previously recognized, or over the
remaining term, if not.
As of December 31, 1999, three of the five milestones had been attained
resulting an aggregate charge to stock-based expenses of $9.2 million during
1999. The remaining shares underlying the fourth and fifth milestones were
remeasured using the December 31, 1999 closing price of $94.38 resulting in a
revised fair value of the warrant of $109.7 million. The Company expects that
future changes in the trading price of the Company's Common Stock at the end of
each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
charges.
In October 1999, the Company entered into an agreement with Qwest
Communications Corporation, pursuant to which the Company will provide email
hosting services to Qwest's customers. As part of the agreement, Qwest agreed to
provide sub-branded advertising for Critical Path in exchange for warrants to
purchase up to a maximum of 3,534,540 shares of Common Stock upon attainment of
each of six milestones. The Company believes that this agreement could have a
significant current and potential future impact on the Company's results of
operations. The following table summarizes the shares underlying each milestone
and the related exercise price:
<TABLE>
<CAPTION>
REGISTERED NO. SHARES
OF SUB-BRANDED UNDERLYING EXERCISE
EMAIL BOXES WARRANTS PRICE
-------------- ---------- --------
<S> <C> <C> <C>
Milestone 1............................ Upon Execution 589,090 $41.581
Milestone 2............................ 400,000 589,090 44.581
Milestone 3............................ 300,000 589,090 47.581
Milestone 4............................ 1,200,000 589,090 50.581
Milestone 5............................ 1,600,000 589,090 53.581
Milestone 6............................ 2,000,000 589,090 56.581
---------
Totals....................... 6,000,000 3,534,540
=========
</TABLE>
The shares underlying those milestones for which achievement is considered
probable are remeasured at each subsequent reporting date, beginning at December
31, 1999, until each sub-branded Qwest mailbox registration threshold is
achieved and the related warrant shares vest, at which time the fair value
attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
Using the Black-Scholes option-pricing model and assuming a term of 5 years
and expected volatility of 90%, the initial fair value of the warrants
associated with the first milestone on the effective date of the agreement
approximated $22.2 million, which is being amortized to advertising expense
using the straight-line method over 3 years. The Company expects that future
changes in the trading price of the Company's Common Stock at the end of each
quarter, and at the time certain milestones are considered probable and
achieved, may cause additional substantial changes in the ultimate amount of the
related stock-based charges.
In December 1999, the Company entered into an agreement with Worldsport
Network Ltd., the exclusive provider of Internet solutions for the General
Association of International Sports Federations ("GAISF") and a majority of the
international federations it recognizes. Worldsport will offer Critical Path's
advanced Web-based email and calendaring services to the entire GAISF network
and its members. As part of the agreement, Worldsport agreed to provide
sub-branded advertising for the Company in exchange for warrants to purchase up
to a 1.25% equity interest in the Company on a fully diluted basis upon
attainment of each of five milestones. The warrants are exercisable for five
years after becoming vested. Any warrants not vested within five years of the
date of the agreement will be cancelled. The Company believes that this
agreement could
39
<PAGE> 40
have a significant current and potential future impact on the Company's results
of operations. The following table summarizes the vesting milestones and related
exercise prices:
<TABLE>
<CAPTION>
REGISTERED NO. OF
SUB-BRANDED
EMAIL BOXES EXERCISE PRICE
----------------- --------------
<S> <C> <C>
Milestone 1.................... 2 million Average of the Company's closing price for
the 15 days prior to reaching milestone 1
("Initial Exercise Price").
Milestone 2.................... 4 million Initial Exercise Price plus $5.00
Milestone 3.................... 8 million Initial Exercise Price plus $10.00
Milestone 4.................... 12 million Initial Exercise Price plus $15.00
Milestone 5.................... 20 million Initial Exercise Price plus $20.00
</TABLE>
The shares underlying those milestones for which achievement is considered
probable are remeasured at each subsequent reporting date, beginning at December
31, 1999, until each sub-branded Worldsport mailbox registration threshold is
achieved and the related warrant shares vest, at which time the fair value
attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
As of December 31, 1999, none of the milestones were considered probable
and, as a result, no deferred compensation associated with these warrants was
recognized. The Company expects that future changes in the trading price of the
Company's Common Stock at the end of each quarter, and at the time subsequent
milestones considered probable and are achieved, will cause additional
substantial changes in the ultimate amount of the related stock-based charges.
In December 1999, the Company entered into an agreement with one of its
lessors, in connection with an office lease, pursuant to which the lessor is
entitled to purchase up to a maximum of 25,000 shares of Common Stock. The
warrants may be exercised beginning January 1, 2000 through December 20, 2006 at
a price of $90.00 per share. The warrants vest at the beginning of each month on
a straight-line basis in the amount of 521 shares per month.
Using the Black-Scholes option pricing model and assuming a term of 6 years
and expected volatility of 90%, the fair value of the warrants on the effective
date of the agreement approximated $2.0 million, which will be amortized to
general and administrative expenses using the straight-line method over 10 years
beginning January 2000.
In January 2000, the docSpace Company entered into an agreement with AT&T
Corporation, pursuant to which the docSpace Company will provide secure
messaging services to AT&T's Internet portal customers. As part of the
agreement, AT&T agreed to provide marketing, publicity, promotional and
provision branding for docSpace, and upon completion of the acquisition for
Critical Path, in exchange for a warrant to purchase up to a maximum of 349,123
shares of Common Stock upon attainment of each of three milestones. The Company
believes that this agreement could have a significant current and potential
future impact on the Company's results of operations. The following table
summarizes the shares underlying each milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANTS PRICE
---------- --------
<S> <C> <C>
Milestone 1................................................. 199,499 $39.098
Milestone 2................................................. 74,812 39.098
Milestone 3................................................. 74,812 39.098
-------
Total............................................. 349,123
=======
</TABLE>
40
<PAGE> 41
The Company believes that all shares underlying these warrants are
considered probable of issuance. The shares underlying the warrants associated
with first milestone were fully vested on the inception date of the agreement.
The shares underlying the remaining warrants associated with the second and
third milestone will be remeasured at each subsequent reporting date, beginning
at March 31, 2000, until each sub-branded AT&T mailbox registration threshold is
achieved, and the related warrant shares vest, at which time the fair value
attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not. The Company expects
that future changes in the trading price of the Company's Common Stock at the
end of each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
charges.
Using the Black-Scholes option-pricing model and assuming a term of 7 years
and expected volatility of 90%, the initial fair value of all the warrants on
the effective date of the agreement approximated $26.4 million, which is
included as a component of the purchase price of the acquisition. The warrants
underlying the second and third milestones will be remeasured at each subsequent
reporting date until the milestone requirements are met. The remeasured amounts
will be capitalized and amortized to advertising expense using the straight-line
method over 3 years.
The Company has incurred significant losses since its inception, and as of
December 31, 1999 had an accumulated deficit of approximately $129.5 million.
The Company intends to continue to invest heavily in sales and marketing,
continued development of its network infrastructure, and continued technology
enhancements. In addition, the Company expects to continue to expand its
business through acquisitions and internal development. The Company expects to
continue to incur substantial operating losses for the foreseeable future.
In view of the rapidly evolving nature of the Company's business, recent
acquisitions, and limited operating history, the Company believes that
period-to-period comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total net revenues, are
not meaningful and should not be relied upon as indications of future
performance. At December 31, 1999, the Company had 488 employees, in comparison
with 93 employees at December 31, 1998. The Company does not believe that its
historical growth rates for revenue, expenses, or personnel are indicative of
future results.
41
<PAGE> 42
RESULTS OF OPERATIONS
The following table presents the historical results of the Company's
operations for the periods ended December 31, 1997, 1998 and 1999 and the
relative composition of net revenues and selected statement of operations data
as a percentage of net revenues for the periods ended December 31, 1998 and
1999, only, as the Company did not begin to generate revenue until 1998.
<TABLE>
<CAPTION>
PERCENTAGE OF
HISTORICAL AMOUNTS NET REVENUES
------------------------------ --------------
PERIOD ENDED DECEMBER 31 1997 1998 1999 1998 1999
------------------------ ------- -------- --------- ------ ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $ -- $ 897 $ 16,157 100% 100%
Cost of net revenues............................ -- (2,346) (21,557) (262) (133)
------- -------- --------- ------ ----
Gross profit (loss)........................... -- (1,449) (5,400) (162) (33)
Operating expenses:
Sales and marketing........................... 244 687 13,811 188 85
Research and development...................... 454 2,098 7,682 234 48
General and administrative.................... 358 3,814 14,051 425 87
Acquisition-related retention bonus........... -- -- 3,587 -- 22
Amortization of intangible assets............. -- -- 32,259 -- 200
Stock-based expenses.......................... -- 2,400 46,460 268 288
------- -------- --------- ------ ----
Total operating expenses.............. 1,056 9,999 117,850 1,115 729
------- -------- --------- ------ ----
Loss from operations............................ (1,056) (11,448) (123,250) (1,277) (763)
Interest and other income, net................ -- 375 7,061 42 44
Interest expense.............................. (18) (388) (752) (43) (5)
------- -------- --------- ------ ----
Net loss........................................ $(1,074) $(11,461) $(116,941) (1,278)% (724)%
======= ======== ========= ====== ====
</TABLE>
Net Revenues
Net revenues increased to $16.2 million in 1999 from $897,000 in 1998.
These increases in net revenue resulted from a substantial increase in the
number of email boxes the Company hosted during 1999 in comparison with the
previous year, as well as from the contribution to current revenues of acquired
companies' revenue streams. At December 31, 1999, the Company hosted 11.1
million active email boxes compared to 800,000 email boxes at December 31, 1998.
In addition, the Company recognized $1.0 million from licensing its software in
1999.
In connection with certain customer contracts executed in 1998, the Company
granted warrants and stock purchase rights to purchase Series B Convertible
Preferred Stock. The fair value of these warrants and stock purchase rights,
determined using the Black-Scholes option-pricing model, has been recognized
ratably as a sales discount over the terms of the respective agreements.
Amortization of this discount amounted to $231,000 and $106,000 for the years
ended December 31, 1998 and 1999, respectively.
In early 1998, the Company executed agreements with E*TRADE, an online
brokerage services company, and Verio, a web hosting organization, pursuant to
which the Company derives revenue for providing messaging services. During the
years ended December 31, 1998 and 1999, E*TRADE accounted for approximately 62%
and 15%, respectively, of the Company's net revenues, excluding the value of
stock purchase rights received by customers. During these same periods, Verio
accounted for approximately 30% and 4%, respectively, of the Company's net
revenues.
Cost of Net Revenues
Cost of net revenues consists principally of costs incurred in the delivery
and support messaging services, including depreciation of capital equipment used
in network infrastructure, amortization of purchased technology included in
intangibles, and personnel costs incurred in operations and customer support
functions.
42
<PAGE> 43
During 1999, these costs were $21.6 million or 133% of net revenues, in
comparison with costs of $2.3 million or 262% of net revenues, for 1998.
Significant acquisitions of equipment for data centers have been made over the
past 12 months, and as a result depreciation expense of networking equipment
during 1999 increased substantially in comparison with the previous year.
Additionally, the Company incurred $3.5 million of consulting and outside
contractor charges during 1999 in its continued effort to enhance its network
and migrate to a new storage platform. Staffing also increased significantly in
operations and customer support during 1998 and 1999, resulting in increased
compensation and other personnel costs. Operations and customer support staff
increased from no employees at December 31, 1997, to 25 employees at December
31, 1998, and further to 174 employees as of December 31, 1999.
During the year ended December 31, 1999, the Company also incurred a
stock-based charge of approximately $2.0 million in connection with a severance
agreement for a terminated employee. This expense was charged to cost of net
revenues, based on the functions and duties previously performed by the
terminated employee. Furthermore, the Company recognized stock-based charges
associated with stock options granted with an exercise price below market value
on the date of grant to employees involved in the revenue-generating activities
of the Company in the amount of $193,000 and $2.6 million in 1998 and 1999,
respectively. Excluding these special charges, cost of net revenues would have
been $2.2 million or 240% of net revenues and $17.0 million or 105% of net
revenues, respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist principally of
compensation for sales and marketing personnel, advertising, public relations,
other promotional costs, and, to a lesser extent, related overhead. Sales and
marketing expenses during the year ended December 31, 1999, amounted to $13.8
million, or 85.5% of net revenues, in comparison with $1.7 million, or 188.1%,
during the previous year and $244,000 in 1997. Increases in marketing and
promotional expenses, incentive compensation payments to sales personnel, and
increases in compensation associated with additional headcount accounted for the
increase in sales and marketing expenses. Sales and marketing staff increased
from 30 employees to 168 employees at December 31, 1998 and 1999, respectively.
At December 31, 1997, the Company had 2 employees in sales and marketing.
Research and Development. Research and development expenses consist
principally of compensation for technical staff, payments to outside
contractors, and, to a lesser extent, related overhead. The Company recognizes
research and development expenses, in-process research and development costs, as
they are incurred. Research and development expenses amounted to $7.7 million,
or 47.5% of net revenues, during the year ended December 31, 1999, in comparison
with $2.1 million, or 233.9% of net revenues, for the previous year and $454,000
in 1997.
These significant increases resulted primarily from increases in personnel
and use of outside contractors as the Company continues to develop and enhance
its messaging service offerings and to develop new electronic messaging
services. Research and development staff increased from 27 employees to 94
employees at December 31, 1998 and 1999, respectively. At December 31, 1997, the
Company had 11 employees in research and development.
General and Administrative. General and administrative expenses consist
principally of compensation for personnel, fees for outside professional
services, occupancy costs and, to a lesser extent, related overhead. General and
administrative expenses amounted to approximately $14.1 million, or 87.0% of net
revenues, during the year ended December 31, 1999, in comparison with $3.8
million or 425.2% of net revenues, during the previous fiscal year and $358,000
in 1997. These increases were attributable primarily to increases in
compensation associated with additional headcount, higher fees for outside
professional services, and higher occupancy costs. General and administrative
staff increased from 11 employees to 52 employees at December 31, 1998 and 1999,
respectively. At December 31, 1997, the Company had 4 employees performing
general and administrative functions.
43
<PAGE> 44
Acquisition-Related Bonus Program
In connection with its acquisitions of dotOne, Amplitude, Xeti and FaxNet,
the Company established a retention bonus program in the aggregate amount of $14
million to provide incentive for former dotOne, Amplitude, Xeti and FaxNet
employees to continue their employment with Critical Path. Payment of bonuses to
the listed employees will occur one year following the date of acquisition,
unless the listed employees voluntarily terminate their employment with the
Company prior to the respective acquisition's one-year anniversary. The
aggregate amount of the eligible bonuses is adjusted downward at each point that
a former dotOne, Amplitude, and FaxNet employee chooses to terminate his or her
employment with the Company. The amount of any such downward adjustment
corresponds to the amount that the terminating employee would have received had
he or she elected to continue employment with the Company. A ratable share of
the adjusted eligible bonus amount will be accrued and charged to compensation
expense over the respective 12 months commencing on the date the bonuses are
granted.
As of December 31, 1999, the aggregate, adjusted eligible bonus amount was
$11.6 million, and the ratable charge to 1999 compensation expense was $4.1
million. Based on the functions of the employees scheduled to receive
acquisition bonuses, $520,000 of the compensation charge was allocated to cost
of net revenues and the remaining $3,587,000 was allocated to operating
expenses.
Similar bonus programs have also been established to provide incentives for
former employees of ISOCOR, docSpace and RemarQ to continue their employment
with Critical Path in the amount of $741,000, $5.0 million, and $2.0 million,
respectively.
Amortization of Intangible Assets
In connection with its acquisitions of Fabrik, dotOne, Amplitude, Xeti and
FaxNet, accounted for under the purchase method of accounting, the Company
recorded goodwill and other intangible assets representing the excess of the
purchase price paid over the fair value of net assets acquired. Other intangible
assets primarily include assembled workforce, customer base and existing
technology. The aggregate amortization of these intangibles was $32.3 million in
1999. There were no acquisitions in 1997 or 1998. The Company anticipates that
future amortization of intangibles associated with its 1999 and first quarter
2000 acquisitions will continue to be amortized on a straight-line basis over
their expected useful lives ranging from two to eight years, and will amount to
approximately $90 million per quarter until 2002, approximately $22 million in
2003 and approximately $5 million thereafter until the related goodwill and
other purchased intangibles are fully amortized. It is likely that the Company
will continue to expand its business through acquisitions and internal
development. Any additional acquisitions or impairment of goodwill and other
purchased intangibles could result in additional merger and acquisition related
costs.
Stock-Based Expenses
In connection with certain stock option grants and Common Stock issuances
during the years ended December 31, 1998 and 1999, the Company recognized
unearned compensation totaling $19.9 million and $22.3 million, respectively,
which is being amortized over the vesting periods of the related options.
Amortization expense recognized during 1998 and 1999 totaled approximately $2.5
million and $17.6 million, respectively. Approximately $193,000 and $2.6 million
of amortized unearned compensation was allocated to cost of net revenues, and
the remaining $2.4 million and $15.1 million was amortized to operating expenses
for the years ended December 31, 1998 and 1999, respectively. During 1999, the
Company also incurred a one-time stock-based charge of approximately $2 million
in connection with a severance agreement for a terminated employee. This expense
was charged to cost of net revenues.
The Company incurred stock-based expenses for warrants the Company granted
to ICQ, a subsidiary of AOL, and Qwest, and for Common Stock issued to one other
strategic partner. Amortization of the fair value of these warrants and Common
Stock resulted in stock-based expenses of approximately $29.7 million for the
year ended December 31, 1999.
44
<PAGE> 45
Interest and Other Income and Interest Expense
Interest and other income consists primarily of interest earnings on cash
and cash equivalents. Interest and other income amounted to $375,000 and $7.1
million during the years ended December 31, 1998 and 1999, respectively. The
Company completed private placements of equity securities in April 1998,
September 1998, and January 1999, and closed public offerings of Common Stock in
April 1999 and June 1999. As a result, interest income increased significantly
during 1999 in comparison with 1998 due to higher cash balances available for
investing. During the years ended December 31, 1998 and 1999, the Company
incurred interest expense on capital lease obligations and stock-based charges
in the amount of $388,000 and $752,000, respectively, of which $161,000 and
$64,000 related to the amortization of stock-based charges and the remainder to
interest payments on capital lease obligations.
Income Taxes
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses from its inception through December
31, 1999. As of December 31, 1999, the Company had approximately $94.9 million
of federal and state net operating loss carryforwards, which expire in varying
amounts beginning in, 2012 and 2005, respectively, available to offset future
taxable income. Under the Tax Reform Act of 1986, the amounts of and benefits
from net operating loss carryforwards may be impaired or limited in certain
circumstances. For example, the amount of net operating losses that the Company
may utilize in any one year would be limited in the presence of a cumulative
ownership change of more than 50% over a three-year period. At December 31,
1999, the Company also had research and development credit carryforwards of
approximately $1.2 million and $717,000 for federal and state purposes,
respectively. The research and development credit carryforwards begin to expire
through 2019 for federal purposes, and do not expire for state purposes. Because
there is significant doubt as to whether the Company will realize any benefit
from this deferred tax asset, the Company has established a full valuation
allowance as of December 31, 1999.
45
<PAGE> 46
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for each of the Company's most recent quarters. This information
has been derived from Critical Path's consolidated unaudited financial
statements, which, in management's opinion, have been prepared on the same basis
as the audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. This information
should be read in conjunction with the audited consolidated financial statements
of Critical Path and the notes thereto included elsewhere in this document. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
<TABLE>
<CAPTION>
1998 1999
------------------ ----------------------------------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............... $ 156 $ 605 $ 1,049 $ 2,006 $ 4,913 $ 8,189
Cost of net revenues....... 941 1,093 2,360 3,977 7,523 7,697
------- ------- --------- --------- -------- --------
Gross profit (loss)...... (785) (488) (1,311) (1,971) (2,610) 492
------- ------- --------- --------- -------- --------
Operating expenses:
Sales and marketing...... 558 851 1,984 3,219 3,557 5,051
Research and
development........... 560 861 1,379 1,430 1,895 2,978
General and
administrative........ 895 1,726 1,550 2,691 3,678 6,132
Acquisition-related
retention bonus....... -- -- -- -- 570 3,017
Amortization of
intangible assets..... -- -- -- 550 9,263 22,446
Stock-based expenses..... 224 1,532 11,657 8,162 5,425 21,216
------- ------- --------- --------- -------- --------
Total operating
expenses....... 2,237 4,970 16,570 16,052 24,388 60,840
Loss from operations....... (3,022) (5,458) (17,881) (18,023) (26,998) (60,348)
Interest and other income,
net...................... 48 255 351 1,882 2,841 1,987
Interest expense........... (87) (126) (64) (180) (167) (341)
------- ------- --------- --------- -------- --------
Net loss................... $(3,061) $(5,329) $ (17,594) $ (16,321) $(24,324) $(58,702)
======= ======= ========= ========= ======== ========
AS A PERCENTAGE OF REVENUES
Net revenues............... 100% 100% 100% 100% 100% 100%
Cost of net revenues....... 603 181 225 198 153 94
------- ------- --------- --------- -------- --------
Gross profit (loss)...... (503) (81) (125) (98) (53) 6
------- ------- --------- --------- -------- --------
Operating expenses:
Sales and marketing...... 358 141 189 161 72 62
Research and
development........... 359 142 131 71 38 36
General and
administrative........ 574 285 148 134 75 75
Acquisition-related
retention bonus....... -- -- -- -- 12 37
Amortization of
intangible assets..... -- -- -- 27 189 274
Stock-based expenses..... 143 253 1,111 407 110 259
------- ------- --------- --------- -------- --------
Total operating
expenses....... 1,434 821 1,579 800 496 743
------- ------- --------- --------- -------- --------
Loss from operations....... (1,937) (902) (1,704) (898) (549) (737)
Interest and other income,
net...................... 31 42 33 94 57 24
Interest expense........... (56) (21) (6) (9) (3) (4)
------- ------- --------- --------- -------- --------
Net loss................... (1,962)% (881)% (1,677)% (813)% (495)% (717)%
======= ======= ========= ========= ======== ========
</TABLE>
46
<PAGE> 47
Net revenues increased quarterly due to a continuous increase in the number
of email boxes hosted during the last half of 1998 and 1999, as well as from the
contribution to 1999 revenues of acquired companies' revenue streams.
Cost of net revenues increased as a result of the depreciation expense
associated with significant acquisitions of equipment for data centers made
during 1999. Additionally, the Company incurred $3.5 million of consulting and
outside contractor charges during 1999 in its continued effort to enhance its
network and migrate to a new storage platform. During the third quarter of 1999,
the Company incurred a one-time stock-based charge of approximately $2 million
in connection with a severance agreement for a terminated employee. This expense
was charged to cost of net revenues, based on the functions and duties
previously performed by the terminated employee. Furthermore, the Company
recognized stock-based charges associated with stock options granted with an
exercise price below market value on the date of grant to employees involved in
the revenue-generating activities of the Company in the amount of $193,000 and
$4.5 million in 1998 and 1999, respectively.
Operating expenses increased on a quarterly basis as a result of staffing
increases in operations and customer support during the second half 1998 and
1999, resulting in increased compensation and other personnel costs. In
addition, the Company incurred higher fees for outside professional services and
amortization of unearned compensation. Furthermore, the Company's 1999
acquisitions resulted in amortization charges for purchased intangibles as well
as acquisition-related retention bonuses during the second had half of 1999.
Fluctuations in Quarterly Results
The Company has incurred operating losses since inception and cannot be
certain that profitability will be achieved on a quarterly or annual basis in
the future. The Company believes that future operating results will be subject
to quarterly fluctuations due to a variety of factors, including, but not
limited to:
- continued growth of the Internet and of email usage;
- demand for outsourced messaging and collaboration services;
- the ability to attract and retain customers and maintain customer
satisfaction;
- the ability to upgrade, develop and maintain systems and infrastructure;
- the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business and infrastructure;
- technical difficulties or system outages;
- the announcement or introduction of new or enhanced services by
competitors;
- the ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;
- the pricing policies of competitors;
- failure to increase international sales; and
- governmental regulation surrounding the Internet and email in particular.
In addition to the factors set forth above, operating results will be
impacted by the extent to which the Company incurs non-cash charges associated
with stock-based arrangements with the employees and non-employees. In
particular, the Company expects to incur substantial non-cash charges associated
with the grant of warrants to ICQ, Inc., a subsidiary of America Online, and may
incur substantial non-cash charges associated with the grant of warrants to
Qwest Communications Corporation and Worldsport Network Ltd. In addition to
amortization, which totaled $9.2 million in 1999, of the initial fair value of
these warrants, future changes in the trading price of the Company's Common
Stock at the end of each quarter and at the date the
47
<PAGE> 48
related milestones are achieved will cause additional substantial changes in the
ultimate amount of such amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by approximately $61.2
million during the year ended December 31, 1999. This net change occurred as the
Company raised approximately $259.8 million in proceeds from the sale of equity
securities, net of issuance costs, and exercise of stock options, used $23.8
million in cash to fund operating activities, paid $116.4 million (net of cash
acquired) to consummate acquisitions, advanced $15.0 million to third parties
and approximately $200,000 to officers pursuant to promissory notes, invested
$7.5 million to obtain equity positions in strategic partners, disbursed $41.8
million to purchase property and equipment, and paid $3.4 million to retire
principal on capital lease obligations and acquire treasury shares. Installation
of network infrastructure equipment in the Company's data centers, license of
new software platforms, purchases of furniture and equipment for new employees,
and leasehold improvements related to expansion of the Company's facilities
accounted for the significant increase in capital expenditures. The Company
expects that investments in property and equipment will continue to grow as the
Company seeks to increase its capacity to provide end-to-end messaging and
collaboration services. Capital lease obligations, including both short-term and
long-term portions, increased approximately $8.3 million, net of principal
repayments, during 1999 as the Company secured financing for a substantial share
of the additions to property and equipment. The Company's capital lease
obligations contain no provisions that would limit the Company's future
borrowing ability.
In January 1999, the Company completed the second round of the Series B
Convertible Preferred Stock financing through the issuance of approximately 3.2
million shares, including 454,544 shares issued pursuant to outstanding stock
purchase rights, for net proceeds of $12.5 million. Also in January 1999, the
Company sold 1,090,909 shares of Common Stock for net proceeds of $2.4 million.
In April 1999, the Company received approximately $114.1 million in net proceeds
upon the closing of the Company's initial public offering of Common Stock. In
June 1999, the Company received approximately $140.7 million in net proceeds
upon the closing of its secondary public offering of Common Stock.
In May 1999, the Company made a minority investment of $3 million in the
common stock of Starmedia Network, Inc. Based on the closing price of
Starmedia's stock at December 31, 1999, the fair value of the Company's
investment was $10.9 million and is recorded in Investments. The excess of the
investment's carrying value over its cost is recorded as an unrealized gain on
investments and included in the equity section of the Company's balance sheet.
The Company made additional investments during 1999 in privately-held companies
totaling $4.5 million.
In July 1999, the Company advanced $10.0 million to a privately-held
company pursuant to a promissory note. The note bears interest at the prime rate
of interest as stipulated in The Wall Street Journal. The amount was advanced in
connection with the Company's evaluation of the obligor for potential
acquisition. Under the terms of the note, all principal and accrued interest is
repayable within 90 days of written demand by the holder. Upon the decision by
the Company not to proceed with an acquisition of the obligor, the Company
presented a demand notice for repayment on August 18, 1999. All principal and
interest was subsequently paid.
In August 1999, the Company advanced $5.0 million to docSpace pursuant to a
promissory note. The note bore interest at a rate equal to 8.0% per annum simple
interest. The amount was advanced in connection with the Company's evaluation of
docSpace for potential acquisition. Under the terms of the note, any portion of
the principal and/or interest outstanding on the note may be converted into
Common Stock at the election of docSpace. In March of 2000, the Company
consummated its acquisition of docSpace at which time a portion of this advance
was converted into common stock of docSpace with the remainder offsetting the
cash portion paid.
The Company believes that existing capital resources will enable it to
maintain current and planned operations for at least the next 12 months.
However, operating and investing activities on a long-term basis may require the
Company to seek additional equity or debt financing. In addition, the Company
may, from
48
<PAGE> 49
time to time, evaluate potential acquisitions of other businesses, products, and
technologies. In the first quarter of 2000, the Company completed its
acquisitions ISOCOR and docSpace and as a result, expended approximately $51.1
million in cash proceeds and other acquisition costs. In addition, the Company
anticipates closing its proposed acquisition of RemarQ on or before March 31,
2000, resulting in $500,000 of estimated cash expenditures. The Company expects
that future acquisitions of businesses and other strategic assets will require
considerable outlays of capital. The Company also expects to incur significant
capital expenditures in connection with its financial accounting integration
system.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB No. 101 will not have a material effect on the
financial position or results of operations of the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. Critical Path does not currently use derivative
instruments.
49
<PAGE> 50
SUPPLEMENTAL PRO FORMA FINANCIAL DATA
The following supplemental pro forma financial information presents the
Company's consolidated results of operations for the years ended December 31,
1998 and 1999, excluding the impact of certain special items consisting of (i)
stock-based compensation charges associated with outstanding options and
warrants, (ii) amortization of intangible assets associated with purchase
business combinations, and (iii) accruals for employee retention bonuses
associated with purchase business combinations. Such supplemental presentation
is for informational purposes only and is not intended to replace the
consolidated operating results prepared and presented in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 1998 1999
------------------------ ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues(1)..................................... $ 897 $ 1,128 $ 16,157 $ 16,263
Cost of net revenues(2)............................. (2,346) (2,153) (21,557) (15,125)
-------- ------- --------- --------
Gross profit (loss)................................. (1,449) (1,025) (5,400) 1,138
-------- ------- --------- --------
Operating expenses:
Sales and marketing............................... 1,687 1,687 13,811 13,811
Research and development.......................... 2,098 2,098 7,682 7,682
General and administrative........................ 3,814 3,814 14,051 14,051
Acquisition-related retention bonus(3)............ -- -- 3,587 --
Amortization of intangible assets(3).............. -- -- 32,259 --
Stock-based expenses(4)........................... 2,400 -- 46,460 --
-------- ------- --------- --------
Total operating expenses.................. 9,999 7,599 117,850 35,544
-------- ------- --------- --------
Loss from operations................................ (11,448) (8,624) (123,250) (34,406)
Interest and other income, net...................... 375 375 7,061 7,061
Interest expense(5)................................. (388) (227) (752) (688)
-------- ------- --------- --------
Net loss............................................ $(11,461) $(8,476) $(116,941) $(28,033)
-------- ------- --------- --------
</TABLE>
- ---------------
(1) Pro Forma amounts exclude stock-based charges associated with warrants and
stock purchase rights issued to certain customers as part of an email
services agreement.
(2) Pro Forma amounts exclude stock-based charges associated with stock options
granted with an exercise price below market value on the date of grant to
employees involved in the revenue-generating activities of the Company. In
addition, the pro forma amounts exclude approximately $2 million associated
with a severance agreement with a terminated employee.
(3) Pro Forma amounts exclude acquisition-related retention bonuses and
amortization of intangible assets associated with the Company's acquisition
during 1999.
(4) Pro Forma amounts exclude stock-based charges associated with stock options
and stock purchase rights issued to certain employees and outside
consultants, as well as warrants issued with the marketing agreement between
the Company and ICQ and Qwest.
(5) Pro Forma amounts exclude stock-based charges associated with warrants
issued to certain lenders in connection with the Company's various
financings and promissory notes.
50
<PAGE> 51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
December 31, 1999. However, the Company is exposed to interest rate risk. The
Company employs established policies and procedures to manage its exposure to
changes in the market risk of its marketable securities, which are classified as
available-for-sale as of December 31, 1998. The Company's capital lease
obligations have fixed interest rates and the fair value of these instruments is
affected by changes in market interest rates. The Company believes that the
market risk arising from holdings of its financial instruments is not material.
In the future, mainly as a result of the Company's acquisition of ISOCOR in
January 2000, a substantial portion of the Company's worldwide operations will
have a functional currency other than the United States dollar. In particular,
the Company will maintain substantial development operations in Ireland, where
the functional currency is the Irish Pound; Germany, where the functional
currency is the German Mark; and Italy, where the functional currency is the
Lira. In addition, a significant portion of the Company's revenues will also be
denominated in currencies other than the United States dollar. Fluctuations in
exchange rates may have a material adverse effect on the Company's results of
operations and could also result in exchange losses. The impact of future
exchange rate fluctuations cannot be predicted adequately. To date, the Company
has not sought to hedge the risks associated with fluctuations in exchange
rates, but may undertake such transactions in the future. There can be no
assurance that any hedging techniques implemented by the Company would be
successful or that the Company's results of operations will not be materially
adversely affected by exchange rate fluctuations.
Information relating to quantitative and qualitative disclosure about
market risk is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the Index of Consolidated Financial Statements which
appears on page F-1 of this report. The Report of Independent Accountants,
Consolidated Financial Statements and Notes to Consolidated Financial Statements
which are listed in the Index of Consolidated Financial Statements and which
appear beginning on page F-2 of this report are incorporated into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
<PAGE> 52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and key employees of Critical Path and
their ages as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Douglas T. Hickey.................... 45 Chief Executive Officer and Director
David C. Hayden...................... 45 Chairman of the Board of Directors
David A. Thatcher.................... 45 President
Mark J. Rubash....................... 42 Executive Vice President and Chief Financial Officer
Paul R. Gigg......................... 46 Executive Vice President and Chief Operating Officer
Joseph Duncan........................ 52 Vice President and Chief Information Officer
Michael Serbinis..................... 26 Vice President and Chief Security Officer
Judie A. Hayes....................... 53 Vice President of Corporate Communications
William H. Rinehart.................. 36 Vice President of Worldwide Internet Sales
Marcy Swenson........................ 36 Vice President of Architecture
Mari E. Tangredi..................... 36 Vice President of Corporate Development
Cynthia D. Whitehead................. 53 Vice President of Operations and Customer Service
Brett M. Robertson................... 39 Vice President of Strategic Development and General
Counsel
Sharon Wienbar....................... 38 Vice President Marketing
R. Scott Newth....................... 36 Vice President, Finance and Planning
Christos M. Cotsakos................. 51 Director
Lisa Gansky(1)....................... 41 Director
Kevin R. Harvey(1)................... 35 Director
James A. Smith(2).................... 47 Director
George Zachary(2).................... 34 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Douglas T. Hickey has served as the Chief Executive Officer and a director
of Critical Path since October 1998, and was also President from October 1998
through January 2000. From February 1998 to October 1998, Mr. Hickey served as
Executive Vice President of Frontier Communications Corporation, a
telecommunications company, and as President of Frontier GlobalCenter. From July
1996 to February 1998, Mr. Hickey served as President and CEO of GlobalCenter,
Inc., a web hosting company. In February 1998, GlobalCenter was acquired by
Frontier. From December 1994 to July 1996, Mr. Hickey was President of Internet
services at MFS Communications, a provider of high-speed fiber-optic services.
From September 1990 to November 1994, Mr. Hickey was general manager of North
American sales and field operations at Ardis, a Motorola company. Mr. Hickey
received a B.S. in economics from Siena College.
David C. Hayden founded Critical Path and served as the Chairman, President
and Chief Executive Officer and Secretary from its inception in February 1997 to
October 1998. Mr. Hayden has served as Chairman of the Board of Directors of
Critical Path since October 1998. From February 1993 to August 1996, Mr. Hayden
served as Chairman, Chief Executive Officer, and co-founder of The McKinley
Group, Inc., creators of Magellan, an Internet search engine. Mr. Hayden
received a B.A. in political science from Stanford University.
David A. Thatcher became President of Critical Path on January 31, 2000;
prior to that he served as Executive Vice President, Chief Financial Officer and
Secretary of Critical Path since December 1998, and served as a director of
Critical Path from May 1997 to March 1998 and from May 1998 to November 1998.
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<PAGE> 53
From June 1998 to December 1998, Mr. Thatcher served as President and Chief
Executive Officer of Geoworks Corporation, a provider of software solutions for
the wireless market. Mr. Thatcher joined Geoworks Corporation in March 1997 as
Vice President of Finance and Administration and Chief Financial Officer and was
appointed President and Director in January 1998. From May 1996 to January 1997,
Mr. Thatcher served as Vice President and Chief Financial Officer of Diba, Inc.,
an Internet software company, which was later acquired by Sun Microsystems, Inc.
From January 1996 to May 1996, Mr. Thatcher served as Vice President and Chief
Financial Officer of The McKinley Group. From March 1993 to November 1995, Mr.
Thatcher served as Vice President and Chief Financial Officer of Peregrine
Systems, Inc., a provider of customer support software. Mr. Thatcher received a
B.S. in accounting from San Diego State University and is a CPA in California.
Mark J. Rubash joined Critical Path as Executive Vice President, Chief
Financial Officer in January 2000. From July 1992 through January 2000, Mr.
Rubash served as a Partner of PricewaterhouseCoopers LLP, an independent
accounting and consulting firm. From October 1987 through July 1992, Mr. Rubash
served as a Manager and Senior Manager of Price Waterhouse LLP. Mr. Rubash
received a B.S. in accounting from California State University at Sacramento and
is a Certified Public Accountant in California.
Paul R. Gigg became the Executive Vice President and Chief Operating
Officer of Critical Path upon the closing of its merger with ISOCOR on January
19, 2000. He joined ISOCOR in 1993 and had served as its President, Chief
Executive Officer and a member of the Board of Directors since November 1997.
Prior to joining ISOCOR, Mr. Gigg was Director of Marketing and Engineering at
Dowty Communications (formerly Case Communications), a developer and supplier of
networking products. Mr. Gigg holds a B.S.E.E. degree from the University of
Wales, United Kingdom.
Joseph Duncan has served as Vice President and Chief Information Officer of
Critical Path since December 1998. From December 1997 to December 1998, Mr.
Duncan was founder and Chief Executive Officer of Charybdis Software, a software
company. From June 1993 to November 1997, Mr. Duncan held various positions at
Oracle Corporation, most recently as Senior Vice President for Groupware Systems
and Object-Oriented Tools. Mr. Duncan received a B.A. in philosophy from the
University of Minnesota.
Michael Serbinis joined Critical Path as its Chief Security Officer in
March 2000. From November 1997 to March 2000, Mr. Serbinis was the Chief
Technology Officer of The docSpace Company, which he co-founded in November
1997. From September 1996 to October 1997, Mr. Serbinis was a software engineer
for Total Control, a subsidiary of General Electric. From April 1996 to August
1996, Mr. Serbinis led search engine engineering at Zip2 Corporation. From
September 1992 to September 1995, Mr. Serbinis was an artificial intelligence
research engineer with Microsoft Corporation. Mr. Serbinis received a BSc in
Engineering Physics at Queen's University in Kingston, Ontario, Canada.
Judie A. Hayes joined Critical Path as Vice President of Corporate
Communications in December 1998. From January 1997 to December 1998, Ms. Hayes
served as Vice President Corporate Marketing and Communications for Frontier
GlobalCenter. From March 1995 to January 1997, Ms. Hayes served as Senior
Director of Corporate Communications for NETCOM On-Line Communication Services,
Inc., an Internet service provider. Ms. Hayes has served as Director of
Marketing Communications for MCI Data Services Division, a telecommunications
company, and Director of Corporate Communications for British Telecom North
America, a telecommunications company. Ms. Hayes received her bachelor's degree
from University of Wisconsin-Whitewater.
William H. Rinehart joined Critical Path as Vice President, Sales in
November 1998. From May 1997 to November 1998, Mr. Rinehart served as Senior
Vice President, General Manager at Frontier GlobalCenter. From July 1996 to June
1997, Mr. Rinehart held a range of positions including Vice President, Product
Development and Vice President, Sales for Genuity, a Bechtel company. He has
also served as Vice President, General Manager at MFS Communications, Internet
Division, from January 1995 to July 1996. From April 1993 to January 1995, Mr.
Rinehart was a Senior Account Executive at Ardis, a wireless data communications
company. Mr. Rinehart received a B.S. in business administration from Ball State
University.
53
<PAGE> 54
Marcy Swenson has served as the Vice President of Software Engineering of
Critical Path since June 1997. From May 1995 to June 1997, Ms. Swenson served as
Vice President of Software Development at Providence Systems. In June 1987, Ms.
Swenson co-founded After Hours Software, Inc., which provides custom software
solutions to Fortune 500 customers, and served as Vice President of Software and
Consulting Services until May 1994. Ms. Swenson has completed advanced studies
in Artificial Intelligence at Stanford University, and received a B.S. in
math/computer science from UCLA.
Mari E. Tangredi has served as Vice President, Corporate Development for
Critical Path since January 2000. From August 1999 to January 2000, Ms. Tangredi
served as Vice President, Business Development at Critical Path, and prior to
that she had served as the company's Vice President, Business Development and
Marketing. From June 1995 to November 1997, Ms. Tangredi served as the General
Manager/Vice President of Electronic Commerce of Pacific Bell. From July 1986 to
May 1995, Ms. Tangredi worked at AT&T Corp. as a programmer and later in various
positions in sales, emerging product development and customer care, providing
network products and services to Fortune 500 customers. Ms. Tangredi received a
B.S. in M.I.S. from Clarkson University and an M.B.A in high technology from
Northeastern University.
Cynthia D. Whitehead has served as Vice President of Customer Service since
March 1999. From May 1998 to March 1999, Ms. Whitehead was an independent
information technology consultant. From 1997 to May 1998, Ms. Whitehead was Vice
President of Information Technology and Chief Information Officer of SBC
Communications, parent of Pacific Bell and Southwestern Bell. From 1970 to 1997,
Ms. Whitehead was employed in various capacities with Pacific Telesis, most
recently as Chief Information Officer and as Vice President -- Technology
Services Group of its Pacific Bell operating subsidiary. Ms. Whitehead received
a B.A. in Psychology from Stanford University.
Brett M. Robertson has served as Vice President of Strategic Development
and General Counsel since June 1999. From July 1998 to December 1998, Ms.
Robertson served as General Counsel of Broderbund Software. From August 1994 to
July 1998 Ms. Robertson served as Associate General Counsel of Broderbund
Software. From 1986 to August 1994, Ms. Robertson practiced corporate law at
various law firms including Wilson Sonsini Goodrich & Rosati, O'Melveny and
Myers, and Cooley Godward LLP. Ms. Robertson received her B.A. from the
University of California at Berkeley and her J.D. from the University of
Virginia.
Sharon Wienbar has served as Vice President of Marketing of Critical Path
since August 1999. From March 1999 to August 1999, Ms. Wienbar served as Vice
President Marketing at Amplitude Software. From 1991 to 1998, Ms. Wienbar was
most recently Vice President at Adobe Systems. Ms. Wienbar received her M.S. and
B.A. from Harvard University and her M.B.A. from Stanford.
R. Scott Newth has served as Vice President of Finance and Planning since
March 2000. From July 1999 to March 2000, Mr. Newth served as President,
Enterprise Messaging. From February 1998 to July 1999, Mr. Newth was President
and Chief Executive Officer of DotOne Corporation. From March 1997 to February
1998, Mr. Newth served as Chief Financial Officer of DotOne. Prior to joining
DotOne, Mr. Newth spent eleven years in investment and merchant banking in large
international companies. Mr. Newth received his B.S. in Finance and M.B.A. from
Florida State University.
Christos M. Cotsakos has served as a director of Critical Path since May
1998. Mr. Cotsakos has served as President, Chief Executive Officer and a
director of E*TRADE Group, an on-line brokerage services company, since March
1996. From March 1995 to January 1996, Mr. Cotsakos served as President,
Co-Chief Executive Officer, Chief Operating Officer and a director of A.C.
Nielsen, Inc. From September 1993 to March 1995, he served as President and
Chief Executive Officer of Nielsen International. From March 1992 to September
1993, he served as President and Chief Operating Officer of Nielsen Europe,
Middle East and Africa. Mr. Cotsakos serves as a director of National Processing
Company, Forte Software, Inc. and The Fourth Network Communications Network,
Inc. Mr. Cotsakos received a B.A. from William Patterson College and an M.B.A.
from Pepperdine University and is currently pursuing a Ph.D. in economics at the
Management School, University of London.
Lisa Gansky has served as a director of Critical Path since May 1998. Ms.
Gansky has been a Principal at Trading Fours, a venture development company,
since January 1997. From June 1995 to January 1997,
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<PAGE> 55
Ms. Gansky served as Vice President of AOL, Inc., an online and Internet
services company. From June 1994 to January 1995, Ms. Gansky founded and served
as Chief Executive Officer of Global Network Navigator, Inc., an Internet
solutions company.
Kevin R. Harvey has served as a director of Critical Path since April 1998.
Mr. Harvey has been a General Partner of Benchmark Capital, a venture capital
firm, since January 1995. From July 1993 to January 1995, he served as General
Manager for Lotus Development Corporation. In August 1990, Mr. Harvey founded
Approach Software Corporation ("Approach"), a software company, where he served
as the President and Chief Executive Officer until July 1993 when Approach was
sold to Lotus Development Corporation. Prior to founding Approach, Mr. Harvey
founded Styleware, a software company, which was subsequently sold to Claris
Corporation. Mr. Harvey is also a director of Silicon Gaming, Inc., an
entertainment and gaming technology company, and a director of several privately
held companies. Mr. Harvey received a B.S.E.E. degree from Rice University,
1987.
James A. Smith has served as a director of Critical Path since January
1999. Mr. Smith has served as the President and Chief Executive Officer of US
West Dex, a provider of Internet directory and database marketing services,
since October 1997. From March 1996 to October 1997, Mr. Smith served as Vice
President of Local Markets for US West. From July 1992 to March 1996, Mr. Smith
served as Vice President and General Manager of Mass Markets for US West. Mr.
Smith received a B.A. from Willamette University and a J.D. from the University
of Washington.
George Zachary has served as a director of Critical Path since April 1998.
Mr. Zachary has been a partner at Mohr, Davidow Ventures II, a venture capital
firm, since January 1996. From March 1993 to December 1997, Mr. Zachary ran the
consumer products business at Silicon Graphics, Inc., a computer workstation
company. Since September 1986 until March 1993, Mr. Zachary has held various
engineering and marketing management positions at Silicon Graphics, Inc., VPL
Research, Inc., Apple Computer, Inc., Texas Instruments Incorporated and C-ATS
Software Inc. Mr. Zachary received a B.S. degree from Massachusetts Institute of
Technology and Massachusetts Institute of Technology Sloan School of Management.
We have authorized seven (7) directors. All directors are elected to hold
office until our next annual meeting of stockholders and until their successors
have been elected. Officers are elected at the first board of directors meeting
following the stockholders' meeting at which the directors are elected and serve
at the discretion of the board of directors. There are no family relationships
among any of our directors or executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and other
employees and administering various incentive compensation and benefit plans.
The Compensation Committee consists of two outside directors. Lisa Gansky and
Kevin Harvey are currently the two outside directors on our Compensation
Committee.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
board of directors currently receives any additional cash compensation. In
connection with their joining the board of directors in May 1998, directors
Christos Cotsakos and Lisa Gansky each received an option to purchase 136,363
shares of common stock vesting monthly over two years at an exercise price of
$0.22 per share.
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<PAGE> 56
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered to us during 1999 by our Chief Executive Officer and our four other
most highly compensated executive officers who received salary and bonus in 1999
in excess of $100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMP SECURITY
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS
--------------------------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Douglas T. Hickey.............................. 1999 $332,373 $ -- --
Chief Executive Officer and Director 1998 51,136 2,549,374(1)
David C. Hayden................................ 1999 222,157 -- --
Chairman of the Board of Directors 1998 170,833 135,000 1,363,636(2)
David A. Thatcher.............................. 1999 185,000 -- --
President 1998 9,110 -- 712,473(3)
William H. Rinehart............................ 1999 185,000 -- --
Vice President of Worldwide Internet Sales 1998 19,621 -- 454,545(4)
Cynthia D. Whitehead........................... 1999 126,614 43,215 230,000(5)
Vice President of Operations and Customer
Service 1998 -- -- --
</TABLE>
- ---------------
(1) In October 1998, Mr. Hickey received two options to purchase shares of
common stock (an option to purchase 478,468 and 2,070,906 shares) at an
exercise price of $0.836, each of which vest in equal installments over 48
months.
(2) Option to purchase 1,363,636 shares of common stock at an exercise price of
$0.022 per share vests as to 25% of the shares on the first anniversary of
Mr. Hayden's employment with Critical Path and 1/48th each full month
thereafter.
(3) Includes options to purchase 576,110 of Common Stock at exercise price of
$0.836 that vest in equal installments over 48 months. In addition, Mr.
Thatcher was granted options to purchase 136,363 shares of Common Stock at
an exercise price of $0.22 per share that vest in equal installments over 48
months.
(4) Options to purchase 454,545 shares of Common Stock at an exercise price of
$0.836 per share that vest in equal installments over 48 months.
(5) Options to purchase 230,000 shares of Common Stock at an exercise price of
$24.00 per share that vest as to 25% of the shares on the first anniversary
of Ms. Whitehead's employment with Critical Path and 1/48th each full month
thereafter.
We granted stock options to certain Named Executive Officers during 1999.
We have never granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
PERCENTAGE OF ASSUMED ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
---- -------- -------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas T. Hickey....... -- -- -- -- -- --
David C. Hayden......... -- -- -- -- -- --
David A. Thatcher....... -- -- -- -- -- --
William H. Rinehart..... -- -- -- -- -- --
Cynthia D. Whitehead.... 230,000(4) 3.17 $24 3/26/09 $3,471,498.34 $8,797,458.38
</TABLE>
- ---------------
(1) Based on options to purchase an aggregate of 7,249,308 shares of common
stock granted during fiscal 1999. Under the terms of Critical Path's 1998
Stock Plan, the committee designated by the board of
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<PAGE> 57
directors to administer the 1998 Stock Plan retains the discretion, subject
to certain limitations within the 1998 Stock Plan, to modify, extend or
renew outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options. See
"Stock Plans."
(2) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant as determined by the board of directors.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent Critical Path's
estimate or projection of the future common stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
(4) These incentive stock options have a ten-year term, subject to earlier
termination in certain events related to termination of employment, and vest
as to 25% of the shares on the first anniversary of the vest start date, and
vest ratably on a monthly basis thereafter, becoming fully vested on the
fourth anniversary of the vest start date.
FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning stock options
held as of December 31, 1999 by each of the Named Executive Officers. Two of
these officers exercised options in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- --------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Douglas T. Hickey...... 0 -- 139,553 1,108,134 $13,170,314.38 $104,580,146.25
David C. Hayden........ 0 -- 994,317 369,319 98,838,666.88 34,854,480.63
David A. Thatcher...... 136,363 $299,988.60(4) 144,027 432,083 13,592,548.13 39,928,458.13
William H. Rinehart.... 37,878 420,445.80(5) 85,227 331,440 8,043,298.13 31,279,650.00
Cynthia D. Whitehead... 0 -- 0 230,000 0 21,706,250.00
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options at fiscal year-end is based on
a price per share of $94.375, the closing price quoted on Nasdaq as of
December 31, 1999, less the exercise price.
(2) Mr. Hickey's option agreements allow for early exercise subject to
repurchase by Critical Path over the vesting period.
(3) Mr. Hayden's option agreements allow for early exercise subject to
repurchase by Critical Path over the vesting period.
(4) Assumes a per share fair market value of $2.20 on January 4, 1999, as
determined by the Board of Directors.
(5) Assumes a per share fair market value of $11.10 on March 25, 1999, as
determined by the Board of Directors.
INCORPORATION BY REFERENCE
The report of the Compensation Committee of the Board of Directors and the
performance graph are incorporated by reference from the Company's proxy
statement for its annual meeting which is anticipated to occur on June 6, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of common stock as of February 29, 2000, by:
- each person or entity known to Critical Path to own beneficially more
than 5% of Critical's Path's common stock;
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<PAGE> 58
- each of Critical Path's directors;
- each of Critical Path's Named Executive Officers; and
- all executive officers and directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF TOTAL SHARES PERCENTAGE OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) COMMON STOCK(2)
------------------- --------------------- ---------------
<S> <C> <C>
Christos Cotsakos(3)........................................ 4,022,223 7.4%
E*TRADE Group, Inc.
Four Embarcadero
2400 Geng Road
Palo Alto, CA 94306....................................... 3,865,877 7.6
David Hayden(4)............................................. 3,332,737 6.2
James A. Smith(5)
US West Internet Ventures, Inc.
1999 Broadway, Suite 500
Denver, CO 80202.......................................... 2,276,131 4.2
Kevin M. Harvey(6)
Benchmark Capital Partners II, L.P.
2489 Sand Hill Road, Suite 200
Menlo Park, CA 94025...................................... 2,182,812 4.0
Douglas T. Hickey(7)........................................ 1,436,646 2.7
Marcy Swenson............................................... 1,044,236 1.9
George Zachary(8)
Mohr, Davidow Ventures V, L.P.
2775 Sand Hill Road, Suite 240
Menlo Park, CA 94025...................................... 633,802 1.2
David Thatcher(9)........................................... 315,133 *
Lisa Gansky................................................. 199,274 *
Mari Tangredi(10)........................................... 154,958 *
Joseph Duncan............................................... 121,926 *
William H. Rinehart......................................... 111,777 *
Paul Gigg(11)............................................... 80,731 *
Cynthia Whitehead........................................... 62,998 *
Judie Hayes................................................. 42,019 *
Robert S. Newth(12)......................................... 38,519 *
Mark J. Rubash(13).......................................... 29,687 *
Brett Robertson(14)......................................... 20,833 *
Sharon Wienbar(15).......................................... 14,815 *
All directors and executive officers as a group(16)......... 16,121,257 29.4
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address for the following shareholders is
c/o Critical Path, Inc., 320 1(st) Street, San Francisco, California 94105.
(2) Applicable percentage ownership is based on 54,086,715 shares of common
stock outstanding as of February 29, 2000. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of the date of this prospectus
are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of another person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each shareholder named in the table has
sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.
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<PAGE> 59
(3) Includes 156,346 shares held by The Cotsakos Revocable Trust, UAD 9/3/87 of
which Mr. Cotsakos is the trustee. Also includes 3,865,877 shares held by
E*TRADE Group, of which Mr. Cotsakos is the President and Chief Executive
Officer. Mr. Cotsakos disclaims beneficial ownership of all shares held by
E*TRADE group, except to the extent of his pecuniary interest.
(4) Includes 85,227 shares subject to options exercisable within 60 days after
February 29, 2000.
(5) Consists of shares held by US West Internet Ventures, a subsidiary of US
West. Mr. Smith is the President and Chief Executive Officer of US West
Dex, also a subsidiary of US West. Mr. Smith disclaims beneficial ownership
of all shares held by US West Internet Ventures, except to the extent of
his pecuniary interest therein.
(6) Includes 2,070,968 shares held by Benchmark Capital Partners II, L.P., of
which Mr. Harvey is a managing partner. Mr. Harvey disclaims beneficial
ownership of all such shares except to the extent of his pecuniary interest
therein.
(7) Includes 179,425 shares subject to options exercisable within 60 days after
February 29, 2000, and 18,180 shares held in the name of Mr. Hickey's minor
children's name.
(8) Includes 604,251 shares held by Mohr, Davidow Ventures V, L.P., of which
Mr. Zachary is a member. Mr. Zachary disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.
(9) Includes 92,036 shares subject to options exercisable within 60 days after
February 29, 2000.
(10) Includes 62,632 shares subject to options exercisable within 60 days after
February 29, 2000.
(11) Includes 44,425 shares subject to options exercisable within 60 days after
February 29, 2000.
(12) Includes 38,519 shares subject to options exercisable within 60 days after
February 29, 2000.
(13) Includes 29,687 shares subject to options exercisable within 60 days after
February 29, 2000.
(14) Includes 20,833 shares subject to options exercisable within 60 days after
February 29, 2000.
(15) Includes 14,815 shares subject to options exercisable within 60 days after
February 29, 2000.
(16) Includes 801,268 shares subject to options exercisable within 60 days after
February 29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SERIES B FINANCING
Critical Path sold an aggregate of 6,863,992 shares of Series B Preferred
Stock in September 1998 and January 1999 at a sale price of $4.26 per share.
Each share of Series B Preferred Stock converted into one share of common stock
in connection with Critical Path's Initial Public Offering in March 1999.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF SERIES B
PREFERRED STOCK
INVESTOR PURCHASED
-------- ------------------
<S> <C>
E*TRADE Group, Inc. ........................................ 3,460,767
US West Data Investments, Inc............................... 1,313,919
Mohr, Davidow Ventures V, L.P. ............................. 234,629
Benchmark Capital Partners II, L.P. ........................ 234,629
CMG@Ventures II, L.L.C...................................... 351,943
The Cotsakos Revocable Trust, UAD 9/3/87.................... 39,886
</TABLE>
Christos Cotsakos, the Chief Executive Officer of E*TRADE Group, Inc., is a
director of Critical Path. Mr. Cotsakos is the trustee of The Cotsakos Revocable
Trust, UAD 9/3/87.
59
<PAGE> 60
The shares held by Mohr, Davidow Ventures V, L.P. include 9,340,570 shares
held by it and 703,034 shares held by Mohr, Davidow Ventures V, L.P. as nominee
for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. George Zachary, a member of Mohr, Davidow Ventures V, L.P., is
a director of Critical Path.
The shares held by Benchmark Capital Partners II, L.P. are held by it as
nominee for Benchmark Capital Partners II, L.P., Benchmark Founders' Fund II,
L.P., Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
Kevin Harvey, a managing member of Benchmark Capital Partners II, L.P., is a
director of Critical Path.
ACQUISITIONS
In July of 1999, Critical Path acquired all outstanding shares of dotOne
Corporation for a total purchase price of $57.0 million consisting of $17.5
million cash, Common Stock valued at $35.0 million, assumed stock options with
an estimated fair market value of $3.2 million, and other acquisition costs of
approximately $1.3 million. In connection with this acquisition, R. Scott Newth,
Critical Path's Vice President, Finance and Planning, may receive a bonus of
$625,000 if he is still employed by Critical Path on the one year anniversary of
the acquisition.
In August of 1999, Critical Path acquired all outstanding shares of
Amplitude Software Corporation, for a total purchase price of $214.4 million
consisting of $45.0 million cash, Common Stock valued at $141.3 million, assumed
stock options with an estimated fair market value of $22.0 million, and other
acquisition costs of approximately $6.1 million. In connection with this
acquisition, Sharon Weinbar, Critical Path's Vice President Marketing, may
receive a bonus of $750,000 if she is still employed by Critical Path on the one
year anniversary of the acquisition.
In January of 2000, Critical Path acquired all outstanding shares of ISOCOR
Corporation for a total purchase price of $274.0 million consisting of Common
Stock valued at $225.7 million, assumed stock options with an estimated fair
market value of $37.2 million, and other acquisition costs of approximately
$11.1 million. In connection with this acquisition, Paul Gigg, Critical Path's
Executive Vice President and Chief Operating Officer, may receive a bonus of
$150,000 if he is still employed by Critical Path on the one year anniversary of
the acquisition.
EMPLOYMENT AGREEMENT AND CHANGE IN CONTROL ARRANGEMENTS
Critical Path and Mr. Hickey are parties to a letter agreement dated
October 1, 1998 governing his employment with Critical Path. The agreement sets
forth Mr. Hickey's compensation level and eligibility for salary increases,
bonuses, benefits and option grants under the 1998 Stock Plan. The agreement
provides for accelerated vesting of a portion of Mr. Hickey's options in the
event of a change of control. Mr. Hickey also received a loan in the amount of
$500,000, bearing interest at the applicable federal rate. The loan will be due
on the earlier of five years of 30 days following termination of his employment
and is non-recourse unless Mr. Hickey terminates his employment voluntarily. Mr.
Hickey's employment under the letter agreement is at-will and may be terminated
by Critical Path or Mr. Hickey at any time, with or without cause and with or
without notice.
LOANS TO OFFICERS
In January of 1999, Critical Path loaned William Rinehart, Vice President
of Worldwide Internet Sales, $65,000 pursuant to a promissory note bearing
interest at the rate of 4.64% per annum. The note is due and payable in 2004.
In November of 1998, Critical Path loaned Doug Hickey, Chief Executive
Officer, $1.1 million pursuant to a promissory note bearing interest at the rate
of 4.51% per annum. The note is due and payable in 2003.
In January of 2000, the Company agreed to lend Mark Rubash, Executive Vice
President and Chief Financial Officer, $100,000. The loan is due and payable in
2005.
60
<PAGE> 61
COMMERCIAL RELATIONSHIPS
In December 1998, Critical Path entered into an agreement with US West
pursuant to which Critical Path agreed to provide email services and certain
related development services to US West. In exchange for such services, US West,
through the use of its sales channels, will provide Critical Path assistance in
selling advertising for the email sites of certain customers of Critical Path.
The agreement also provides for the joint development of certain services and
features from time to time. James Smith, a director of the Company, is the
President and Chief Executive Officer of US West Dex. For the year ended
December 31, 1999, US West accounted for approximately $460,000 of Critical
Path's revenues.
In April 1998, Critical Path entered into an agreement with E*TRADE
pursuant to which each party will include the other party in certain advertising
campaigns, including E*TRADE's international strategic partner relationships.
Critical Path will also provide email services to users of E*TRADE's Internet
access services. In addition, under the terms of the agreement, Critical Path
agreed to develop certain features for its email services which Critical Path
may make available to other customers in addition to E*TRADE. Christos Cotsakos,
the Chief Executive Officer of E*TRADE is a director of Critical Path. In
addition, E*TRADE owns in excess of five percent of Critical Path. For the year
ended December 31, 1999, E*TRADE accounted for approximately $2.4 million of
Critical Path's revenues.
INDEMNIFICATION
Critical Path's articles of incorporation limit the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the California
Corporations Code. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Critical Path's bylaws provide that Critical Path may indemnify its
directors and officers to the fullest extent permitted by California law,
including in circumstances in which indemnification is otherwise discretionary
under California law. Critical Path has also entered into indemnification
agreements with its officers and directors containing provisions that may
require Critical Path, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
RELATED TRANSACTIONS POLICY
Critical Path believes that the foregoing transactions were in its best
interests. It is Critical Path's current policy that all transactions by
Critical Path with officers, directors, 5 percent shareholders and their
affiliates will be entered into only if such transactions are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to Critical Path than could be obtained from unaffiliated parties and
are reasonably expected to benefit Critical Path.
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<PAGE> 62
PART IV. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements
Please see the accompanying Index to Consolidated Financial Statements
which appears on page F-1 of this report. The Report of Independent Accountants,
Consolidated Financial Statements and Notes to Consolidated Financial Statements
which are listed in the Index to Consolidated Financial Statements and which
appear beginning on page F-2 of this report are included in Item 8 above.
(a)(2) Financial Statement Schedule
Financial Statement Schedules have been omitted because the information
required to be set forth therein is not applicable or is included in the
Financial Statements or notes thereto.
(b) Reports on Form 8-K
On March 20, 2000 the Company filed on Form 8-K announcing the acquisition
of the docSpace Company.
On February 3, 2000 the Company filed a report on Form 8-K announcing the
acquisition of ISOCOR.
On November 12, 1999 the Company filed a report on Form 8-K/A (as an
amendment to the Form 8-K filed on September 13, 1999) to report the financial
information required in connection with its acquisition of Amplitude.
On November 1, 1999, the Company filed a report on Form 8-K announcing the
signing of a definitive reorganization agreement between Critical Path and
ISOCOR.
On October 1, 1999 the Company filed a report on Form 8-K/A (as an
amendment to the Form 8-K filed on August 2, 1999) to report the financial
information required in connection with its acquisition of DotOne.
(c) Exhibits
The following exhibits are incorporated herein by reference or are filed
with this report as indicated below:
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement, dated May 26, 1999, between the
Registrant and Fabrik Communications, Inc. (Incorporated by
reference to Exhibit 2.1 to the Registrant's Registration on
Form S-1/A (File No. 333-78197)
2.2 Agreement and Plan of Reorganization, dated October 20,
1999, by and among Critical Path, Inc., Initialize
Acquisition Corp. and ISOCOR. (Incorporated by reference to
Annex A to the Registrant's Registration Statement on Form
S-4 (File No. 333-92199)
2.3 Agreement and Plan of Reorganization, dated June 22, 1999,
among Critical Path, Inc., Amplitude Software Corp. and
Apollo Acquisition Corp. (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
(File No. 000-25331)
2.4 Agreement and Plan of Reorganization, dated July 15, 1999,
among Critical Path, Inc., dotOne Corporation and dotOne
Acquisition Corp. (Incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K (File No.
000-25331)
2.5 Agreement and Plan of Reorganization, dated January 28,
2000, by and among Critical Path, Inc., D.V. Acquisition
Corp. and RemarQ Communities, Inc.
2.6 Agreement and Plan of Reorganization, dated November 3,
1999, by and among Critical Path, Inc., Compass Holding
Corp., Compass Acquisition Corp., 3034996 Nova Scotia
Company, 3034997 Nova Scotia Company and The docSpace
Company.
2.7 Agreement and Plan of Reorganization, dated November 2,
1999, by and among Critical Path, Inc., Wellfleet
Acquisition Corp. and FaxNet Corporation.
2.8 Agreement and Plan of Reorganization, dated October 8, 1999,
by and among Critical Path, Inc., Xeti Acquisition Corp. and
Xeti, Inc.
3.1 Amended and Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)(b) to the
Registrant's Registration on Form S-1 (File No. 333-71499)
</TABLE>
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<PAGE> 63
<TABLE>
<C> <S>
3.2 Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3(ii)(b) to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499)
4.1 Form of Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
4.2 Warrant to Purchase Preferred Stock dated September 11, 1998
issued by the Registrant to Hambrecht & Quist LLC.
(Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
4.3 Warrant to Purchase Preferred Stock dated January 13, 1999
issued by the Registrant to Hambrecht & Quist LLC.
(Incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
4.4 Warrant to Purchase Common Stock dated January 29, 1999
issued by the Registrant to America Online, Inc.
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.2 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.3 1998 Stock Plan and forms of stock option agreements
thereunder. (Incorporated by reference to Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 (File
No. 333-71499)
10.4 Series B Preferred Stock Purchase Agreement dated September
11, 1998. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.5 Amendment to Series B Preferred Stock Purchase Agreement
dated January 13, 1999. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.6 Amended and Restated Investors' Rights Agreement dated
September 11, 1998. (Incorporated by reference to Exhibit
10.6 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499)
10.7 Amendment to the Amended and Restated Investors' Rights
Agreement dated January 13, 1999. (Incorporated by reference
to Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499)
10.8 Master Equipment Lease Agreement dated April 28, 1998, and
Lease Line Schedule thereto, by and between the Registrant
and Lighthouse Capital Partners II, L.P. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.9 Master Lease Agreement dated May 1, 1998, and addendum
thereto, by and between the Registrant and Comdisco, Inc.
(Incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.10 Standard Industrial/Multitenant Lease-Gross dated June 20,
1997 by and between the Registrant and 501 Folsom Street
Building. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.11 Letter Agreement dated October 1, 1998 by and between the
Registrant and Douglas Hickey. (Incorporated by reference to
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.12 Promissory Note and Security Agreement dated November 2,
1998 by and between the Registrant and Douglas Hickey.
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.13 Warrant Agreement dated April 28, 1998 by and between the
Registrant and Lighthouse Capital Partners II, L.P.
(Incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
</TABLE>
63
<PAGE> 64
<TABLE>
<C> <S>
10.14 Warrant Agreement dated May 1, 1998 by and between the
Registrant and Comdisco, Inc. (Incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.15 Master Services Agreement dated December 10, 1998 by and
between the Registrant and US West Communications Services,
Inc. (Incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.16 Email Services Agreement dated May 27, 1998 by and between
the Registrant and Network Solutions, Inc. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.17 Email Services Agreement dated July 6, 1998 by and between
the Registrant and Starmedia Network, Inc. (Incorporated by
reference to Exhibit 10.17 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.18 Amendment to email Services Agreement September 30, 1998 by
and between the Registrant and E*TRADE Group, Inc.
(Incorporated by reference to Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.19 Email Services Agreement dated September 14, 1998 by and
between the Registrant and Sprint Communications Company
L.P. (Incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.20 Email Services Agreement dated March 19, 1998 by and between
the Registrant and NTX, Inc. dba TABNet, Inc. (Incorporated
by reference to Exhibit 10.20 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499)
10.21 QuickStart Loan and Security Agreement dated May 12, 1998 by
and between the Registrant and Silicon Valley Bank.
(Incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.22 Email Services Agreement dated January 29, 1999 by and
between the Registrant and ICQ, Inc. (Incorporated by
reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.23 Sublease dated February 8, 1999 by and between Times Direct
Marketing, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.24 Promissory Note and Security Agreement dated January 26,
1999 by and between the Registrant and Bill Rinehart.
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.25 Office lease dated December 1999 by and between Ecker-Folsom
Properties, LLC and the Registrant
10.26 Office lease dated December 1999 by and between Ecker-Folsom
Properties, LLC and the Registrant
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27.1 Financial Data Schedule
</TABLE>
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<PAGE> 65
CRITICAL PATH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Shareholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Critical Path, Inc.
In our opinion, the accompanying consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Critical Path, Inc. and its subsidiaries (the "Company")
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from February 19, 1997 (Inception) to December 31, 1997 and
for the years ended December 31, 1998 and 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 17, 2000
F-2
<PAGE> 67
CRITICAL PATH, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 1998 1999
----------- -------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 14,791 $ 75,932
Restricted cash........................................... 325 325
Accounts receivable, net.................................. 121 10,147
Other current assets...................................... 138 40,800
-------- ---------
Total current assets.............................. 15,375 127,204
Investments................................................. -- 18,426
Notes receivable from officers.............................. 500 669
Property and equipment, net................................. 4,687 52,517
Intangible assets, net...................................... -- 474,297
Other assets................................................ 101 692
-------- ---------
Total assets...................................... $ 20,663 $ 673,805
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 760 $ 35,621
Accrued expenses.......................................... 89 7,120
Deferred revenue, current................................. 500 1,603
Capital lease obligations, current........................ 1,502 6,585
-------- ---------
Total current liabilities......................... 2,851 50,929
Deferred revenue, long-term................................. -- 215
Capital lease obligations, long-term........................ 2,454 5,669
-------- ---------
Total liabilities................................. 5,305 56,813
-------- ---------
Commitments and contingencies
Shareholders' equity
Series A Convertible Preferred Stock and paid-in-capital,
$0.001 par value Shares authorized -- 13,288
Shares issued and outstanding -- 12,725 and none
Liquidation value -- $9,162.......................... 9,124 --
Series B Convertible Preferred Stock and paid-in-capital,
$0.001 par value
Shares authorized -- 10,000
Shares issued and outstanding -- 3,637 and none
Liquidation value -- $15,494......................... 15,441 --
Common Stock and paid-in-capital, $0.001 par value
Shares authorized -- 38,636
Shares issued and outstanding -- 8,294 and 46,937 (net
of 134 treasury shares at cost of $229)............... 21,850 864,699
Notes receivable from shareholders.......................... (1,151) (1,154)
Unearned compensation....................................... (17,371) (124,906)
Accumulated deficit, including other comprehensive income... (12,535) (121,647)
-------- ---------
Total shareholders' equity........................... 15,358 616,992
-------- ---------
Total liabilities and shareholders' equity........ $ 20,663 $ 673,805
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 68
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
PERIOD ENDED DECEMBER 31 ------- -------- ---------
<S> <C> <C> <C>
Net revenues............................................... $ -- $ 897 $ 16,157
Cost of net revenues....................................... -- (2,346) (21,557)
------- -------- ---------
Gross profit (loss)........................................ -- (1,449) (5,400)
------- -------- ---------
Operating expenses:
Sales and marketing...................................... 244 1,687 13,811
Research and development................................. 454 2,098 7,682
General and administrative............................... 358 3,814 14,051
Acquisition-related retention bonus...................... -- -- 3,587
Amortization of intangible assets........................ -- -- 32,259
Stock-based expenses..................................... -- 2,400 46,460
------- -------- ---------
Total operating expenses......................... 1,056 9,999 117,850
------- -------- ---------
Loss from operations....................................... (1,056) (11,448) (123,250)
Interest and other income, net............................. -- 375 7,061
Interest expense........................................... (18) (388) (752)
------- -------- ---------
Net loss................................................... $(1,074) $(11,461) $(116,941)
======= ======== =========
Net loss per share -- basic and diluted.................... $ (0.54) $ (2.94) $ (3.93)
======= ======== =========
Weighted average shares -- basic and diluted............... 1,994 3,899 29,770
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 69
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
PERIOD ENDED DECEMBER 31 ------- -------- ---------
<S> <C> <C> <C>
Convertible Preferred Stock and paid-in-capital
Balance, beginning of year............................... $ -- $ -- $ 24,565
Issuance of Series A Preferred Stock, net................ -- 9,124 --
Issuance of Series B Preferred Stock, net................ -- 15,441 12,496
Conversion of Preferred Stock, net....................... -- -- (37,061)
------- -------- ---------
Balance, end of year.................................. -- 24,565 --
------- -------- ---------
Common Stock and paid-in-capital
Balance, beginning of year............................... -- 53 21,850
Issuance of Common Stock................................. 53 86 645,828
Exercise of stock options and warrants................... -- 1,106 1,648
Issuance of warrants and stock purchase rights........... -- 723 --
Unearned compensation related to stock options and
warrants.............................................. -- 19,882 158,541
Conversion of Preferred Stock, net....................... -- -- 37,061
Purchase of treasury stock............................... -- -- (229)
------- -------- ---------
Balance, end of year.................................. 53 21,850 864,699
------- -------- ---------
Notes receivable from shareholders
Balance, beginning of year............................... -- -- (1,151)
Issuance of Common Stock................................. -- (85) --
Exercise of stock options and warrants................... -- (1,066) (29)
Repayment of shareholder notes........................... -- -- 26
------- -------- ---------
Balance, end of year.................................. -- (1,151) (1,154)
------- -------- ---------
Unearned compensation
Balance, beginning of year............................... -- -- (17,371)
Unearned compensation related to stock options and
warrants.............................................. -- (19,882) (158,541)
Amortization of unearned compensation.................... -- 2,511 51,006
------- -------- ---------
Balance, end of year.................................. -- (17,371) (124,906)
------- -------- ---------
Accumulated deficit, including other comprehensive income
Balance, beginning of year............................... -- (1,074) (12,535)
------- -------- ---------
Net loss................................................. (1,074) (11,461) (116,941)
Other comprehensive income:
Unrealized investment gains........................... -- -- 7,926
Foreign currency translation adjustments.............. -- -- (97)
------- -------- ---------
Comprehensive loss.................................. (1,074) (11,461) (109,112)
------- -------- ---------
Balance, end of year.................................. (1,074) (12,535) (121,647)
------- -------- ---------
Total Shareholders' Equity....................... $(1,021) $ 15,358 $ 616,992
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 70
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
PERIOD ENDED DECEMBER 31 ------- -------- ---------
<S> <C> <C> <C>
Operations
Net loss................................................. $(1,074) $(11,461) $(116,941)
Provision for doubtful accounts.......................... -- 50 573
Depreciation and amortization............................ 26 1,019 40,322
Common stock issued for services......................... 3 -- --
Amortization of warrants and stock purchase rights....... -- 473 31,317
Amortization of unearned compensation.................... -- 2,511 19,845
Accounts receivable...................................... -- (171) (4,708)
Other current assets..................................... (48) (86) (25,612)
Accounts payable......................................... 609 151 25,916
Accrued expenses......................................... 18 71 5,633
Deferred revenue......................................... -- 500 (163)
------- -------- ---------
Net cash used in operating activities................. (466) (6,943) (23,818)
------- -------- ---------
Investing
Notes receivable from officers........................... -- (500) (169)
Property and equipment purchases......................... (409) (491) (41,819)
Purchase of investments.................................. -- -- (10,500)
Payments for acquisitions, net of cash acquired.......... -- -- (116,359)
Acquisition advances..................................... -- -- (15,000)
Restricted cash.......................................... -- (325) --
------- -------- ---------
Net cash used in investing activities................. (409) (1,316) (183,847)
------- -------- ---------
Financing
Proceeds from issuance of Preferred Stock, net........... -- 23,445 12,496
Proceeds from issuance of Common Stock................... 50 41 259,803
Proceeds from equipment lease line....................... -- 198 --
Proceeds from convertible promissory notes payable....... 847 500 --
Repayment of convertible promissory notes payable........ -- (227) --
Proceeds from payments of shareholder notes receivable... -- -- 26
Principal payments on lease obligations.................. (21) (908) (3,193)
Purchase of treasury stock............................... -- -- (229)
------- -------- ---------
Net cash provided by financing activities............. 876 23,049 268,903
------- -------- ---------
Net change in cash and cash equivalents.................... 1 14,790 61,238
Effect of exchange rates on cash and cash equivalents...... -- -- (97)
Cash and cash equivalents at beginning of period........... -- 1 14,791
------- -------- ---------
Cash and cash equivalents at end of period................. $ 1 $ 14,791 $ 75,932
======= ======== =========
Supplemental cash flow disclosure:
Cash paid for interest................................... $ 1 $ 244 $ 688
Cash paid for income taxes............................... $ -- $ -- $ --
Non-cash investing and financing activities:
Property and equipment leases............................ $ 118 $ 4,714 $ 5,863
Common Stock issued for notes receivable................. $ -- $ 1,151 $ 29
Conversion of notes payable into Preferred Stock......... $ -- $ 1,120 $ --
Unrealized gain on investment............................ $ -- $ -- $ 7,926
Common stock and options issued for acquisitions......... $ -- $ -- $ 387,651
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 71
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Critical Path, Inc. was incorporated in California on February 19, 1997.
Critical Path, along with its subsidiaries (collectively referred to herein as
the "Company") provides complete end-to-end Internet messaging and collaboration
solutions to corporations, Internet service providers, telecommunications
companies, web hosting companies and web portals.
Acquisitions
To date, business combinations have been accounted for under the purchase
method of accounting. The Company includes the results of operations of the
acquired business from the acquisition date. Net assets of the companies
acquired are recorded at their fair value at the acquisition date. The excess of
the purchase price over the fair value of net assets acquired is included in
goodwill and other purchased intangibles in the accompanying consolidated
balance sheet.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash equivalents and restricted cash
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of deposits in money market funds. Restricted cash comprises
amounts held on deposit that are required as collateral for Company issued
credit cards.
Investments
The Company's marketable securities are classified as available-for-sale as
of the balance sheet date and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in shareholders' equity. Realized gains or
losses and permanent declines in value, if any, on available-for-sale securities
will be reported in other income or expense as incurred. The Company uses the
cost method to account for certain non-marketable securities in which it has a
minority interest and does not exercise significant influence. The Company
periodically reviews these investments for other-than-temporary impairment.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, restricted
cash, and accounts receivable. Cash and cash equivalents and restricted cash are
deposited with financial institutions that management believes are creditworthy.
The Company's accounts receivable are derived from transactions with companies
primarily located in the United States. The Company maintains reserves for
potential credit losses; historically, such losses have been within management's
expectations.
F-7
<PAGE> 72
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1998 and 1999, approximately 62% and 30%
of revenues, before charges related to amortization of the fair value of
warrants issued to customers, were derived from the delivery of Internet
messaging services to two customers. During the year ended December 31, 1999,
these two customers accounted for approximately 15% and 4% of net revenues
before charges related to amortization of warrants.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts and notes receivable, accounts payable and capital
lease obligations, are carried at cost, which approximates fair value due to the
short maturity of these instruments.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the shorter of the
estimated useful lives of the assets, generally three to five years, or the
lease term, if applicable. Gains and losses on disposals are included in income
at amounts equal to the difference between the net book value of the disposed
assets and the proceeds received upon disposal. Expenditures for replacements
and betterments are capitalized, while expenditures for maintenance and repairs
are charged against earnings as incurred.
Internally developed software
During 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires that certain costs for the development of internal
use software should be capitalized, including the costs of coding, software
configuration, upgrades and enhancements. The adoption of this pronouncement did
not have a material effect on the Company's financial results.
Intangible assets
Goodwill represents the excess of the purchase price paid over the fair
value of tangible and identifiable intangible net assets acquired in business
combinations. Identifiable intangible assets primarily include assembled
workforce, customer base, and existing technology. The Company uses modeling
techniques on new acquisitions and long-range business plans, revised annually,
to assess whether a revision of the existing estimated useful lives of
intangible assets is necessary. Intangible assets are stated net of accumulated
amortization and are amortized on a straight-line basis over their expected
useful lives ranging from two to eight years.
Valuation of long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company periodically evaluates the carrying value
of long-lived assets and certain identifiable intangibles for impairment, when
events and circumstances indicate that the book value of an asset may not be
recoverable. An impairment loss is recognized whenever the review demonstrates
that the book value of a long-lived asset is not recoverable. Since February 19,
1997 (inception) through December 31, 1999, no impairment losses have been
identified.
F-8
<PAGE> 73
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
The Company derives most of its revenue through the sale of electronic
messaging services. Billings for such services are based either on contractual
rates per active mailbox per month, non-refundable fixed payments or a
percentage of customer generated email advertising revenues. Revenues from
contracts specifying a contractual rate per active mailbox per month are
recognized monthly for each active mailbox covered by the respective contract.
Revenues from contracts that provide non-refundable fixed payments are not
dependent upon the active number of mailboxes and are therefore recognized
ratably over the contract term. Revenues based upon a percentage of customer
generated email advertising revenues are recognized when such revenues are
earned and reported by the customer.
Revenues for software licenses for which collection of the resulting
receivable is deemed probable are recognized upon delivery of the product
provided there is persuasive evidence of an arrangement, the fee is fixed and
determinable, and the agreement does not require significant customization of
the software. Revenues from software maintenance are recognized ratably over the
maintenance term. Revenues from the Company's enhanced facsimile, long distance
and other services are recognized as the services are performed. Amounts billed
or received in advance of service delivery are recorded as deferred revenue.
Research and development
Research and development costs include expenses incurred by the Company to
develop and enhance its messaging service offerings and to develop new
electronic messaging services. Research and development costs, including
in-process research and development costs, are expensed as incurred.
Advertising expense
Advertising costs are expensed as incurred and totaled $0, $135,000 and
$414,000 during the period from February 19, 1997 (Inception) through December
31, 1997 and the years ended December 31, 1998 and 1999, respectively.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price of the option. The Company accounts for
equity instruments issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Income taxes
Income taxes are computed using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's consolidated financial statements or
tax returns. The measurement of current and deferred tax assets and liabilities
are based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
F-9
<PAGE> 74
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net loss per share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
per Share" and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98,
basic net loss per share is computed by dividing the net loss available to
common shareholders for the period by the weighted average number of common
shares outstanding during the period, excluding shares subject to repurchase and
in escrow relative to acquisition. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if their effect is
dilutive. Potential common shares comprise restricted Common Stock, shares held
in escrow, and incremental Common and Preferred shares issuable upon the
exercise of stock options and warrants and upon conversion of Series A and
Series B Convertible Preferred Stock.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources.
Foreign currency translation
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue and expenses are translated at
average rates of exchange prevailing during the year. Translation adjustments
resulting from this process are charged or credited to other comprehensive
income, a component of shareholders' equity. Gains and losses on foreign
currency transactions are included in "Interest and other expense, net."
Segment and geographic information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not have separately reportable operating segments. The
Company operates in one principal business segment across domestic and
international markets. Substantially all of the Company's operating results and
identifiable assets are in the United States.
Reclassifications
Certain amounts previously reported have been reclassified to conform to
the current period presentation.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB No. 101 will not have a material effect on the
financial position or results of operations of the Company.
F-10
<PAGE> 75
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of Effective Date of FASB Statement No. 133".
SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application encouraged.
Critical Path does not currently use derivative instruments.
NOTE 2 -- ACQUISITIONS
Fabrik Communications
On May 26, 1999, the Company acquired substantially all the operating
assets of the Connect Service business of Fabrik Communications ("Fabrik"). The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of Fabrik's Connect
Service have been included in the Company's consolidated financial statements
since the acquisition date. The purchase price has been allocated to the
tangible and intangible net assets acquired on the basis of their respective
fair values on the date of acquisition. The total purchase price was
approximately $20.1 million, consisting of $12.0 million cash, Common Stock
(109,091 shares) valued at $8.0 million, and other acquisition-related expenses
of approximately $100,000. Of the total purchase price, approximately $500,000
was allocated to property and equipment, and the remainder was allocated to
intangible assets, including customer list ($2.1 million), assembled workforce
($400,000) and goodwill ($17.1 million). The acquired intangible assets will be
amortized over their estimated useful lives of two to three years. Goodwill will
be amortized using the straight-line method over three years, resulting in a
quarterly charge of approximately $1.4 million during the amortization period.
The following entries were recorded in connection with the acquisition of
the Connect Service business of Fabrik Communications:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fair value of assets acquired............................... $20,100
Liabilities assumed......................................... --
Fair value of Common Stock issued........................... (8,000)
-------
Cash paid, including acquisition costs...................... 12,100
Less: cash acquired......................................... --
-------
Net cash paid............................................... $12,100
=======
</TABLE>
dotOne Corporation
On July 21, 1999, the Company acquired dotOne Corporation ("dotOne"), a
leading corporate email messaging service provider. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the net
assets and results of operations of dotOne have been included in the Company's
consolidated financial statements since the acquisition date. The purchase price
has been allocated to the tangible net liabilities and intangible net assets
acquired on the basis of their respective fair values on the date of
acquisition. The total purchase price was approximately $57.0 million,
consisting of $17.5 million cash, Common Stock (640,623 shares) valued at $35.0
million, assumed stock options with an estimated fair market value of $3.2
million, and other acquisition-related expenses of approximately $1.3 million.
Of the total purchase price, approximately $1.7 million was allocated to net
tangible liabilities, and the remainder was allocated to intangible assets,
including customer list ($4.6 million), assembled workforce ($1.5 million),
existing technology ($600,000), and goodwill ($52.0 million). The acquired
intangible assets will be
F-11
<PAGE> 76
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortized over their estimated useful lives of three to five years. Goodwill
will be amortized using the straight-line method over three years, resulting in
a quarterly charge of $4.3 million during the amortization period.
The following entries were recorded in connection with the dotOne
acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $ 60,484
Liabilities assumed......................................... (3,497)
Fair value of Common Stock and options issued............... (38,200)
--------
Cash paid, including acquisition costs...................... 18,787
Less: cash acquired......................................... 419
--------
Net cash paid............................................... $ 18,368
========
</TABLE>
Amplitude Software Corporation
On August 31, 1999, the Company acquired Amplitude Software Corporation
("Amplitude"), a leading provider of Internet calendaring and resource
scheduling solutions. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of operations
of Amplitude have been included in the Company's consolidated financial
statements since the acquisition date. The purchase price has been allocated to
the tangible and intangible net assets acquired on the basis of their respective
fair values on the date of acquisition. The total purchase price was $214.4
million, consisting of $45.0 million cash, Common Stock (4,107,250 shares)
valued at $141.3 million, assumed stock options with an estimated fair market
value of $22.0 million, and other acquisition-related expenses of approximately
$6.1 million. Of the total purchase price, approximately $4.4 million was
allocated to net tangible assets, and the remainder was allocated to intangible
assets, including customer list ($600,000), assembled workforce ($3.8 million),
existing technology ($4.1 million), and goodwill ($201.5 million). The acquired
intangible assets will be amortized over their estimated useful lives of two to
four years. Goodwill will be amortized using the straight-line method over four
years, resulting in a quarterly charge of approximately $12.6 million during the
amortization period.
The following entries were recorded in connection with the Amplitude
acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $ 217,916
Liabilities assumed......................................... (3,536)
Fair value of Common Stock and options issued............... (163,289)
---------
Cash paid, including acquisition costs...................... 51,091
Less: cash acquired......................................... 3,337
---------
Net cash paid............................................... $ 47,754
=========
</TABLE>
Xeti, Inc.
On November 24, 1999, the Company acquired Xeti, Inc. ("Xeti"), a leading
developer of standards-based public key infrastructure solutions. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the tangible and intangible net
assets acquired on the basis of their respective fair values on the acquisition
date. The total purchase price of approximately $20.5 million consisted of $2.0
million in cash, Common Stock (274,048 shares) valued at $18.5 million, assumed
stock options of $3.1 million, and other acquisition costs of approximately
$200,000. Of the total purchase price, approximately $200,000 was allocated to
net tangible assets and the remainder was allocated to intangible assets,
including assembled work force ($360,000), existing technology ($540,000) and
goodwill ($22.7 million). The inquired intangible assets, excluding goodwill,
are being amortized over their estimated
F-12
<PAGE> 77
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
useful lives of two to three years. Goodwill is being amortized using the
straight-line method over three years, resulting in an aggregate quarterly
charge of $1.7 million during the amortization period. At December 31, 1999,
cumulative amortization of intangible asset totaled $574,400.
The following entries were recorded in connection with the Xeti
acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fair value of assets acquired............................... $23,868
Liabilities assumed......................................... 81
Fair value of Common Stock and options issued............... 21,600
-------
Cash paid, including acquisition costs...................... 2,187
Less: cash acquired......................................... 235
-------
Net cash paid............................................... $ 1,952
=======
</TABLE>
FaxNet Corporation
On December 6, 1999, the Company acquired FaxNet Corporation, ("FaxNet"), a
leading outsource supplier of carrier-class enhanced fax and integrated
messaging solutions. The acquisition was accounted for using the purchase method
of accounting and accordingly, the purchase price was allocated to the tangible
and intangible net assets acquired on the basis of their respective fair values
on the acquisition date. The fair value of intangible assets was determined
based upon a valuation using a combination of methods, including an income
approach for the acquired existing technology, an income approach for the
customer base and replacement cost approach for the value of the assembled
workforce.
The total purchase price of approximately $199.3 million consisted of $20.0
million of cash, $152.4 million of the Company's Common Stock (2,845,282
shares), assumed stock options with a fair value of $7.3 million, assumed
subordinated notes of $4.2 million and other liabilities of $7.5 million, and
other acquisition related expenses of approximately $7.9 million, consisting of
financial advisor and other professional fees. Of the total purchase price,
approximately $1.6 million was allocated to net tangible assets, and the
remainder was allocated to intangible assets, including existing technology
($6.1 million), customer base ($5.5 million), assembled workforce ($900,000) and
goodwill ($185.2 million). The acquired intangible assets, excluding goodwill,
are amortized over their estimated useful lives of three to eight years.
Goodwill is amortized over its estimated useful life of eight years.
The following entries were recorded in connection with the FaxNet
acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fair value of assets acquired............................... $209,735
Liabilities assumed......................................... 10,348
Fair value of common stock and options issued............... 159,662
--------
Cash paid, including acquisition costs...................... 39,725
Less: cash acquired......................................... 3,515
--------
Net cash paid............................................... $ 36,210
========
</TABLE>
F-13
<PAGE> 78
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Results (Unaudited)
The following unaudited pro forma summary presents the Company's
consolidated results of operations for the year ended December 31, 1998 and 1999
as if the acquisitions had been consummated at the beginning of each period. The
pro forma consolidated results of operations include certain pro forma
adjustments, including the amortization of intangible assets, the reduction of
interest income for lower cash balances as a result of the elimination of the
Fabrik cash balance which was not acquired by the Company.
<TABLE>
<CAPTION>
1998 1999
Year Ended December 31 --------- ---------
<S> <C> <C>
(in thousands, except per share amounts)
Net revenues................................................ $ 30,796 $ 41,329
Net loss.................................................... (142,446) (222,387)
Net loss per share:.........................................
Basic and diluted......................................... (6.64) (6.01)
</TABLE>
The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisitions taken place at the beginning of the
periods presented.
ISOCOR Corporation
On January 19, 2000, the Company acquired ISOCOR Corporation, ("ISOCOR"), a
leading supplier of Internet messaging, directory and directory software
solutions. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the tangible and
intangible net assets acquired on the basis of their respective fair values on
the acquisition date. The fair value of intangible assets was determined based
upon a valuation using a combination of methods, including an income approach
for the acquired existing and in-process technologies, an income approach for
the customer base and replacement cost approach for the value of the assembled
workforce.
The total purchase price of approximately $274.0 million consisted of
$225.7 million of the Company's Common Stock (5,029,964 shares), assumed stock
options with a fair value of $37.2 million, and other acquisition related
expenses of approximately $11.1 million, consisting primarily of payments for
financial advisor and other professional fees. Of the total purchase price,
$19.2 million was allocated to net tangible assets, and the remainder was
allocated to intangible assets, including in-process technology ($200,000),
existing technology ($18.3 million), customer base ($9.8 million), assembled
workforce ($3.4 million) and goodwill ($223.1 million). The acquired in-process
technology was expensed in the period the transaction was consummated. The other
acquired intangible assets, excluding goodwill, were amortized over their
estimated useful lives of three years. Goodwill is amortized over its estimated
useful life of three years.
The docSpace Company
In March of 2000, the Company acquired all outstanding stock of The
docSpace Company, a leading provider of Web-based services for secure file
delivery, storage and collaboration. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase price was allocated
to the tangible and intangible assets acquired on the basis of their respective
fair values on the acquisition date. The fair value of intangible assets was
determined based upon a preliminary valuation using a combination of methods,
including a cost approach for the acquired existing technology, and replacement
cost approach for the value of the assembled workforce.
The total purchase price of $300.4 million consisted of $30.0 million cash,
Common Stock (3,805,826 shares) valued at $234.0 million, the assumption of
warrants valued at $26.4 million and other acquisition costs of approximately
$10.0 million. Of the total purchase price, approximately $5.4 million has been
allocated to net tangible liabilities and the remainder has been allocated to
intangible assets, including
F-14
<PAGE> 79
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assembled workforce ($500,000), existing technology ($21.5 million), and
goodwill ($283.8 million). The acquired intangible assets, excluding goodwill,
will be amortized over their estimated useful lives of three years. Goodwill
will be amortized using the straight-line method over three years, resulting in
an aggregate quarterly charge of $23.9 million during the amortization period.
RemarQ Communities, Inc.
On January 28, 2000, the Company signed a definitive agreement to acquire
RemarQ Communities Inc., ("RemarQ"), a provider of Internet collaboration
services for corporations, Web portals and Internet service providers. The
acquisition, which is subject to the approval of RemarQ's stockholders and is
expected to close on or before March 31, 2000, will be accounted for using the
purchase method of accounting and accordingly, the purchase price will be
allocated to the tangible and intangible net assets acquired on the basis of
their respective fair values on the acquisition date.
The total estimated purchase price of approximately $267.5 million will
consist of approximately $267.0 million of the Company's Common Stock including
assumed stock options based upon the number of shares to be determined at
closing (estimated to be 3,982,930 shares including assumed stock options based
upon the terms of the merger agreement and assuming no dissenting shares), and
an average of the closing market price of the Company's Common Stock over a
period of two days prior and two days after the proposed transaction was
announced ($67.0375), and other estimated acquisition related expenses of
approximately $500,000, consisting primarily of payments for legal and other
professional fees. Of the total estimated purchase price, approximately $8.7
million will be allocated to net tangible assets, and the remainder will be
allocated to intangible assets, including existing technology ($4.3 million),
assembled workforce ($3.2 million), customer base ($5.6 million), and goodwill
totaling ($258.8 million). The acquired intangible assets, excluding goodwill,
will be amortized over their estimated useful lives of one to three years.
Goodwill will be amortized over its estimated useful life of three years.
NOTE 3 -- ACQUISITION-RELATED RETENTION BONUS
In connection with its acquisitions of dotOne, Amplitude, Xeti and FaxNet,
the Company established a retention bonus program in the aggregate amount of $14
million to provide incentive for former dotOne, Amplitude, Xeti and FaxNet
employees to continue their employment with Critical Path. Payment of bonuses to
the listed employees will occur one year following the date of acquisition,
unless the listed employees voluntarily terminate their employment with the
Company prior to the respective acquisition's one-year anniversary. The
aggregate amount of the eligible bonuses is adjusted downward at each point that
a former dotOne, Amplitude, and FaxNet employee chooses to terminate his or her
employment with the Company. The amount of any such downward adjustment
corresponds to the amount that the terminating employee would have received had
he or she elected to continue employment with the Company. A ratable share of
the adjusted eligible bonus amount will be accrued and charged to compensation
expense over the respective 12 months commencing on the date the bonuses are
granted. As of December 31, 1999, the aggregate, adjusted eligible bonus amount
was $10.6 million, and the ratable charge to compensation expense was $4.1
million. Based on the functions of the employees scheduled to receive
acquisition bonuses, $520,000 of the compensation charge was allocated to cost
of net revenues and the remaining $3.6 million was allocated to operating
expenses.
F-15
<PAGE> 80
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1999
---------------------- ---- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable................................ $171 $10,770
Allowance for doubtful accounts.................... (50) (623)
---- -------
Accounts receivable, net................. $121 $10,147
==== =======
</TABLE>
Bad debt expense was $0, $50, and $446 in 1997, 1998, and 1999,
respectively.
NOTE 5 -- OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 1998 1999
----------- ---- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred acquisition costs......................... $ -- $21,000
Notes receivable................................... -- 15,572
Other current assets............................... 138 4,228
---- -------
Other current assets..................... $138 $40,800
==== =======
</TABLE>
Deferred acquisition costs
In connection with the Company's agreements to acquire docSpace and ISOCOR
(see Note 2 -- "Acquisitions"), the Company has accrued for certain
acquisition-related costs in the amount of $10 million and $11 million,
respectively. Upon consummation of these acquisitions, the related amounts were
recognized as part of the relative purchase price.
Notes receivable
In July 1999, the Company advanced $10 million to a privately-held company
pursuant to a promissory note. The note bears interest at the prime rate of
interest as stipulated in the Wall Street Journal. The amount was advanced in
connection with the Company's evaluation of the obligor for potential
acquisition. Under the terms of the note, all principal and accrued interest is
repayable within 90 days of written demand by the holder. Upon the decision by
Critical Path not to proceed with an acquisition of the obligor, Critical Path
presented a demand notice for repayment on August 18, 1999. All amounts owed to
Critical Path pursuant to this note were due to be paid not later than November
16, 1999, however, Critical Path granted an extension to the obligor. All
principal and interest was subsequently paid in January 2000.
In August 1999, the Company advanced $5 million to docSpace pursuant to a
promissory note. The note bears interest at the prime rate of interest of 8.0%
per annum and matures on August 2, 2000. The amount was advanced in connection
with the Company's evaluation of docSpace for potential acquisition. Under the
terms of the note, any portion of the principal and/or interest outstanding on
the note may be converted into Common Stock at the election of docSpace. On
March 8, 2000, the Company consummated its acquisition of docSpace.
F-16
<PAGE> 81
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVESTMENTS
<TABLE>
<CAPTION>
NET ESTIMATED
COST UNREALIZED FAIR
DECEMBER 31, 1999 BASIS GAINS VALUE
----------------- ----- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketable securities.................................. $ 3,000 $7,926 $10,926
Non-marketable securities, at cost..................... 7,500 -- 7,500
------- ------ -------
Investments.......................................... $10,500 $7,926 $18,426
======= ====== =======
</TABLE>
The Company's investments consist of equity investments in strategic
corporate partners. The Company's investment in Starmedia is a marketable
security and is stated at fair value, which is based on quoted market rates.
Adjustments to the fair value of this investment are recorded as a component of
other comprehensive income. The Company's other investments are recorded at
historical cost. Although the market value of these investments are not readily
determinable, management believes the fair value of these investments exceed
their carrying value. No long-term investments were held as of December 31,
1998.
NOTE 7 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31 1998 1999
----------- ------ -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and software............................. $5,247 $64,312
Furniture and fixtures.................................... 74 1,694
Leasehold improvements.................................... 411 1,499
------ -------
5,732 67,505
Less: Accumulated depreciation and amortization........ (1,045) (14,988)
------ -------
$4,687 $52,517
====== =======
</TABLE>
Property and equipment includes $4.8 million and $18.6 million of assets
under capital leases at December 31, 1998 and 1999, respectively. Accumulated
depreciation of assets under capital leases totaled $765,000 and $7.0 million at
December 31, 1998 and 1999, respectively.
Depreciation expense of assets totaled $26,000, $1,019,000 and $8,063,000
for the periods ended December 31, 1997, 1998, and 1999, respectively.
The company expensed software development costs during the periods ended
December 31, 1997, 1998, and 1999, respectively. To date, no amounts associated
with internally developed software have been capitalized.
NOTE 8 -- INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 1999
----------- --------------
(IN THOUSANDS)
<S> <C>
Goodwill.................................................... $475,368
Customer list............................................... 12,800
Assembled workforce......................................... 6,960
Existing technology......................................... 9,940
Patent license.............................................. 1,488
--------
506,556
Less: accumulated amortization.............................. (32,259)
--------
Intangible assets, net...................................... $474,297
========
</TABLE>
F-17
<PAGE> 82
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Related amortization expense was $32.6 million in 1999. There were no
intangible assets during 1997 and 1998.
NOTE 9 -- RELATED PARTY TRANSACTIONS
Notes receivable from shareholders
At December 31, 1998, the Company had notes receivable from shareholders
and officers of the Company related to purchases of Common Stock totaling
$85,000 and $1,066,000 which accrue interest at 5.69% and 4.51% per annum,
respectively. At December 31, 1999, the Company had notes receivable from
shareholders, who are officers of the Company, related to purchases of Common
Stock totaling $1,066,000 and $30,000 respectively, and which accrue interest at
4.51% per annum. The notes are full recourse and secured by the Common Stock.
The notes are due and payable in February 2003 or, for the $1,066,000 note, 90
days following termination of the officer.
Notes receivable from officers
At December 31, 1998 and 1999, the Company held notes receivable from
officers totaling $500,000 and $669,000, respectively. The notes accrue interest
at the rate of 4.51% and between 4.51% and 4.64% per annum, respectively, and
are secured by all shares of the Company's Common Stock held by these
individuals, and are due and payable in November 2003 and between November 2003
and February 2004, respectively, or 30 days following termination of the
officer.
Revenues
In April 1998, the Company entered into an email services agreement with a
significant customer, who was also a holder of the Company's Series B Preferred
Stock and is still a holder of the Company's Common Stock. Net revenues from
this shareholder approximated $605,000 and $2.4 million for the years ended
December 31, 1998 and 1999, respectively.
The following is a summary of revenues and receivables associated with
related parties:
<TABLE>
<CAPTION>
REVENUES RECEIVABLES
-------------- --------------
YEAR ENDED DECEMBER 31 1998 1999 1998 1999
---------------------- ---- ------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
E*TRADE..................................... $605 $2,423 $-- $1,055
AOL......................................... 29 460 29 426
US West..................................... -- 287 -- 267
---- ------ --- ------
$634 $3,170 $29 $1,748
==== ====== === ======
</TABLE>
NOTE 10 -- BORROWINGS
Convertible promissory notes
At December 31, 1997, the Company had obligations totaling $420,000 under
7% convertible promissory notes payable to individual investors. In April 1998,
the principal amount of the notes was converted into 582,040 shares of Series A
Convertible Preferred Stock at $0.72 per share. In January and February 1998,
the Company issued an additional $430,000 of 7% convertible promissory notes to
individual investors. In April 1998, the principal amount of the notes was
converted into 595,897 shares of Series A Convertible Preferred Stock at $0.72
per share.
F-18
<PAGE> 83
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible promissory notes-related parties
At December 31, 1997, the Company had obligations totaling $427,000 under
7% - 10% convertible promissory notes payable to the Company's founder and an
individual associated with the founder. In April 1998, $200,000 of the principal
amount of the notes was converted into 277,162 shares of Series A Convertible
Preferred Stock at $0.72 per share and the remaining balance of $227,000 was
repaid in cash.
In January and February 1998, the Company issued an additional $70,000 of
7% convertible promissory notes to a member of the Board of Directors and an
individual associated with the Company's founder. In April 1998, the principal
amount of the notes was converted into 97,006 shares of Series A Convertible
Preferred Stock at $0.72 per share. See Note 9 -- "Related Parties".
NOTE 11 -- INCOME TAXES
The Company did not provide any current or deferred federal, state or
foreign income tax provision or benefit for any of the periods presented because
it has experienced operating losses since inception. The Company has provided a
full valuation allowance on the deferred net tax asset, consisting primarily of
net operating loss carryforwards, because of uncertainty regarding its
realizability
At December 31, 1999, the Company had approximately $94.9 million of
federal and state net operating loss carryforwards available to offset future
taxable income. Federal and state net operating loss carryforwards expire in
varying amounts through 2019 and 2005, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period. These carryforwards will begin to expire
at various times starting in 2012 and 2005 for federal and state tax purposes,
respectively. To the extent that net operating loss carryforwards, when
realized, relate to stock option deductions of approximately $8.9 million, the
resulting benefits will be credited to shareholders' equity.
At December 31, 1999, the Company also had research and development credit
carryforwards of approximately $1.2 million and $717,000 for federal and state
purposes, respectively. The research and development credit carryforwards expire
through 2019 for federal purposes, and do not expire for state purposes.
F-19
<PAGE> 84
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1999
----------- ------ -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $3,763 $37,791
Research and development credits.......................... 238 1,630
Fixed assets.............................................. -- 2,295
Accrued liabilities....................................... -- 1,946
Other..................................................... -- 77
------ -------
Total deferred tax assets................................... 4,001 43,739
Deferred tax liabilities
Intangible assets......................................... -- 18,379
------ -------
Total deferred tax liabilities.............................. -- 18,379
------ -------
Valuation allowance for net deferred tax assets............. 4,001 25,360
------ -------
Net deferred tax assets..................................... $ -- $ --
====== =======
</TABLE>
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1999
---------------------- ------ ------
<S> <C> <C>
Statutory tax benefit....................................... (34.00)% (34.00)%
State taxes, net of federal benefit......................... (5.83) (5.83)
Stock-based expenses........................................ -- 12.71
Goodwill amortization....................................... -- 8.97
Research and development credits............................ (2.57) (0.79)
Change in valuation allowance............................... 42.19 18.90
Other....................................................... 0.21 0.04
------ ------
Provision for income taxes.................................. 0.00% 0.00%
====== ======
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2004. Rent expense for
the period from February 19, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999, totaled $33,000, $220,000 and
$1,253,000, respectively.
Certain lease agreements contain covenants, which, among other
restrictions, prohibit the Company with respect to changes in business without
prior written consent of the bank. The Company's acquisition of Amplitude (see
Note 2 -- "Acquisitions") triggered a change in business covenant violation of
the Amplitude's lease facility agreement acquired by the Company. The Company
has obtained a waiver from the bank for its violation and has amended the
underlying agreement so as to prevent future violations.
F-20
<PAGE> 85
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31
2000...................................................... $ 6,971 $ 3,327
2001...................................................... 5,441 3,879
2002...................................................... 1,720 3,138
2003...................................................... 16 2,354
2004 and thereafter....................................... -- 12,553
------- -------
Total minimum lease payments.............................. 14,148 $25,251
=======
Less: Amount representing interest........................ (1,814)
Unamortized discount...................................... (80)
-------
Present value of capital lease obligations................ 12,254
Less: Current portion..................................... (6,585)
-------
Long-term portion of capital lease obligations............ $ 5,669
=======
</TABLE>
Equipment lease lines
In April 1998, the Company entered into a financing agreement that provides
for the acquisition of equipment up to $1,000,000. Amounts available under this
agreement are limited to specific acquisitions through March 2001 and are
collateralized by the related equipment. Such amounts are payable over a three-
year period in monthly installments of principal and interest, with interest
accruing at a rate of 6.3% per annum.
In April 1998, the Company entered into another financing agreement that
provides for the acquisition of equipment up to $2,000,000. Amounts available
under this agreement are limited to specific acquisitions between May 1, 1998
and April 30, 1999. Such amounts are payable over a three-year period in monthly
installments of principal and interest, with interest accruing at the rate of
7.0% per annum. As part of this agreement, the Company issued warrants to
purchase 97,006 shares of Series A Preferred Stock at a purchase price of $0.72
per share. The Company estimated the fair value of these warrants at date of
issuance was approximately $53,000 that is being amortized as interest expense
over the term of the lease obligation.
In May 1998, the Company entered into a financing agreement that provides
for the acquisition of equipment up to $3,500,000 and software and tenant
improvements up to $1,500,000. Amounts available under this agreement were
limited to specific acquisitions between March 1, 1998 and May 1, 1999. Such
amounts are payable over a three-year period in monthly installments of
principal and interest, with interest accruing at the rate of 7.0% per annum. As
part of this agreement, the Company issued warrants to purchase 242,516 shares
of Series A Preferred Stock at a purchase price of $0.72 per share. The Company
estimated the fair value associated with these warrants at date of issuance was
approximately $133,000 which is being amortized as interest expense over the
term of the lease obligation.
Service Level Agreements
Net revenues are derived from contractual relationships that typically have
one to three year terms. Certain agreements require minimum performance
standards regarding the availability and response time of email services. If
these standards are not met, such contracts are subject to termination and the
Company could be subject to monetary penalties.
F-21
<PAGE> 86
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contingencies
The Company recently acquired The docSpace Company, which is involved in a
patent infringement action with Tumbleweed Communications Corp. The lawsuit
relates to a Tumbleweed patent that describes an apparatus for delivering
documents via the Internet. docSpace has denied the allegations of infringement,
and has counterclaimed for violations of the antitrust laws and related state
law claims. This case is in the preliminary phase and the Company is not
currently able to assess the impact, if any, on its financial position or
results of operations.
The Company is party to various legal proceedings in the ordinary course of
its business. The Company believes that the ultimate outcome of these matters
will not have a material adverse impact on its financial position, results of
operations, or operating cash flow.
NOTE 13 -- SHAREHOLDERS' EQUITY
Changes in equity security shares outstanding were:
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ -------
PERIOD ENDED DECEMBER 31 (IN THOUSANDS)
<S> <C> <C> <C>
Convertible Preferred Stock..............................
Shares outstanding, beginning of year.................. -- -- 16,362
Issuance of Series A................................... -- 12,725 --
Issuance of Series B................................... -- 3,637 3,550
Conversion of Preferred Stock.......................... -- -- (19,912)
----- ------ -------
Shares outstanding, end of year..................... -- 16,362 --
----- ------ -------
Common Stock Shares outstanding, beginning of year....... -- 2,394 8,294
Issuance of Common Stock............................... 2,394 3,975 17,285
Exercise of stock options and warrants................. -- 1,925 1,580
Conversion of Preferred Stock.......................... -- -- 19,912
Purchase of Treasury Stock............................. -- -- (134)
----- ------ -------
Shares outstanding, end of year..................... 2,394 8,294 46,937
===== ====== =======
</TABLE>
Incorporation and Authorized Capital
The Company's Articles of Incorporation authorize the Company to issue
38,636,363 shares of Common Stock at $0.001 par value, and 13,288,519 and
10,000,000 shares of Series A and Series B Convertible Preferred Stock
(together, "Preferred Stock"), respectively, at $0.001 par value. The holders of
Preferred Stock have various voting and dividend rights as well as preferences
in the event of liquidation.
Preferred Stock
On April 1, 1998, the Company completed its Series A Convertible Preferred
Stock ("Series A") financing through the issuance of 12,707,851 shares at a
price per share of $0.72 for net cash proceeds of $7,991,000, and the conversion
of convertible promissory notes payable totaling $1,120,000. The Company issued
an additional 18,013 shares of Series A Preferred Stock to the convertible
promissory note holders upon the exercise of their warrants for proceeds of
$13,000.
In September 1998, the Company issued 3,636,739 shares of its Series B
Convertible Preferred Stock ("Series B") at $4.26 per share for net proceeds of
approximately $15,441,000. In connection with this financing, the Company issued
warrants to purchase 70,290 shares of Series B at $4.26 per share to the
placement agent.
F-22
<PAGE> 87
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 1999, the Company completed the second round of the Series B
financing through the issuance of 2,772,708 shares at $4.26 per share for net
proceeds of approximately $10,749,000. In connection with this financing, the
Company issued warrants to purchase 51,364 shares of Series B at $4.26 per share
to the placement agent.
Prior to the closing of the Company's initial public offering, the Series B
placement agent sold back to the Company at $4.26 per share an aggregate of
53,293 shares held by the placement agent or its affiliates.
As of the closing of the Company's initial public offering, all of the
Preferred Stock outstanding was converted into an aggregate of 19,912,000 shares
of Common Stock at conversion ratio of 1:1.
Common Stock
In January 1999, the Company sold 1,090,909 shares of Common Stock at a
price of $2.20 per share to a customer that also agreed to provide marketing
related services. In connection with the transactions, the Company recognized a
charge totaling $2,247,000 that will be attributed to sales and marketing
expense over the one-year term of the agreement.
On March 29, 1999, the Company completed its initial public offering
(referred to herein as the "Offering") of 5,175,000 shares of Common Stock
(including the exercise of the underwriters over allotment option) and realized
net proceeds of $114.1 million.
On June 2, 1999, the Company completed its secondary public offering of
3,000,000 shares of Common Stock and realized net proceeds of $140.7 million.
Warrants
In May 1998, the Company issued a warrant to purchase up to $250,000 of
Preferred Stock in the Company's next financing round to a customer as part of
an email services agreement. The warrant was exercisable until December 31, 2001
and the exercise price per share was equal to the price per share at which the
Company sold the Preferred Stock. In September 1998, the warrant was exercised
in connection with the Series B financing at a per share price of $4.26. The
Company has estimated the fair value of the warrants approximated $143,000,
which will be recognized as a sales discount over the term of the services
agreement. Approximately $95,000 and $48,000 was recognized in 1998 and 1999,
respectively.
In connection with various financing agreements described in Note 10, the
Company issued warrants to purchase 339,522 shares of Series A at $0.72 per
share. The warrants are exercisable for seven years from May 1, 1998, or five
years from the effective date of the Company's initial public offering,
whichever is shorter. The total amount of related warrants were exercised in
September and October of 1999.
In connection with the issuance of certain convertible promissory notes
described in Note 10, the Company issued warrants to purchase 113,636 shares of
Common Stock at $0.02 per share and 241,123 shares of Series A at $0.72 per
share. These warrants are exercisable for one and three years, respectively. The
warrants to purchase Common Stock were exercised in September 1998. At December
31, 1998, warrants to purchase 18,013 shares of Series A had been exercised. The
Company estimated the fair value of the warrants issued at approximately
$119,000 that was being amortized as interest expense during 1998 through March
of 1999 at which time the remaining warrants to purchase 223,110 share of Series
A were exercised.
In connection with the Series B financings, the Company issued warrants to
purchase 121,654 shares of Series B at $4.26 per share to the placement agent.
The total amount of warrants was exercised in March 1999.
In January 1999, the Company entered into an agreement with ICQ, Inc., a
subsidiary of America Online, Inc., pursuant to which the Company provides email
hosting services that are integrated with ICQ's
F-23
<PAGE> 88
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
instant messaging service provided to ICQ's customers. As part of the agreement,
ICQ agreed to provide sub-branded advertising for the Company in exchange for a
warrant to purchase 2,442,766 shares of Series B, issuable upon attainment of
each of five milestones. The following table summarizes the shares underlying
each milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANT PRICE
---------- --------
<S> <C> <C>
Milestone 1............................................... 814,254 $4.26
Milestone 2............................................... 407,128 5.50
Milestone 3............................................... 407,128 6.60
Milestone 4............................................... 407,128 8.80
Milestone 5............................................... 407,128 11.00
---------
Totals.......................................... 2,442,766
=========
</TABLE>
In the quarter ended June 30, 1999, the Company amended the vesting terms
of the agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying each of the remaining milestones vest on
the date in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis. The
Company believes it is probable that all milestones will be achieved.
Using the Black-Scholes option-pricing model and assuming a term of seven
years and expected volatility of 90%, the initial fair value of the warrant on
the effective date of the agreement approximated $16.5 million, which is being
amortized to advertising expense using the straight-line method over four years.
The shares underlying the second through fifth milestones are remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved and the related warrant shares vest, at which time the
fair value attributable to that tranche of the warrant is fixed. In the event
such remeasurement results in increases or decreases from the initial fair
value, which could be substantial, these increases or decreases will be
recognized immediately, if the fair value of the shares underlying the milestone
has been previously recognized, or over the remaining term, if not.
As of December 31, 1999, three of the five milestones had been attained.
Aggregate charges to stock-based expenses of $9.2 million were recorded during
1999 related to these warrants. The remaining shares underlying the fourth and
fifth milestones were remeasured using the December 31, 1999 closing price of
$94.38 resulting in a revised fair value of the warrant of $109.7 million. The
Company expects that future changes in the trading price of the Company's Common
Stock at the end of each quarter, and at the time certain milestones are
achieved, will cause additional substantial changes in the ultimate amount of
the related stock-based charges.
Qwest Communications Corporation
In October 1999, the Company entered into an agreement with Qwest
Communications Corporation, a telecommunications company, pursuant to which the
Company will provide email hosting services to Qwest's customers. As part of the
agreement, Qwest agreed to provide sub-branded advertising for Critical Path in
exchange for a warrant to purchase up to a maximum of 3,534,540 shares of Common
Stock upon attainment of each of six milestones. The Company believes that this
agreement could have a significant current and
F-24
<PAGE> 89
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
potential future impact on the Company's results of operations. The following
table summarizes the shares underlying each milestone and the related exercise
price:
<TABLE>
<CAPTION>
REGISTERED NO. SHARES
OF SUB-BRANDED UNDERLYING EXERCISE
EMAIL BOXES WARRANTS PRICE
-------------- ---------- --------
<S> <C> <C> <C>
Milestone 1.......................... Upon Execution 589,090 $41.581
Milestone 2.......................... 400,000 589,090 44.581
Milestone 3.......................... 300,000 589,090 47.581
Milestone 4.......................... 1,200,000 589,090 50.581
Milestone 5.......................... 1,600,000 589,090 53.581
Milestone 6.......................... 2,000,000 589,090 56.581
---------
Totals..................... 6,000,000 3,534,540
=========
</TABLE>
The shares underlying those milestones for which achievement is considered
probable are remeasured at each subsequent reporting date, beginning at December
31, 1999, until each sub-branded Qwest mailbox registration threshold is
achieved and the related warrant shares vest, at which time the fair value
attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
Using the Black-Scholes option-pricing model and assuming a term of 5 years
and expected volatility of 90%, the initial fair value of the warrants
associated with the first milestone approximated $22.2 million, which is being
amortized to advertising expense using the straight-line method over 3 years.
The Company expects that future changes in the trading price of the Company's
Common Stock at the end of each quarter, and at the time certain milestones are
considered probable and achieved, may cause additional substantial changes in
the ultimate amount of the related stock-based charges.
Worldsport Network Ltd.
In December 1999, the Company entered into an agreement with Worldsport
Network Ltd., the sole and exclusive provider of Internet solutions for the
General Association of International Sports Federations ("GAISF") and a majority
of the international federations it recognizes. Worldsport will offer Critical
Path's advanced Web-based email and calendaring services to the entire GAISF
network and its members. As part of the agreement, Worldsport agreed to provide
sub-branded advertising for the Company in exchange for warrants to purchase up
to a 1.25% equity interest in the Company on a fully diluted basis upon
attainment of each of five milestones based on the number of email boxes
Worldsport registers and provides sub-branding. The warrants are exercisable for
five years after becoming vested. Any warrants not vested within five years of
the date of the agreement will be cancelled. The Company believes that this
agreement could have a
F-25
<PAGE> 90
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
significant current and potential future impact on the Company's results of
operations. The following table summarizes the vesting milestones and related
exercise prices:
<TABLE>
<CAPTION>
REGISTERED NO.
OF SUB-BRANDED
EMAIL BOXES EXERCISE PRICE
----------------- --------------
<S> <C> <C>
Milestone 1....................... 2 million Average of the Company's closing
price for 15 days prior to
reaching the milestone 1
(Initial Exercise Price).
Milestone 2....................... 4 million Initial Exercise Price plus $5.00
Milestone 3....................... 8 million Initial Exercise Price plus $10.00
Milestone 4....................... 12 million Initial Exercise Price plus $15.00
Milestone 5....................... 20 million Initial Exercise Price plus $20.00
</TABLE>
The shares underlying those milestones for which achievement is considered
probable are remeasured at each subsequent reporting date, beginning at December
31, 1999, until each sub-branded Worldsport mailbox registration threshold is
achieved and the related warrant shares vest, at which time the fair value
attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
As of December 31, 1999, none of the milestones were considered probable
and as a result, no deferred compensation associated with these warrants was
recognized. The Company expects that future changes in the trading price of the
Company's Common Stock at the end of each quarter, and at the time subsequent
milestones are considered probable and achieved, will cause additional
substantial changes in the ultimate amount of the related stock-based expenses.
Lessor Warrant
In December 1999, the Company entered into an agreement with one of its
lessors, in connection with an office lease, pursuant to which the lessor is
entitled to purchase up to a maximum of 25,000 shares of Common Stock. The
warrants may be exercised beginning January 1, 2000 through December 20, 2006 at
a price of $90.00 per share. The warrants vest at the beginning of each month on
a straight-line basis in the amount of 521 shares per month.
Using the Black-Scholes option pricing model and assuming a term of 6 years
and expected volatility of 90%, the fair value of the warrants on the effective
date of the agreement approximated $2.0 million, which will be amortized to
general and administrative expenses using the straight-line method over 10 years
beginning January 2000.
AT&T
In January 2000, the docSpace Company entered into an agreement with AT&T
Corporation, pursuant to which the docSpace Company will provide secure
messaging services to AT&T's Internet portal customers. As part of the
agreement, AT&T agreed to provide marketing, publicity, promotional and
provision branding for docSpace, and upon completion of the acquisition for
Critical Path, in exchange for a warrant to purchase up to a maximum of 349,123
shares of Common Stock upon attainment of each of three milestones. The Company
believes that this agreement could have a significant current and potential
future impact on the
F-26
<PAGE> 91
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's results of operations. The following table summarizes the shares
underlying each milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANTS PRICE
---------- ----------
<S> <C> <C>
Milestone 1................................................. 199,499 39.098
Milestone 2................................................. 74,812 39.098
Milestone 3................................................. 74,812 39.098
-------
Totals............................................ 349,123
=======
</TABLE>
The Company believes that all shares underlying these warrants are
considered probable of issuance. The shares underlying the warrants associated
with the first milestone were fully vested on the inception date of the
agreement. The shares underlying the remaining warrants associated with the
second and third milestone will be remeasured at each subsequent reporting date,
beginning at March 31, 2000, until each sub-branded AT&T mailbox registration
threshold is achieved and the related warrant shares vest, at which time the
fair value attributable to that tranche of the warrant is fixed. In the event
such remeasurement results in increases or decreases from the initial fair
value, which could be substantial, these increases or decreases will be
recognized immediately, if the fair value of the shares underlying the milestone
has been previously recognized, or over the remaining term, if not. The Company
expects that future changes in the trading price of the Company's Common Stock
at the end of each quarter, and at the time certain milestones are achieved,
will cause additional substantial changes in the ultimate amount of the related
stock-based charges.
Using the Black-Scholes option-pricing model and assuming a term of 7 years
and expected volatility of 90%, the initial fair value of all the warrants on
the effective date of the agreement approximated $26.4 million, which is
included as a component of the purchase price of the acquisition. The warrants
underlying the second and third milestones will be remeasured at each subsequent
reporting date until the milestone requirements are met. The remeasured amounts
will be capitalized and amortized to expense using the straight-line method over
3 years.
The Company expects that future changes in the trading price of the
Company's Common Stock at the end of each quarter, and at the time certain
milestones are achieved, will cause additional substantial changes in the
ultimate amount of the related stock-based charges.
Stock Purchase Rights
In February 1998, the Company entered into stock purchase agreements with
three founders and sold 3,863,635 shares of the Company's Common Stock at $0.02
per share. Under the terms of the stock purchase agreements, the Company has the
right to purchase the shares of Common Stock at the original issue price in the
event any one of the founders ceases to be an employee of the Company. These
repurchase rights lapse 25% on the first anniversary of the vesting start date
and ratably each month thereafter for 36 months. In the event of a change in
control of the Company or the closing date of the Offering, repurchase rights
with respect to 50% of the then unvested shares of Common Stock will lapse. On
September 1, 1999, 80,508 shares were repurchased in connection with the early
termination of one of the founders. At December 31, 1998 and 1999, 2,130,680 and
1,155,303 of these shares of Common Stock were subject to repurchase rights,
respectively. In connection with the issuance of these shares, the Company
recorded unearned compensation of $1,306,000 that is being recognized over the
periods in which the Company's repurchase rights lapse.
In May 1998, the Company issued a right to purchase 454,544 shares of
Common Stock or Preferred Stock in a subsequent financing to a customer as part
of an email services agreement. Under the agreement, the price was equal to 80%
of the price at which the Preferred Stock was sold in the subsequent financing
for the initial 227,272 shares and 100% of such price for the remaining 227,272
shares. In September 1998, the
F-27
<PAGE> 92
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company completed its initial Series B financing at a per share price of $4.26.
The Company estimated the fair value of the purchase right to be $194,000, which
is recognized as a sales discount over the term of the services agreement.
Approximately $136,000 and $58,000 was recognized in 1998 and 1999,
respectively. No warrants were exercised as of December 31, 1998. In January
1999, the customer exercised stock purchase rights to purchase 454,544 shares of
Series B for cash proceeds of approximately $1,744,000.
In October 1998, an officer exercised stock options to purchase 1,274,687
shares of the Company's Common Stock at a price of $0.84 per share. Under the
terms of the option, the Company has the right to purchase the unvested shares
of Common Stock at the original issue price in the event the officer ceases to
be an employee of the Company. The repurchase rights lapse ratably each month
for 48 months. At December 31, 1998 and 1999, 1,221,575 and 902,903 of these
shares of Common Stock were subject to repurchase rights, respectively. In
connection with the option grant preceding this transaction, the Company
recognized unearned compensation totaling $3.8 million that is included in the
aggregate unearned compensation charges discussed below.
Employee Stock Purchase Plan
In January 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan") effective on the date of the Company's
Offering. The Purchase Plan reserves 600,000 shares for issuance thereunder.
Employees generally will be eligible to participate in the Purchase Plan if the
Company customarily employs them for more than 20 hours per week and more than
five months in a calendar year and are not 5% or greater shareholders. Under the
Purchase Plan, eligible employees may select a rate of payroll deduction up to
15% of their compensation subject to certain maximum purchase limitations. The
Purchase Plan will be implemented in a series of overlapping twenty-four month
offering periods beginning on the effective date of the Offering with subsequent
offering periods beginning on the first trading day on or after May 1 and
November 1 of each year. Purchases will occur on each April 30 and October 31
(the "Purchase Dates") during each participation period. Under the Purchase
Plan, eligible employees will be granted an option to purchase shares of Common
Stock at a purchase price equal to 85% of the fair market value per share of
Common Stock on either the start date of the offering period or the date on
which the option is exercised, whichever is less. If the fair market value of
the Common Stock on any Purchase Date (other than the final Purchase Date) is
lower than the fair market value on the start date of that offering period, then
all participants in that offering period will be automatically withdrawn from
such offering period and re-enrolled in the offering period immediately
following.
Stock purchases under the Purchase Plan were 42,495 in 1999. The estimated
weighted average fair value of those purchase was $11.00 per share in 1999. The
Company based its estimates on the Black-Scholes model using the following
assumption: risk-free weighted average interest rate of 6.0%, volatility factor
of expected market price of the Company's Common Stock of 90.0%, and expected
life of 90 days.
Stock Options
In January 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). The 1998 Plan provides for the granting of up to
12,288,741 stock options to employees and consultants of the Company. Options
granted under the Plan may be either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). ISOs may be granted only to Company
employees (including officers and directors). NSOs may be granted to Company
employees and consultants. In September 1999, the Company's Board of Directors
adopted the 1999 Stock Option Plan ("1999 Plan"). The 1999 Plan provides for the
granting of up to 4.0 million NSOs options to employees, directors, and
consultants.
F-28
<PAGE> 93
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has, in connection with the acquisition of various companies,
assumed the stock option plans of each acquired company. At December 31, 1999, a
total of 830,672 shares of the Company's Common Stock were reserved for
outstanding shares issued under the assumed plans, and the related options are
included in the following table.
Options under all of the Company's stock option plans may be granted for
periods of up to ten years and at prices no less than 85% of the estimated fair
value of the shares on the date of grant as determined by the Board of
Directors, provided, however, that (i) the exercise price of an ISO may not be
less than 100% of the estimated fair value of the shares on the date of grant,
and (ii) the exercise price of an ISO granted to a 10% shareholder may not be
less than 110% of the estimated fair value of the shares on the date of grant.
Options generally vest 25% per year and are exercisable for a maximum period of
ten years from the date of grant.
A summary of the status of the Company's stock option plans as of December
31, 1998, and 1999, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1999
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of the period........... -- -- 7,752,556 $ 0.86
Granted and assumed............................ 10,595,453 $0.74 8,315,363 26.87
Exercised...................................... (1,924,723) 0.58 (1,247,665) 1.32
Canceled....................................... (918,174) 0.16 (1,032,295) 19.04
---------- ----------
Outstanding, end of the period................. 7,752,556 0.86 13,787,959 15.12
Options exercisable at December 31............. 939,522 0.02 2,245,271 0.88
Weighted-average fair value of options
granted during the period.................... 1.56 30.15
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE -------------------------------------
NUMBER REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$ 0.022 - $ 0.022 1,791,043 8.14 $ 0.02 1,122,718 $ 0.02
$ 0.040 - $ 0.550 377,929 8.28 0.33 88,043 0.27
$ 0.740 - $ 0.836 3,105,722 8.82 0.82 490,474 0.83
$ 1.110 - $ 2.200 1,480,620 8.83 2.14 412,572 2.02
$ 2.270 - $ 4.012 1,586,121 9.01 3.61 107,184 3.26
$ 4.120 - $29.803 1,319,911 9.25 19.21 19,593 8.75
$33.875 - $33.875 2,866,925 9.67 33.87 4,167 33.89
$34.500 - $84.000 1,246,688 9.81 58.76 520 47.75
$84.500 - $84.500 5,000 9.99 84.50 0 --
$87.000 - $87.000 8,000 9.33 87.00 0 --
---------- ---- ------ --------- ------
13,787,959 9.05 $15.12 2,245,271 $ 0.88
========== =========
</TABLE>
The compensation cost associated with the Company's stock-based
compensation plans, determined using the minimum value method prescribed by SFAS
No. 123, did not result in a material difference from the reported net loss for
the year ended December 31, 1998. Had compensation cost been recognized based on
F-29
<PAGE> 94
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the fair value at the date of grant for options granted during 1999, the pro
forma amounts of the Company's net loss and net loss per share would have been
as follows:
<TABLE>
<CAPTION>
1999
YEAR ENDED DECEMBER 31 ---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net loss -- as reported................................. $(116,941)
Net loss -- pro forma................................... (79,690)
Basic and diluted net loss per share -- as reported..... (3.93)
Basic and diluted net loss per share -- pro forma....... (2.68)
</TABLE>
The Company calculated the minimum value and the fair value of each option
grant on the date of grant during the years ended December 31, 1998 and 1999,
respectively, using the Black-Scholes option pricing model as prescribed by SFAS
No. 123 using the following assumptions:
<TABLE>
<CAPTION>
1998 1999
YEAR ENDED DECEMBER 31 ---- ----
<S> <C> <C>
Risk-free interest rate..................................... 5.9% 6.0%
Expected lives (in years)................................... 4.0 4.0
Dividend yield.............................................. 0.0% 0.0%
Expected volatility......................................... 0.0% 90.0%
</TABLE>
Unearned stock-based compensation
In connection with certain stock option grants and Common Stock issuances
during the years ended December 31, 1998 and 1999, the Company recognized
unearned compensation totaling $19.9 million and $22.3 million respectively,
which is being amortized over the vesting periods of the related options.
Amortization expense recognized during 1998 and 1999 totaled approximately $2.5
million, and $17.6 million, respectively.
During 1999, the Company also incurred a stock-based charge of
approximately $2 million in connection with a severance agreement for a
terminated employee. This expense was charged to cost of net revenues.
Other comprehensive income
The tax effects allocated to each component of "Other comprehensive income"
were:
<TABLE>
<CAPTION>
BEFORE TAX BENEFIT NET OF
TAX (EXPENSE) TAX
------ ----------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Unrealized investment gains............................ $7,926 -- $7,926
Foreign currency translation adjustments............... (97) -- (97)
------ -- ------
Other comprehensive income............................. $7,829 -- $7,829
====== == ======
</TABLE>
F-30
<PAGE> 95
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- LOSS PER SHARE
Net loss per share is calculated as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ------------
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss........................................... $(1,074) $(11,461) $(116,941)
Weighted average shares outstanding................ 2,717 5,119 32,634
Weighted average common shares issued subject to
repurchase agreements............................ (723) (1,220) (1,840)
Shares held in escrow related to acquisitions...... -- -- (1,024)
------- -------- ---------
Shares used in computation of basic and diluted
loss per share................................... 1,994 3,899 29,770
======= ======== =========
Basic and diluted loss per share................... $ (0.54) $ (2.94) $ (3.93)
======= ======== =========
</TABLE>
At December 31, 1998 and 1999, 28,607,997 and 19,164,493 potential common
shares respectively, are excluded from the determination of diluted net loss per
share, as the effect of such shares on a weighted average basis is
anti-dilutive.
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Net Revenues.......................................... $ 70 $ 66 $ 156 $ 605
Gross profit (loss)................................... (12) (164) (785) (488)
Loss from operations.................................. (1,170) (1,798) (3,022) (5,458)
Net loss.............................................. (1,320) (1,751) (3,061) (5,329)
Net loss per share -- basic and diluted............... (0.49) (0.50) (0.74) (1.14)
1999
Net Revenues.......................................... $ 1,049 $ 2,006 $ 4,913 $ 8,189
Gross profit (loss)................................... (1,311) (1,971) (2,610) 492
Loss from operations.................................. (17,881) (18,023) (26,998) (60,348)
Net loss.............................................. (17,594) (16,321) (24,324) (58,702)
Net loss per share -- basic and diluted............... (2.51) (0.49) (0.65) (1.41)
</TABLE>
F-31
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 17th day of March, 2000.
Critical Path, Inc.
By: /s/ DOUGLAS T. HICKEY
------------------------------------
Douglas T. Hickey
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas T. Hickey and Mark J. Rubash, and each of
them, his or her true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K filed pursuant to the requirements of the
Securities Exchange Act of 1934 and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ DOUGLAS T. HICKEY Chief Executive Officer March 17, 2000
- ----------------------------------------------------- and Director
Douglas T. Hickey (Principal Executive Officer)
/s/ MARK J. RUBASH Executive Vice President, March 17, 2000
- ----------------------------------------------------- Chief Financial Officer
Mark J. Rubash (Principal Financial and
Accounting Officer)
/s/ DAVID C. HAYDEN Chairman of the Board March 17, 2000
- -----------------------------------------------------
David C. Hayden
Director March 17, 2000
- -----------------------------------------------------
Christos M. Cotsakos
Director March 17, 2000
- -----------------------------------------------------
Lisa Gansky
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ KEVIN R. HARVEY Director March 17, 2000
- -----------------------------------------------------
Kevin R. Harvey
/s/ JAMES A. SMITH Director March 17, 2000
- -----------------------------------------------------
James A. Smith
/s/ GEORGE ZACHARY Director March 17, 2000
- -----------------------------------------------------
George Zachary
</TABLE>
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Asset Purchase Agreement, dated May 26, 1999, between the
Registrant and Fabrik Communications, Inc. (Incorporated by
reference to Exhibit 2.1 to the Registrant's Registration on
Form S-1/A (File No. 333-78197)
2.2 Agreement and Plan of Reorganization, dated October 20,
1999, by and among Critical Path, Inc., Initialize
Acquisition Corp. and ISOCOR. (Incorporated by reference to
Annex A to the Registrant's Registration Statement on Form
S-4 (File No. 333-92199)
2.3 Agreement and Plan of Reorganization, dated June 22, 1999,
among Critical Path, Inc., Amplitude Software Corp. and
Apollo Acquisition Corp. (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
(File No. 000-25331)
2.4 Agreement and Plan of Reorganization, dated July 15, 1999,
among Critical Path, Inc., dotOne Corporation and dotOne
Acquisition Corp. (Incorporated by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K (File No.
000-25331)
2.5 Agreement and Plan of Reorganization, dated January 28,
2000, by and among Critical Path, Inc., D.V. Acquisition
Corp. and RemarQ Communities, Inc.
2.6 Agreement and Plan of Reorganization, dated November 3,
1999, by and among Critical Path, Inc., Compass Holding
Corp., Compass Acquisition Corp., 3034996 Nova Scotia
Company, 3034997 Nova Scotia Company and The docSpace
Company.
2.7 Agreement and Plan of Reorganization, dated November 2,
1999, by and among Critical Path, Inc., Wellfleet
Acquisition Corp. and FaxNet Corporation.
2.8 Agreement and Plan of Reorganization, dated October 8, 1999,
by and among Critical Path, Inc., XETI Acquisition Corp. and
XETI, Inc.
3.1 Amended and Restated Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)(b) to the
Registrant's Registration on Form S-1 (File No. 333-71499)
3.2 Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3(ii)(b) to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499)
4.1 Form of Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
4.2 Warrant to Purchase Preferred Stock dated September 11, 1998
issued by the Registrant to Hambrecht & Quist LLC.
(Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
4.3 Warrant to Purchase Preferred Stock dated January 13, 1999
issued by the Registrant to Hambrecht & Quist LLC.
(Incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
4.4 Warrant to Purchase Common Stock dated January 29, 1999
issued by the Registrant to America Online, Inc.
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.2 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.3 1998 Stock Plan and forms of stock option agreements
thereunder. (Incorporated by reference to Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 (File
No. 333-71499)
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.4 Series B Preferred Stock Purchase Agreement dated September
11, 1998. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.5 Amendment to Series B Preferred Stock Purchase Agreement
dated January 13, 1999. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.6 Amended and Restated Investors' Rights Agreement dated
September 11, 1998. (Incorporated by reference to Exhibit
10.6 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499)
10.7 Amendment to the Amended and Restated Investors' Rights
Agreement dated January 13, 1999. (Incorporated by reference
to Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 (File No. 333 71499)
10.8 Master Equipment Lease Agreement dated April 28, 1998, and
Lease Line Schedule thereto, by and between the Registrant
and Lighthouse Capital Partners II, L.P. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (File No. 333- 71499)
10.9 Master Lease Agreement dated May 1, 1998, and addendum
thereto, by and between the Registrant and Comdisco, Inc.
(Incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.10 Standard Industrial/Multitenant Lease-Gross dated June 20,
1997 by and between the Registrant and 501 Folsom Street
Building. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.11 Letter Agreement dated October 1, 1998 by and between the
Registrant and Douglas Hickey. (Incorporated by reference to
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.12 Promissory Note and Security Agreement dated November 2,
1998 by and between the Registrant and Douglas Hickey.
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.13 Warrant Agreement dated April 28, 1998 by and between the
Registrant and Lighthouse Capital Partners II, L.P.
(Incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.14 Warrant Agreement dated May 1, 1998 by and between the
Registrant and Comdisco, Inc. (Incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1 (File No. 333-71499)
10.15 Master Services Agreement dated December 10, 1998 by and
between the Registrant and US West Communications Services,
Inc. (Incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.16 Email Services Agreement dated May 27, 1998 by and between
the Registrant and Network Solutions, Inc. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.17 Email Services Agreement dated July 6, 1998 by and between
the Registrant and Starmedia Network, Inc. (Incorporated by
reference to Exhibit 10.17 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.18 Amendment to email Services Agreement September 30, 1998 by
and between the Registrant and E*TRADE Group, Inc.
(Incorporated by reference to Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.19 Email Services Agreement dated September 14, 1998 by and
between the Registrant and Sprint Communications Company
L.P. (Incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.20 Email Services Agreement dated March 19, 1998 by and between
the Registrant and NTX, Inc. dba TABNet, Inc. (Incorporated
by reference to Exhibit 10.20 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499)
10.21 QuickStart Loan and Security Agreement dated May 12, 1998 by
and between the Registrant and Silicon Valley Bank.
(Incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.22 Email Services Agreement dated January 29, 1999 by and
between the Registrant and ICQ, Inc. (Incorporated by
reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.23 Sublease dated February 8, 1999 by and between Times Direct
Marketing, Inc. and the Registrant (Incorporated by
reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499)
10.24 Promissory Note and Security Agreement dated January 26,
1999 by and between the Registrant and Bill Rinehart.
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1 (File No.
333-71499)
10.25 Office lease dated December 1999 by and between Ecker-Folsom
Properties, LLC and the Registrant
10.26 Office lease dated December 1999 by and between Ecker-Folsom
Properties, LLC and the Registrant
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 2.5
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CRITICAL PATH, INC.
D.V. ACQUISITION CORP.
AND
REMARQ COMMUNITIES, INC.
DATED AS OF JANUARY 28, 2000
<PAGE> 2
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of January 28, 2000, among Critical Path, Inc., a California
corporation ("Parent"), D.V. Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and Remarq Communities, a
Delaware corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") and all outstanding
options and other rights to acquire or receive shares of Company Capital Stock
shall be converted into the shares of or right to receive shares of Common Stock
of Parent ("Parent Common Stock").
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Voting Agreements in substantially
the form attached hereto as Exhibit A (the "Voting Agreement").
D. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions.
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
F. The parties intend for the Merger to be accounted for financial
accounting purposes as a purchase.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
<PAGE> 3
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporation Law (the "DGCL"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation and as a wholly owned subsidiary of Parent. The Company,
as the surviving corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation".
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than two (2) business days, following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
unless another place or time is agreed to by Parent and the Company. The date
upon which the Closing actually occurs is herein referred to as the "Closing
Date". On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing an Agreement of Merger with the California Secretary of
State (the "Agreement of Merger"), a form of which is attached hereto, in
accordance with the relevant provisions of applicable law. The date and time the
Merger becomes effective in accordance with the provisions of the DGCL is the
"Effective Time".
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the DGCL. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Certificate of Incorporation of Merger Sub
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
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<PAGE> 4
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Shares to Be Issued; Effect on Capital Stock. The aggregate number
of shares of Parent Common Stock to be issued (including Parent Common Stock to
be reserved for issuance upon exercise of any of the Company's options to be
assumed by Parent) in exchange for the acquisition by Parent of all outstanding
Company Capital Stock and all unexpired and unexercised options to acquire
Company Capital Stock shall be 3,982,930 (the "Stock Consideration"). No
adjustment shall be made in the number of shares of Parent Common Stock issued
in the Merger as a result of any cash proceeds received by the Company from the
date hereof to the Closing Date pursuant to the exercise of options to acquire
Company Capital Stock. Subject to the terms and conditions of this Agreement, as
of the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, the Company or the holder of any shares of the Company
Capital Stock, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common
Stock of the Company ("Company Common Stock") issued and outstanding immediately
prior to the Effective Time (other than any shares of Company Common Stock to be
canceled pursuant to Section 1.6(c) and any Dissenting Shares (as defined and to
the extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into that number of shares of Parent Common Stock as is
equal to the Exchange Ratio (as defined in paragraph (h) below).
(b) Conversion of Company Preferred Stock. Each share of Series A
Preferred Stock of the Company ("Series A Preferred") and Series B Preferred
Stock of the Company ("Series B Preferred", and together with the Series A
Preferred, the "Company Preferred") issued and outstanding immediately prior to
the Effective Time (other than any shares of Company Preferred that are
converted into shares of Company Common Stock immediately prior to the Effective
Time, any shares of Company Preferred to be canceled pursuant to Section 1.6(c)
and any Dissenting Shares (as defined and to the extent provided in Section
1.7(a)) will be canceled and extinguished and be converted automatically into
that number of shares of Parent Common Stock as is equal to the Exchange Ratio
(as defined in paragraph (h) below) multiplied by the number of shares of
Company Common Stock into which such share of Company Preferred would convert
pursuant to an automatic conversion as described in the Company's Certificate of
Incorporation.
(c) Cancellation of Parent-Owned and Company-Owned Stock. Each
share of Company Capital Stock owned by Merger Sub, Parent, the Company or any
direct or indirect wholly-owned subsidiary of Parent or of the Company
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(d) Stock Options. At the Effective Time, all options to purchase
Company Common Stock then outstanding under the Company's 1998 Stock Plan (the
"Option Plan"), or otherwise, shall be assumed by Parent in accordance with
provisions described below.
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<PAGE> 5
(i) At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each a "Company Option") under the
Option Plan or otherwise, whether vested or unvested, shall be, in connection
with the Merger, assumed by Parent. Each Company Option so assumed by Parent
under this Agreement shall continue to have, and be subject to, the same terms
and conditions set forth in the Option Plan and/or as provided in the respective
option agreements governing such Company Option immediately prior to the
Effective Time, except that (A) such Company Option shall be exercisable for
that number of whole shares of Parent Common Stock equal to the product of the
number of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio (as defined in paragraph (h) below), rounded down to the nearest
whole number of shares of Parent Common Stock and (B) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Option shall be equal to the quotient determined by dividing the
exercise price per share of Company Common Stock at which such Company Option
was exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent.
(ii) It is the intention of the parties that the Company
Options assumed by Parent qualify following the Effective Time as incentive
stock options as defined in Section 422 of the Code to the extent the Company
Options qualified as incentive stock options immediately prior to the Effective
Time.
(iii) Promptly following the Effective Time, Parent will
issue to each holder of an outstanding Company Option a document evidencing the
foregoing assumption of such Company Option by Parent.
(e) Capital Stock of Merger Sub. Each share of Common Stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock or Company Capital
Stock occurring or with a record date after the date hereof and prior to the
Effective Time.
(g) Fractional Shares. No fraction of a share of Parent Common
Stock will be issued, but in lieu thereof, each holder of shares of Company
Capital Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock to
be received by such holder) shall be entitled to receive from Parent an amount
of cash (rounded down to the nearest whole cent) equal to the product of (i)
such fraction,
-4-
<PAGE> 6
multiplied by (ii) the average closing price of a share of Parent
Common Stock for the ten (10) consecutive trading days ending on the second
trading day immediately prior to the Closing, as reported on the Nasdaq National
Market.
(h) Definitions.
(i) Escrow Consideration. The "Escrow Consideration"
shall mean 0.2 multiplied by the Stock Consideration.
(ii) Exchange Ratio. The "Exchange Ratio" shall mean the
Stock Consideration divided by the Outstanding Aggregate Amount.
(iii) Outstanding Aggregate Amount. The "Outstanding
Aggregate Amount" shall mean the sum of the Outstanding Common Amount and the
Outstanding Option Amount.
(iv) Outstanding Common Amount. The "Outstanding Common
Amount" shall mean the aggregate number of shares of Company Common Stock
outstanding on the date hereof (treating all shares of outstanding Company
Preferred Stock and the Comdisco Rights (as defined herein) as automatically
converting into Company Common Stock as of such time).
(v) Outstanding Option Amount. The "Outstanding Option
Amount" shall mean the aggregate number of shares of Company Common Stock
issuable upon the exercise of all outstanding options to acquire shares of
Company Common Stock on the date hereof.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of Company Capital Stock held by a holder who has demanded
and perfected appraisal or dissenters' rights for such shares in accordance with
the DGCL and who, as of the Effective Time, has not effectively withdrawn or
lost such appraisal or dissenters' rights ("Dissenting Shares"), shall not be
converted into or represent Parent Common Stock pursuant to Section 1.6, but the
holder thereof shall only be entitled to such rights as are granted by the DGCL.
(b) Notwithstanding the provisions of subsection (a), if any
holder of shares of Company Capital Stock who demands appraisal of such shares
under the DGCL shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only Parent Common Stock, such holder's portion of
the Cash Consideration Amount and cash in lieu of fractional shares as provided
in Section 1.6, without interest thereon.
(c) The Company shall give Parent (i) prompt notice of any
written demands for appraisal of any shares of Company Capital Stock,
withdrawals of such demands, and any other
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<PAGE> 7
instruments served pursuant to the DGCL and received by the Company and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
demands for appraisal under the DGCL. The Company shall not, except with the
prior written consent of Parent, voluntarily make any payment with respect to
any demands for appraisal of capital stock of the Company or offer to settle or
settle any such demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Parent shall
designate a bank or trust company reasonably acceptable to the Company to act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, the aggregate number of shares of Parent Common
Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of
Company Capital Stock; provided that on behalf of the holders of Company Capital
Stock, Parent shall deposit into an escrow account a number of shares of Parent
Common Stock equal to the Escrow Amount out of the Stock Consideration otherwise
issuable pursuant to Section 1.6. The portion of the Escrow Amount contributed
on behalf of each holder of Company Capital Stock (other than holders of
Dissenting Shares on whose behalf no shares will be deposited into the escrow
account) shall be in proportion to the aggregate number of shares of Parent
Common Stock which such holder would otherwise be entitled to receive under
Section 1.6 by virtue of ownership of outstanding shares of Company Capital
Stock.
(c) Exchange Procedures. Promptly after the Effective Time,
Parent shall cause to be mailed to each holder of record of a certificate or
certificates (the "Certificates") which immediately prior to the Effective Time
represented outstanding shares of Company Capital Stock whose shares were
converted into shares of Parent Common Stock pursuant to Section 1.6, (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holder of
such Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Parent Common Stock (less the number
of shares of Parent Common Stock, if any, to be deposited in the Escrow Fund (as
defined in Section 7.5 below) on such holder's behalf pursuant to Section 7.5
hereof), plus cash in lieu of fractional shares in accordance with Section 1.6,
to which such holder is entitled pursuant to Section 1.6, and the Certificate so
surrendered shall forthwith be canceled. As soon as practicable after the
Effective Time, and subject to and in accordance with the provisions of Article
VII hereof, Parent shall cause to be distributed to the Escrow Agent a
certificate or certificates representing that number of shares of Parent Common
-6-
<PAGE> 8
Stock equal to the Escrow Amount which shall be registered in the name of the
Escrow Agent. Notwithstanding the provisions contained in Section 1.6(g), any
fractional share that would otherwise result from the issuance of a certificate
representing the shares of Parent Common Stock to be deposited into escrow
pursuant to Article VII hereof shall be rounded down to the nearest whole share
and any fraction of a share that would otherwise result from the issuance of a
certificate representing the remaining shares of Parent Common Stock which each
such shareholder would otherwise be entitled to receive under Section 1 by
virtue of ownership of outstanding shares of Company Common Stock shall be
rounded up to the nearest whole share. Such shares shall be owned beneficially
and of record by the holders on whose behalf such shares were deposited in the
Escrow Fund and shall be available to compensate Parent as provided in Article
VII. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Company Capital Stock will be deemed from
and after the Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full shares of Parent
Common Stock into which such shares of Company Capital Stock shall have been so
converted and the right to receive an amount in cash in lieu of the issuance of
any fractional shares in accordance with Section 1.6. Parent shall use its
reasonable efforts to cause the Exchange Agent to issue to each Company
stockholder the Parent Common Stock pursuant to Section 1.6 within 5 business
days after the Exchange Agent receives all documents necessary to effect such
exchange, properly completed, guaranteed and presented for transfer, from each
such Stockholder.
(d) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record of
such Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock.
(e) Transfers of Ownership. If any certificate for shares of
Parent Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of a certificate
for shares of Parent Common Stock in any name other than that of the registered
holder of the Certificate surrendered, or established to the satisfaction of
Parent or any agent designated by it that such tax has been paid or is not
payable.
(f) No Liability. Notwithstanding anything to the contrary in
this Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Capital Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
-7-
<PAGE> 9
1.9 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Capital Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such shares of Parent Common Stock and cash for
fractional shares, if any, as may be required pursuant to Section 1.6; provided,
however, that Parent may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
1.11 Tax and Accounting Consequences. It is intended by the parties
hereto that the Merger shall (i) constitute a reorganization within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) be accounted for financial reporting purposes as a purchase. The parties to
this Agreement hereby adopt this Agreement as a "plan of reorganization" within
the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations. No party to this Agreement shall take any action inconsistent with
such treatment.
1.12 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and directors
of the Company and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the following representations and warranties to
Parent and Merger Sub, subject to such exceptions as are specifically disclosed
in the disclosure schedules (referencing the appropriate section number)
supplied by the Company to Parent (the "Company Schedules") and dated as of the
date hereof. Any information disclosed on the Company Schedules under any
section number set forth therein shall be deemed to be disclosed and
incorporated into any
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other section under the Company Schedules where such disclosure would on its
face reasonably be deemed to apply.
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, prospects, assets (including intangible assets), financial condition
or results of operations of the Company; provided, however, that in no event
shall any of the following constitute a Material Adverse Effect: (i) any
effects, changes, events, circumstances or conditions (including, without
limitation, litigation, delays in customer orders, a reduction in sales, a
disruption in business relationships or a loss of employees) resulting from the
announcement or pendency of the transactions contemplated by this Agreement;
(ii) any effects, changes, events, circumstances or conditions taken by the
Company that were necessary for the Company to comply with the terms of this
Agreement, or (iii) the occurrence of a short term service outage or other short
term inability to provide services that, in any case, does not impair, but for
such short term outage or inability to provide services, the Company's ability
to provide its services to its customers (hereinafter a material adverse effect
on the business, prospects, assets (including intangible assets), financial
condition or results of operations of the Company, as modified by the proviso
contained in this sentence is referred to as a "Material Adverse Effect"). The
Company has delivered a true, correct and complete copy of its Certificate of
Incorporation and Bylaws, each as amended to date, to Parent.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, of which 11,268,147 shares are issued and
outstanding, and 5,631,354 shares of Preferred Stock, of which 3,131,354 shares
are designated Series A Preferred Stock, all of which are issued and
outstanding, and 2,500,000 shares are designated Series B Preferred Stock,
2,352,941 of which are issued and outstanding as of the date of this Agreement.
The Company Capital Stock is held by the persons, with the domicile addresses
and in the amounts set forth on Schedule 2.2(a). All outstanding shares of
Company Capital Stock are duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of the Company or any agreement to which
the Company is a party or by which it is bound.
(b) The Company has reserved 3,268,646 shares of Common Stock
for issuance to employees and consultants pursuant to the Option Plan, of which
343,375 shares are subject to outstanding, unexercised options as of the date of
this Agreement and 741,419 shares remain available for future grant as of the
date of this Agreement. The Company has reserved 147,058 shares of Series B
Preferred Stock for issuance to Comdisco Inc. pursuant to Section 8 of that
certain Subordinated Loan and Security Agreement between the Company and
Comdisco Inc (the
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"Comdisco Rights"). The Comdisco Rights terminate upon the consummation of the
Merger. Schedule 2.2(b) sets forth for each Company Option outstanding as of the
date of this Agreement the name of the holder of such option, the domicile
address of such holder, the number of shares of Common Stock subject to such
option, the exercise price of such option and the vesting schedule for such
option, including the extent vested to date and whether the exercisability of
such option will be accelerated and become exercisable by the transactions
contemplated by this Agreement. Except for the Company Options described in
Schedule 2.2(b), as of the date of this Agreement there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which the Company is a party or by which it is bound obligating the
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of the
Company. Except for the Company Options described in Schedule 2.2(b), as of the
date of this Agreement, there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which the
Company is a party or by which it is bound obligating the Company to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. The holders
of Company Options have been or will be given, or shall have properly waived,
any required notice prior to the Merger and all such rights will be terminated
at or prior to the Effective Time. As a result of the Merger, Parent will be the
record and sole beneficial owner of all Company Capital Stock and rights to
acquire or receive Company Capital Stock.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the approval of the Merger and this
Agreement by the Company's stockholders, the Company has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The vote required of the Company's
stockholders to duly approve the Merger and this Agreement is a majority of the
outstanding shares of Company Common Stock and a majority of the outstanding
shares of Company Preferred Stock. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Company, subject
only to the approval of this Agreement and the Merger by the Company's
stockholders. The Company's Board of Directors has unanimously approved the
Merger and this Agreement. This Agreement has been duly executed and delivered
by the Company and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. Except as set
forth on Schedule 2.4, subject only to the approval of the Merger and this
Agreement by the Company's stockholders, the execution and delivery of this
Agreement by the Company does not, and, as of the Effective Time, the
performance by the Company of its obligations under this Agreement will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under (any
such event, a "Conflict") (i) any provision of the Articles of Incorporation or
Bylaws of the Company or
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(ii) any material mortgage, indenture, lease, contract or other material
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or its properties or assets. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other federal, state, county, local or
foreign governmental authority, instrumentality, agency or commission
("Governmental Entity") or any third party (so as not to trigger any Conflict),
is required at or prior to the Effective Time by or with respect to the Company
in connection with the Company's execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Agreement of Merger with the Delaware Secretary of State, (ii) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, (iii) expiration or early termination of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and (iv) such other consents, waivers, authorizations,
filings, approvals and registrations which are set forth on Schedule 2.4.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
unaudited balance sheet as of December 31, 1999 (the "Balance Sheet") and the
related unaudited statements of operations and cash flows for the twelve-month
period then ended and the Company's unaudited balance sheet dated as of December
31, 1998 and the unaudited statements of operations and cash flows for the
twelve-month period ended December 31, 1998 (collectively, the "Company
Financials"). The Company Financials have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a basis consistent
throughout the periods indicated and consistent with each other. The Company
Financials present fairly the financial condition and operating results of the
Company as of the dates and during the periods indicated therein, subject, in
the case of the unaudited financial statements, to the absence of footnotes and
normal year-end adjustments, which will not be material in amount or
significance.
2.6 No Undisclosed Liabilities. The Company does not have any liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with generally accepted accounting principles), which individually or in the
aggregate, (i) has not been reflected in the Balance Sheet or other Company
Financials, or (ii) has not arisen in the ordinary course of the Company's
business since December 31, 1999, consistent with past practices and in the
aggregate do not exceed $100,000.
2.7 No Changes. From December 31, 1999 to the date of this Agreement,
there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or
Bylaws of the Company;
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(c) capital expenditure or commitment by the Company of $100,000
in any individual case or $250,000 in the aggregate;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other
unlawful labor practice;
(f) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees,
independent contractors or consultants, or the declaration, payment or
commitment or obligation of any kind for the payment, by the Company, of a bonus
or other additional salary or compensation to any such person except as
otherwise contemplated by this Agreement;
(j) sale, lease, license or other disposition of any of the
assets or properties of the Company, except in the ordinary course of business
and consistent with past practices;
(k) amendment or termination of any material contract, agreement
or license to which the Company is a party or by which it is bound;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices and except for advances under the Company's existing revolving credit
agreement (which agreement has not been amended since December 31, 1999);
(m) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company;
(n) commencement or notice or to the Company's knowledge threat
of commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
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(o) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.11 below) or of
infringement by the Company of any third party's Intellectual Property rights;
(p) issuance or sale by the Company of any of its shares of
capital stock, or securities exchangeable, convertible or exercisable therefor,
or of any other of its securities, except for options granted in the ordinary
course of business and Company Common Stock issued upon the exercise of options;
(q) change in pricing or royalties charged by the Company to its
customers or licensees or in pricing or royalties set or charged by persons who
have licensed Intellectual Property to the Company;
(r) event or condition of any character that has or would be
reasonably expected to have a Material Adverse Effect on the Company; or
(s) agreement by the Company or any officer or employees thereof
to do any of the things described in the preceding clauses (a) through (r)
(other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement,
"Tax" or, collectively, "Taxes", means any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties and
impositions, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) The Company as of the Effective Time will have
prepared and filed all required federal, state, local and foreign returns,
estimates, information statements and reports ("Returns") relating to any and
all Taxes concerning or attributable to the Company or its operations and such
Returns were when so filed true and correct and have been completed in
accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will
have paid or accrued all Taxes it is required to pay or accrue and (B) will have
withheld with respect to its employees all federal and state income taxes, FICA,
FUTA and other Taxes required to be withheld.
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(iii) To the Company's knowledge, there is no Tax
deficiency outstanding, proposed or assessed against the Company, nor has the
Company executed any waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(iv) To the Company's knowledge, no audit or other
examination of any Return of the Company is in progress as of the date of this
Agreement, nor has the Company been notified as of or prior to the date of this
Agreement of any request for such an audit or other examination.
(v) The Company has no knowledge of any basis for the
assertion of any liabilities for unpaid federal, state, local or foreign Taxes
which have not been accrued or reserved against on the Balance Sheet whether
asserted or unasserted, contingent or otherwise attributable to the Company, its
assets or operations.
(vi) The Company has provided to Parent copies of all
federal and state income and all state sales and use Tax Returns for all periods
since the date of Company's incorporation.
(vii) There are (and as of immediately following the
Closing there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") on the assets of the Company relating
to or attributable to Taxes, other than for statutory liens for Taxes not yet
due.
(viii) The Company has no knowledge of any basis for
the assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company.
(ix) None of the Company's assets are treated as
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(x) As of the Effective Time, there will not be any
contract, agreement, plan or arrangement to which the Company is a party,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to Section 280G or 162 of the Code.
(xi) The Company has not filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or
allocation agreement nor does the Company owe any amount under any such
agreement.
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(xiii) The Company is not, and has not been at any
time, a "United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code.
2.9 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has had
or reasonably could be expected to have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. Without
limiting the foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all real property
currently, or at any time in the past, leased by the Company, the name of the
lessor and the date of the lease and each amendment thereto and, with respect to
any current lease, the aggregate annual rental and/or other fees payable under
any such lease. All such current leases are in full force and effect and
enforceable by the Company and there is not, under any of such leases, any
existing default by the Company (or to the Company's knowledge, by the other
party to such lease) or event of default (or event which with notice or lapse of
time, or both, would constitute such a default).
(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Company Financials and except for liens for Taxes not
yet due and payable, municipal and zoning ordinances, easements for public
utilities and such imperfections of title and encumbrances, if any, which are
not material in character, amount or extent, and which do not materially detract
from the value, or materially interfere with the present use, of the property
subject thereto or affected thereby.
2.11 Intellectual Property.
(a) For the purposes of this Section 2.11, the following terms
have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United
States and foreign patents and utility models and applications therefor
and all reissues, divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof, and equivalent or
similar rights anywhere in the world in inventions and discoveries
("Patents"); (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know
how, technology, technical data and customer lists, and all
documentation embodying or
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evidencing any of the foregoing; (iii) all copyrights, copyrights
registrations and applications therefor and all other rights
corresponding thereto throughout the world ("Copyrights"); (iv) all mask
works, mask work registrations and applications therefor, and any
equivalent or similar rights in semiconductor masks, layouts,
architectures or topology ("Maskworks"); (v) all industrial designs and
any registrations and applications therefor throughout the world; (vi)
all trade names, logos, common law trademarks and service marks,
trademark and service mark registrations and applications therefor and
all goodwill associated therewith throughout the world ("Trademarks");
(vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all
source code, object code, firmware, development tools, files, records
and data, all media on which any of the foregoing is recorded; (ix) all
World Wide Web addresses, sites and domain names; and (x) any similar,
corresponding or equivalent rights to any of the foregoing anywhere in
the world.
"Business" means the business of the Company, including the manufacture,
use, licensing, distribution and sale of any products or technology or
the provision of any services by the Company, as currently conducted or
as conducted since the inception of the Company.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by or licensed to the Company.
"Registered Intellectual Property" shall mean all United States,
international and foreign: (i) Patents, including applications therefor;
(ii) registered Trademarks, applications to register Trademarks,
including intent-to-use applications, or other registrations or
applications related to Trademarks; (iii) Copyrights registrations and
applications to register Copyrights; (iv) Mask Work registrations and
applications to register Mask Works; and (v) any other Company
Intellectual Property owned by the Company that is the subject of an
application, certificate, filing, registration or other document issued
by, filed with, or recorded by, any state, government or other public
legal authority at any time.
(b) Schedule 2.11(b) lists all Registered Intellectual Property
in whole or in part owned by or filed in the name of the Company (the "Company
Registered Intellectual Property").
(c) Each item of Company Intellectual Property owned by the
Company, including all Company Registered Intellectual Property listed on
Schedule 2.11(b), is free and clear of any encumbrance, including any lien or
security interest other than (i) Liens for Taxes not yet due and payable and
(ii) end-user licenses granted by the Company pursuant to its standard form of
end-user license, a copy of which is attached to Schedule 2.11(c).
(d) The Company owns exclusively, and has good title to, all
copyrighted works that are software products of the Company or other works of
authorship that the Company otherwise purports to own.
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(e) Except for end-user licenses granted by the Company pursuant
to its standard form of end-user license, the Company has not transferred
ownership of, or granted any license of or right to use or authorized the
retention of any rights to use, any Intellectual Property that is, or was,
Company Intellectual Property, to any other person.
(f) The Company Intellectual Property constitutes all the
Intellectual Property used in and/or necessary to the conduct of the Business
including (i) the making, using, selling, marketing, or importing of any product
or device, (ii) the practice of any process, (iii) the offering or performance
of any service, or (iv) the copying, display, performance, distribution,
creation of derivative works of, or the exploitation of any device or work,
including any of the foregoing with respect to products, technology or services
currently under development by Company.
(g) The contracts, licenses and agreements listed on Schedule
2.11(g) include all material contracts, licenses and agreements (other than
end-user licenses granted by the Company pursuant to its standard form of
end-user license) pursuant to which any Person, including any Affiliate of
Company, has licensed any Intellectual Property to the Company.
(h) The contracts, licenses and agreements listed on Schedule
2.11(h) include all contracts and agreements pursuant to which any Person,
including any third party developer or consultant, has developed any device or
technology, authored any work, or otherwise created any Intellectual Property
rights, either separately or jointly with the Company or any other Person, that
the Company uses or possess or which the Company believes it owns.
(i) The contracts, licenses and agreements listed on Schedule
2.11(i) include all material contracts, licenses and agreements pursuant to
which the Company has licensed to or transferred to any third person or any
Affiliate of the Company any material Company Intellectual Property other than
end-user licenses granted by the Company pursuant to its standard form of
end-user license.
(j) Neither the consummation of the transaction contemplated by
this Agreement nor the transfer to the Buyer of any contracts, licenses,
agreements or Company Intellectual Property will cause or obligate Buyer (i) to
grant to any third party any rights or licenses with respect to any Intellectual
Property of Buyer; or (ii) pay any royalties or other amounts in excess of those
being paid by Company prior to the Closing.
(k) Schedule 2.11(k) lists all agreements, licenses and contracts
pursuant to which Company has agreed to indemnify, hold harmless, or otherwise
agree to be liable for any losses cost or damages of, a third party with respect
to any Intellectual Property or product or service of Company.
(l) Except as set forth on Schedule 2.11(l), all material Company
Intellectual Property, including any item thereof, will be fully, transferable,
alienable or licensable by, Company without restriction and without payment of
any kind to any third party.
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(m) Except as set forth on Schedule 2.11(m), the consummation of
the transactions contemplated by this Agreement will not result in the loss of,
or otherwise adversely affect, any ownership rights of Company in any Company
Intellectual Property or result in the breach or termination of any license,
contract or agreement to which Company is a party respecting any material
Company Intellectual Property.
(n) The operation of the Business, including (i) the making,
using, selling, marketing, or importing of any product or device, (ii) the
practice of any process, (iii) the offering or performance of any service, or
(iv) the copying, distribution, performance, display, creation of derivative
works of, or the exploitation of any device or work, including any of the
foregoing with respect to products, technology or services currently under
development by Company, does not, and will not when conducted in substantially
the same manner following the Closing by Buyer, infringe or misappropriate the
Intellectual Property of any person, violate the rights of any person, or
constitute unfair competition or trade practices under the laws of any
jurisdiction, and the Company has not received written notice from any person
claiming that such operation or any act, product, technology or service of the
Business infringes or misappropriates the Intellectual Property of any person or
constitutes unfair competition or trade practices under the laws of any
jurisdiction (nor is the Company aware of any basis therefor). Without limiting
the foregoing, The Company has not misappropriated the trade secrets of, or
infringed the Copyright or Mask work of any third party.
(o) There are no contracts, licenses or agreements between the
Company and any other person with respect to Company Intellectual Property under
which there is any litigation or other legal proceeding known to the Company
regarding the scope of such agreement, or performance under such contract,
license or agreement including with respect to any payments to be made or
received by the Company thereunder.
(p) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property owned by the Company.
(q) No Company Intellectual Property owned by the Company or
product, technology or service of the Business is subject to any proceeding or
outstanding decree, order, judgment, agreement or stipulation that restricts in
any manner the use, transfer or licensing thereof by the Company or may affect
the validity, use or enforceability of such Company Intellectual Property.
(r) Schedule 2.11(r) lists all action, including the payment of
any fees, that must, or should be performed by, or on behalf of, the Company in
the ninety-day period following the Closing Date, with respect to any
application for, perfection of, preservation of, or continuation of any rights
of Company with respect to any Company Intellectual Property, including the
filing of any patent applications, response to Patent Office actions or payment
of fees, including renewal fees.
(s) The Company has not claimed small business status, or other
particular status in the application for any Registered Company Intellectual
Property which claim of status was not at
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the time made, or which has since become inaccurate or false or that will no
longer be true and accurate as a result of the Closing.
(t) All software products of the Company were written and created
solely by either (i) employees of the Company acting within the scope of their
employment or (ii) by third parties who have validly assigned all of their
rights, including Intellectual Property rights in such products to the Company,
and no third party owns or has any rights to the software products or any
Intellectual Property rights therein.
(u) The Company has no knowledge of any facts or circumstances
that would render any Company Intellectual Property owned by the Company invalid
or unenforceable. Without limiting the foregoing, Company knows of no
information, materials, facts, or circumstances, including any information or
fact that would constitute prior art, that would render any of the Company
Registered Intellectual Property invalid or unenforceable, or would adversely
effect any pending application for any Company Registered Intellectual Property
and the Company has not misrepresented, or failed to disclose, and is not aware
of any misrepresentation or failure to disclose, any fact or circumstances in
any application for any Company Register Intellectual Property that would
constitute fraud or a material misrepresentation with respect to such
application or that would otherwise effect the validity or enforceability of any
Company Registered Intellectual Property.
(v) The Company has taken all steps reasonable and customary
under the circumstances to protect the confidentiality and trade secret status
of any material confidential information of the Company and knows of no basis on
which it could be claimed that the Company has failed to protect the
confidentiality of any material Confidential Information of the Company.
(w) All employees of the Company who have contributed to the
development of the Company Intellectual Property owned by the Company have
entered into valid and binding agreements with the company sufficient to vest
title in the Company of all Intellectual Property created by such employee in
the scope of his or her employment with the Company.
2.12 Agreements, Contracts and Commitments. As of the date of this
Agreement, the Company is not a party to nor is it bound by:
(a) any collective bargaining agreements,
(b) any agreements or arrangements that contain any severance pay
or similar post-employment liabilities or obligations,
(c) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements,
(d) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization, other
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than employment offer letters that provide for employment "at will" and do not
provide for severance benefits upon termination of employment,
(e) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(f) any fidelity or surety bond or completion bond,
(g) any lease of personal property involving annual payments by
the Company in any individual case in excess of $100,000, or in the aggregate in
excess of $250,000,
(h) any agreement of indemnification or guaranty other than
pursuant to the Company's standard end-user license agreement, which is attached
to the disclosure schedule,
(i) any agreement containing any covenant limiting the freedom of
the Company to engage in any line of business or to compete with any person,
(j) any agreement relating to capital expenditures and involving
payments required to be made by the Company after the date of this Agreement in
excess of $250,000,
(k) any agreement relating to the disposition or acquisition by
the Company after the date of this Agreement of assets or any interest in any
business enterprise outside the ordinary course of the Company's business,
(l) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money by or extension of credit by or to the Company, including guaranties
referred to in clause (viii) hereof,
(m) any purchase order or contract for the purchase of raw
materials (not including in-license of technology) involving $5,000 or more,
(n) any construction contracts,
(o) any distribution, joint marketing or development agreement
which cannot be canceled without penalty upon notice of sixty (60) days or less,
(p) any agreement pursuant to which the Company has granted or is
required to grant in the future, to any party a source-code license or option or
other right to use or acquire source-code, or
(q) any other agreement that involves payments by the Company of
$100,000 or more or is not cancelable without penalty within thirty (30) days.
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The Company is not in breach, violation or default under, and the
Company has not between December 31, 1998 and the date of this Agreement
received any written notice that it has breached, violated or defaulted under,
any of the terms or conditions of any agreement, contract or commitment required
to be set forth on Schedule 2.12 or Schedule 2.11 (any such agreement, contract
or commitment, a "Contract") (except for notices relating to breaches,
violations or defaults that have been cured or corrected in all material
respects). Each Contract is in full force and effect and is not subject to any
default thereunder of which the Company has knowledge by any party obligated to
the Company pursuant thereto. Schedule 2.12(c) identifies each Contract that
requires a consent, waiver or approval to preserve all rights of, and benefits
to, the Surviving Corporation under such Contract as a result of entering into
this Agreement or effecting the Merger or the other transactions contemplated by
this Agreement (each a "Required Consent").
2.13 Interested Party Transactions. To the Company's knowledge, no
officer or director of the Company (nor any ancestor, sibling, descendant or
spouse of any of such persons, or any trust, partnership or corporation in which
any of such persons has or has had an economic interest), has or has had,
directly or indirectly, (i) an economic interest in any entity which furnished
or sold, or furnishes or sells, services or products that the Company furnishes
or sells, or proposes to furnish or sell, (ii) an economic interest in any
entity that purchases from, or sells or furnishes to, the Company, any goods or
services or (iii) a beneficial interest in any contract or agreement set forth
in Schedule 2.12(a) or Schedule 2.11; provided, that (x) ownership of no more
than one percent (1%) of the outstanding voting stock of a publicly traded
corporation shall not be deemed an "economic interest in any entity" for
purposes of this Section 2.13.
2.14 Compliance with Laws. The Company has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation.
2.15 Litigation. There is no action, suit or proceeding of any nature
pending or to the Company's knowledge threatened against the Company, its
properties or any of its officers or directors, in their respective capacities
as such. To the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any governmental entity. No governmental entity has at
any time challenged or questioned the legal right of the Company to manufacture,
offer or sell any of its products in the present manner or style thereof.
2.16 Insurance. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no
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<PAGE> 23
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.17 Minute Books. The minute books of the Company provided to counsel
for Parent are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
stockholders or actions by written consent since the time of incorporation of
the Company.
2.18 Environmental Matters.
(a) Hazardous Material. The Company has not: (i) operated any
underground storage tanks, and has no knowledge of the existence, at any time,
of any underground storage tank (or related piping or pumps), at any property
that the Company has at any time owned, operated, occupied or leased; or (ii)
released any amount of any substance that has been designated by any
Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, the Federal Water
Pollution Control Act, as amended, the Clean Air Act, as amended, and the
regulations promulgated pursuant to said laws, (a "Hazardous Material"). No
Hazardous Materials are present, as a result of the deliberate actions or
omissions of the Company, or, to the Company's knowledge, as a result of any
actions of any third party or otherwise, in, on or under any property, including
the land and the improvements, ground water and surface water thereof, that the
Company has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not
transported, stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law in effect on
or before the Closing Date, nor has the Company disposed of, transported, sold,
or manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental
approvals, permits, licenses, clearances and consents (the "Environmental
Permits") necessary for the conduct of the Company's Hazardous Material
Activities and other businesses of the Company as such activities and businesses
are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activities of the Company. The Company is
not aware of any fact or circumstance which would
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<PAGE> 24
reasonably be likely to involve the Company in any environmental litigation or
impose upon the Company any environmental liability.
2.19 Brokers' and Finders' Fees; Third Party Expenses. The Company has
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby. Schedule
2.19 sets forth the principal terms and conditions of any agreement, written or
oral, with respect to such fees. Schedule 2.19 sets forth the Company's
reasonable estimate as of the date of this Agreement of all Third Party Expenses
(as defined in Section 5.4) expected to be incurred by the Company in connection
with the negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby.
2.20 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of
"Affiliate" set forth in Section 2.20(a)(i) below (such definition shall only
apply to this Section 2.20), for purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity
under common control with the Company within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan,
program, policy, practice, contract, agreement or other arrangement providing
for compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded and whether or not
legally binding, including without limitation, each "employee benefit plan",
within the meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any "Employee" (as defined below), and pursuant to
which the Company or any Affiliate has or would reasonably be expected to have
any material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or
retired employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each
management, employment, severance, consulting, relocation, repatriation,
expatriation, visa, work permit or similar agreement or contract between the
Company or any Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
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<PAGE> 25
(vii) "Multiemployer Plan" shall mean any "Pension
Plan" (as defined below) which is a "multiemployer plan", as defined in Section
3(37) of ERISA; and
(viii) "Pension Plan" shall refer to each Company
Employee Plan which is an "employee pension benefit plan", within the meaning of
Section 3(2) of ERISA.
(b) Schedule. Schedule 2.20(b) contains an accurate and complete
list of each Company Employee Plan and each Employee Agreement in existence on
or prior to the date of this Agreement, together with a schedule of all
liabilities, whether or not accrued, under each such Company Employee Plan or
Employee Agreement. The Company does not have any plan or commitment, whether
legally binding or not, to establish any new Company Employee Plan or Employee
Agreement, to modify any Company Employee Plan or Employee Agreement (except to
the extent required by law or to conform any such Company Employee Plan or
Employee Agreement to the requirements of any applicable law, in each case as
previously disclosed to Parent in writing, or as required by this Agreement), or
to enter into any Company Employee Plan or Employee Agreement, nor does it have
any intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent (i) correct and
complete copies of all documents embodying or relating to each Company Employee
Plan and each Employee Agreement including all amendments thereto and written
interpretations thereof; (ii) the most recent annual actuarial valuations, if
any, prepared for each Company Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust; (iv) if
the Company Employee Plan is funded, the most recent annual and periodic
accounting of Company Employee Plan assets; (v) the most recent summary plan
description together with the most recent summary of material modifications, if
any, required under ERISA with respect to each Company Employee Plan; (vi) all
IRS determination letters and rulings relating to Company Employee Plans and
copies of all applications and correspondence to or from the IRS or the
Department of Labor ("DOL") with respect to any Company Employee Plan; (vii) all
communications material to any Employee or Employees relating to any Company
Employee Plan and any proposed Company Employee Plans, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in any material liability to the Company; and (viii) all
registration statements and prospectuses prepared in connection with each
Company Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed in
all material respects all obligations required to be performed by it under each
Company Employee Plan and each Company Employee Plan has been established and
maintained in all material respects in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and regulations,
including but not limited to ERISA or the Code; (ii) no "prohibited
transaction", within the meaning of Section 4975 of the Code or Section 406 of
ERISA, has occurred with respect to any Company Employee Plan; (iii) there are
no actions, suits or claims pending, or, to the knowledge of the Company,
threatened or anticipated (other than routine claims for benefits) against any
Company
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<PAGE> 26
Employee Plan or against the assets of any Company Employee Plan; and (iv) each
Company Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without liability to the
Company, Parent or any of its Affiliates (other than ordinary administration
expenses and other liabilities typically incurred in a termination event); (v)
there are no inquiries or proceedings pending or, to the knowledge of the
Company, threatened by the IRS or DOL with respect to any Company Employee Plan;
and (vi) neither the Company nor any Affiliate is subject to any penalty or tax
with respect to any Company Employee Plan under Section 402(i) of ERISA or
Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed
to or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan
provides, or has any liability to provide, life insurance, medical or other
employee benefits to any Employee upon his or her retirement or termination of
employment for any reason, except as may be required by statute, and the Company
has never represented, promised or contracted (whether in oral or written form)
to any Employee (either individually or to Employees as a group) that such
Employee(s) would be provided with life insurance, medical or other employee
welfare benefits upon their retirement or termination of employment, except to
the extent required by statute.
(h) Effect of Transaction.
(i) The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan as in effect
prior to the Closing that will or could reasonably be expected to result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made
by the Company or Parent or any of their respective affiliates in connection
with the Merger with respect to any Employee will be characterized as an "excess
parachute payment", within the meaning of Section 280G(b)(1) of the Code.
(i) Employment Matters. The Company (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and
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(iv) is not liable for any payment to any trust or other fund or
to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company
is pending or, to the knowledge of the Company, threatened. The Company is not
involved in or, to the knowledge of the Company, threatened with, any labor
dispute, grievance, or litigation relating to labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if adversely determined,
would, individually or in the aggregate, result in liability to the Company. The
Company has not engaged in any unfair labor practices within the meaning of the
National Labor Relations Act which would, individually or in the aggregate,
directly or indirectly result in a liability to the Company. The Company is not
presently, nor has it been in the past, a party to, or bound by, any collective
bargaining agreement or union contract with respect to Employees and no
collective bargaining agreement is being negotiated by the Company.
2.21 Year 2000 Compliance. All of the Company's internal computer
systems and each Constituent Component (as defined below) of those systems and
all computer-related products and services and each Constituent Component of
those products and services of the Company and each of its subsidiaries fully
comply with the Year 2000 Qualification Requirements. "Year 2000 Qualification
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
of each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designed to ensure date and
time entry recognition, calculations that accommodate same century and
multi-century formulas and date values, leap year recognition and calculations,
and date data interface values that reflect the century, (iii) accurately manage
and manipulate data involving dates and times, including single century formulas
and multi-century formulas, and will not cause an abnormal ending scenario
within the application or generate incorrect values or invalid results involving
such dates, (iv) accurately process any date rollover, and (v) accept and
respond to two-digit year date input in a manner that resolves any ambiguities
as to the century. "Constituent Component" means all software (including
operating systems, programs, packages and utilities), firmware, hardware,
networking components, and peripherals provided as part of the configuration.
2.22 Representations Complete. To the Company's knowledge, none of the
representations or warranties made by the Company (as modified by the Company
Schedules), nor any statement made in any Schedule or certificate furnished by
the Company pursuant to this Agreement, or furnished in or in connection with
documents mailed or delivered to the stockholders of the Company in connection
with soliciting their consent to this Agreement and the Merger,
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contains or will contain at the Effective Time, any untrue statement of a
material fact, or omits or will omit at the Effective Time to state any material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Parent and
Merger Sub has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the ability of Parent and Merger Sub to
consummate the transactions contemplated hereby.
3.2 Authority. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms. The execution and delivery of this
Agreement by Parent and Merger Sub does not, and, as of the Effective Time, the
performance by Parent and Merger Sub of their obligations under this Agreement
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the Articles
of Incorporation or Bylaws of Parent or Merger Sub or (ii) any material
mortgage, indenture, lease, contract or other material agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or Merger Sub or their
properties or assets. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any Governmental Entity or any
third party (so as not to trigger any Conflict), is required at or prior to the
Effective Time by or with respect to the Parent and Merger Sub in connection
with the execution and delivery of this Agreement by Parent and Merger Sub or
the consummation of the transactions contemplated hereby, except for (i) the
filing of the Agreement of Merger with the California Secretary of State, (ii)
such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, (iii) expiration or early termination of the applicable waiting
period
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under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and (iv) receipt of the California Permit (as defined in Section 5.1
below).
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 150,000,000 shares
of Common Stock, of which 46,937,236 shares were issued and outstanding as of
December 31, 1999 and 5,000,000 shares of Preferred Stock, none of which is
issued or outstanding as of the date hereof. Please note that the Parent issued
an additional 4,946,351 shares of its Common Stock to shareholders of ISOCOR, a
California corporation, on January 19, 2000. The authorized capital stock of
Merger Sub consists of 1,000 shares of Common Stock, 1,000 shares of which, as
of the date hereof, are issued and outstanding and are held by Parent. All such
shares have been duly authorized, and all such issued and outstanding shares
have been validly issued, are fully paid and nonassessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof.
(b) Parent has reserved 14,368,057 shares of Common Stock for
issuance to employees and consultants pursuant to the 1998 Stock Option Plan
("Parent Option Plan"), of which 13,793,031 shares are subject to outstanding,
unexercised options as of December 31, 1999. Parent has issued warrants that may
be exercised for 3,233,103 shares of Parent Common Stock as of January 31, 2000.
Except for the Parent Options and warrants described in Schedule 3.3(b), as of
January 31, 2000, there were no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which Parent is a party or by
which it is bound obligating the Parent to grant, extend, accelerate the vesting
of, change the price of, otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement.
(c) The shares of Parent Common Stock to be issued pursuant to
the Merger will, when issued in accordance with the terms of this Agreement, be
duly authorized, validly issued, fully paid and nonassessable.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC") for all periods subsequent to March 31, 1999, all in the
form so filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein not misleading, except to the extent corrected by a
subsequently filed document with the SEC. The financial statements of Parent,
including the notes thereto, included in the SEC Documents (the "Parent
Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto) and present fairly the consolidated financial position of
Parent at the dates thereof and of its
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operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal audit adjustments).
3.5 Merger Sub. Merger Sub has been formed solely for the purpose of
executing and delivering this Agreement and consummating the transactions
contemplated hereby. Since the date of its incorporation, Merger Sub has neither
engaged in or transacted any business or activity of any nature whatsoever other
than activities related to its corporate organization and the execution and
delivery of this Agreement. Merger Sub has no assets or properties or debts,
liabilities or obligations of any kind whatsoever, and other than this
Agreement, is not a party to any contract, agreement or undertaking of any
nature. The authorized capital stock of Merger Sub consists of 1,000 shares of
Merger Sub Common Stock, of which 1,000 shares are issued and outstanding. All
of the issued and outstanding shares of Merger Sub Common Stock are owned of
record and beneficially by Parent, free and clear of any encumbrance.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of (i) the termination of
this Agreement and (ii) the Effective Time, the Company agrees (except to the
extent that Parent shall otherwise consent in writing, which consent shall not
be unreasonably withheld or delayed, except as contemplated by this Agreement)
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due, and, to the extent
consistent with such business, to use all reasonable efforts consistent with
past practice and policies to preserve intact its present business organization,
keep available the services of its present officers and key employees and
preserve their relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it, all with the goal of
preserving unimpaired its goodwill and ongoing businesses at the Effective Time.
The Company shall promptly notify Parent of any event or occurrence or emergency
not in the ordinary course of its business, and any material event involving the
Company or its business. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement and the
Effective Time, except as expressly contemplated by this Agreement or disclosed
in Schedule 4.1, the Company shall not, without the prior written consent of
Parent during the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement and the Effective Time (which
consent shall not be unreasonably withheld or delayed):
(a) Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to End-User Licenses in the
ordinary course of business);
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(b) Enter into or amend any agreements pursuant to which any
other party is granted marketing, distribution or similar rights of any type or
scope with respect to any products of the Company;
(c) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Schedules;
(d) Commence any litigation;
(e) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor) other than
repurchases made in accordance with agreements referred to on the Company
Schedules;
(f) Other than (1) repurchases made in accordance with agreements
referred to on the Company Schedules, (2) the granting of stock options in the
ordinary course of business, consistent with past practice not to exceed in the
aggregate 100,000 in any two month period, provided, however, that that Company
shall be entitled to grant such additional options only to non-officer, new
employees and that such optionees are not granted any change of control benefits
or other acceleration provisions in connection with such grants, or (3) the
issuance of shares of Company Capital Stock upon exercise or conversion of
presently outstanding Company Options, Company Options granted in the future in
accordance with this Section 4.1, the Comdisco Rights, or currently outstanding
shares of Company Preferred Stock, issue, grant, deliver or sell or authorize or
propose the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(g) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws;
(h) Acquire or agree to acquire by merging or consolidating with,
or by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof;
(i) Acquire or agree to acquire any assets in an amount in excess
of $100,000 in the case of a single transaction or in excess of $250,000 in the
aggregate in any 60-day period;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
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(k) Incur any indebtedness for borrowed money or guarantee any
such indebtedness outside the ordinary course of business or issue or sell any
debt securities of the Company or guarantee any debt securities of others;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements previously disclosed to Parent on the Company Disclosure
Schedules;
(m) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees or, except in the ordinary course of business consistent with
past practices, extend employment offers;
(n) Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(o) Pay, discharge or satisfy, in an amount in excess of $250,000
(in the aggregate; provided, that in the event that such amount exceeds
$100,000, the Company shall have satisfied its obligations identified in
Schedule 4.1(o)), any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business of liabilities
reflected or reserved against in the Company Financial Statements (or the notes
thereto) or expenses consistent with the provisions of this Agreement incurred
in connection with any transaction contemplated and permitted hereby;
(p) Make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes, enter into any
closing agreement, settle any claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes;
(q) Enter into any strategic alliance, development or joint
marketing agreement; provided, that the foregoing is not intended to prevent the
Company from entering into transactions that are in the ordinary course of
business and consistent with its past practices; or
(r) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (q) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of (i) the Effective Time and
(ii) the date of termination of this Agreement pursuant to the provisions of
Section 8.1 hereof, the Company will not (nor will the Company permit any of the
Company's officers, directors, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than Parent and its designees: (a) solicit, conduct discussions with or engage
in negotiations with any person, relating to the possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its capital stock or assets,
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(b) provide information with respect to it to any person, other than Parent,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its capital stock or assets, (c) enter into an agreement with any
person, other than Parent, providing for the acquisition of the Company (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise) or
any material portion of its capital stock or assets or (d) make or authorize any
statement, recommendation or solicitation in support of any possible acquisition
of the Company (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
receives prior to the Effective Time or the termination of this Agreement any
offer or proposal relating to any of the above, the Company shall immediately
notify Parent thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 California Permit; Stockholder Meeting.
(a) As promptly as practicable (and in any event within ten
business days) after the execution of this Agreement, Parent shall prepare the
necessary documents and Parent shall apply to obtain a permit (a "California
Permit") from the California Commissioner of Corporations (after a hearing
before such Department) pursuant to Section 25121 of the California Corporate
Securities Law of 1968, so that the issuance of the Parent Common Stock in the
Merger shall be exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), by virtue of the exemption from registration
contained in Section 3(a)(10) thereof. The Company shall cooperate with, and
provide information to, Parent in connection with Parent's application for the
California Permit and shall prepare an information statement to be mailed to the
Company's stockholders concurrently with the notice of any hearing. The Company
and Parent will respond to any comments from the California Commissioner of
Corporations and use their reasonable best efforts to have the California Permit
granted as soon as practicable after such filing. As promptly as practicable
after the date of this Agreement, Parent shall prepare and make such filings as
are required under applicable Blue Sky laws relating to the transactions
contemplated by this Agreement.
(b) As promptly as practicable after the receipt of a California
Permit, the Company shall submit this Agreement and the transactions
contemplated hereby, including without limitation the Merger, to the Company
stockholders for approval and adoption as provided by the DGCL and the Company's
Certificate of Incorporation and Bylaws. The information submitted to the
Company's stockholders shall be subject to review and approval by Parent and
shall include
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information regarding the Company, the terms of the Merger and this Agreement
and, subject to Section 5.2 (c) hereof, the unanimous recommendation of the
Board of Directors of the Company in favor of the Merger, this Agreement and the
transactions contemplated hereby.
(c) Nothing in this Agreement shall prevent the Board of
Directors of the Company from withholding, withdrawing, amending or modifying
its recommendation in favor of the Merger if (i) a Superior Offer (as defined
below) is made to the Company and is not withdrawn, (ii) neither the Company nor
any of its representatives shall have violated any of the restrictions set forth
in Section 4.2, and (iii) the Board of Directors of the Company concludes in
good faith, after consultation with its outside counsel, that, in light of such
Superior Offer, the withholding, withdrawal, amendment or modification of such
recommendation is required in order for the Board of Directors of the Company to
comply with its fiduciary obligations to the Company and the Company's
shareholders under applicable law. Nothing contained in this Section 5.1 shall
limit the Company's obligation to hold and convene the Company Stockholders'
Meeting (regardless of whether the recommendation of the Board of Directors of
the Company shall have been withdrawn, amended or modified). For purposes of
this Agreement, "Superior Offer" shall mean an unsolicited, bona fide written
offer made by a third party to consummate any of the following transactions: (i)
a merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company pursuant to which the
shareholders of the Company immediately preceding such transaction hold less
than 51% of the equity interest in the surviving or resulting entity of such
transaction; (ii) a sale or other disposition by the Company of assets
(excluding inventory and used equipment sold in the ordinary course of business)
representing in excess of 50% of the fair market value of the Company's business
immediately prior to such sale, or (iii) the acquisition by any person or group
(including by way of a tender offer or an exchange offer or issuance by the
Company), directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of shares representing in excess of 50% of the voting power
of the then outstanding shares of capital stock of the Company, in each case on
terms that the Board of Directors of the Company determines, in its reasonable
judgment (based on a written opinion of an investment bank of nationally
recognized reputation) to be more favorable to the Company shareholders from a
financial point of view than the terms of the Merger and the consideration of
which reasonably likely exceeds the value of the consideration in the Merger
(after taking into account all relevant factors, including any conditions to the
Superior Offer, the timing of the consummation of the transaction pursuant to
the Superior Offer, the risk of nonconsummation thereof and the need for any
required governmental or other consents, filings and approvals); provided,
however, that any such offer shall not be deemed to be a "Superior Offer" if any
financing required to consummate the transaction contemplated by such offer is
not committed.
(d) If for any reason the California Permit is not issued or if
the exemption provided by Section 3(a)(10) of the Securities Act is not
available with respect to the issuance of the Parent Common Stock in connection
with the Merger, then Parent shall as soon as practicable (and in any event
within five (5) business days of receiving all necessary financial statements
and accountant consents), prepare and file with the SEC a Form S-4 Registration
Statement (the "Form S-4 Registration Statement") with respect to the issuance
of the Parent Common Stock in connection
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with the Merger. Each of the Company and Parent shall use all reasonable efforts
to have the Form S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The Company will
use its reasonable efforts to cause the proxy statement included in the Form S-4
Registration Statement to be mailed to the Company's stockholders as promptly as
practicable after the Form S-4 Registration Statement is declared effective
under the Securities Act, and to call and hold a meeting of the Company's
stockholders to vote on a proposal to adopt and approve this Agreement and the
transactions contemplated hereby, including without limitation the Merger.
(e) If for any reason the California Permit is issued, but is not
available for a limited number of stockholders of the Company, the Parent shall
grant registration rights to such effected stockholders on a pari passu basis
(as to rights and timely filing) with the shareholders of the Parent's Common
Stock who were issued such shares in a transaction contemplated under Rule 145
promulgated under the Securities Act of 1933, as amended.
5.2 Access to Information. Subject to any applicable contractual
confidentiality obligations (which the Company shall use its reasonable efforts
to cause to be waived) each party shall afford the others and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, agreements and records, and (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of it as the others may reasonably
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.3 Confidentiality. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of the Mutual Nondisclosure Agreement between
Parent and the Company dated as of December 9, 2000.
5.4 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses (it being understood
that (a) Third Party Expenses of the Company will include, without limitation,
all fees and expenses payable to Pillsbury Madison & Sutro LLP in connection
with their representation of the Company with respect to the Merger, and (b) if
the Closing occurs, the reasonable Third Party Expenses referred to in paragraph
(a) of this sentence will be paid by Parent or the Surviving Corporation, and
not by the Stockholders).
5.5 Public Disclosure. Upon execution and delivery of this Agreement by
the parties hereto, Parent and the Company shall release a jointly prepared
announcement describing the Merger. Except as aforesaid, unless otherwise
required by law (including, without limitation, securities laws) or, as to
Parent, by the rules and regulations of the National Association of Securities
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Dealers, Inc., prior to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party hereto unless approved by Parent and the Company prior to release,
provided that such approval shall not be unreasonably withheld.
5.6 Consents. The Company shall use its reasonable efforts to obtain the
consents, waivers and approvals under any of the Contracts identified on
Schedule 2.12(c) as may be required in connection with the Merger.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates material to Parent,
in Parent's reasonable judgement, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and capital stock.
5.9 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate at or prior to the Effective Time except as contemplated by this
Agreement (including the Company Schedules) and (ii) any failure of the Company
or Parent, as the case may be, to comply with or satisfy in any material respect
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.10 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
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5.11 Form S-8. Parent shall file within 30 days after the Closing a
registration statement on Form S-8 for the shares of Parent Common Stock
issuable with respect to assumed Company Options promptly after the Closing
Date, provided that the Company provides all necessary information for the
preparation of such registration statement.
5.12 NMS Listing. Parent shall cause to be listed on the Nasdaq National
Market the shares of Parent Common Stock issuable, and those required to be
reserved for issuance, in connection with the Merger, upon official notice of
issuance.
5.13 Cooperation With Financial Statements. The Company will use its
best efforts to cause the Company's management and its independent auditors to
facilitate on a timely basis (i) the preparation of historical and pro forma
financial statements as required by Parent to comply with applicable SEC
regulations, and (ii) the review of the Company's audit work papers, including
the examination of selected interim financial statements and data.
5.14 Employee Benefits.
(a) Parent shall take such reasonable actions as are necessary to
allow eligible employees of the Company to participate in the benefit programs
of Parent, or alternative benefits programs substantially comparable to those
applicable to employees of Parent on similar terms, as soon as practicable after
the Effective Time. Without limiting the generality of the foregoing, (i) to the
extent that any employee of the Company becomes eligible to participate in any
employee benefit plan of Parent after the Effective Time, Parent, the Surviving
Corporation and their subsidiaries shall credit such employee's service with the
Company, to the same extent as such service was credited under the similar
employee benefit plans of the Company immediately prior to the Effective Time,
for purposes of determining eligibility to participate in and vesting under, and
for purposes of calculating benefits under, such employee benefit plan of
Parent, and (ii) to the extent permitted by such employee benefit plan of Parent
and applicable law, Parent, the Surviving Corporation and its subsidiaries shall
waive any pre-existing condition limitations, waiting periods or similar
limitations under such employee benefit plan of Parent and shall provide each
such employee with credit for any co-payments previously made and any
deductibles previously satisfied.
(b) Parent shall reserve the sum set forth on Schedule 5.14 in
cash, which sum shall be (i) allocated among those employees of the Company as
determined by the Company (and agreed to by Parent) prior to the Closing (the
"Participating Employees"), and (ii) paid to each such Participating Employee in
accordance with the terms set forth in Schedule 5.14.
5.15 Parent shall cause the Surviving Corporation to pay severance costs
in accordance with its standard policies for employees of Parent to those
employees of the Company whose employment with the Surviving Corporation is
terminated.
5.16 From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification agreements between the Company and its directors
and officers in effect immediately prior to the
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Effective Time (the "INDEMNIFIED PARTIES") and any indemnification provisions
under the Company Certificate of Incorporation and Bylaws as in effect on the
date hereof. The Certificate of Incorporation and Bylaws of the Surviving
Corporation will contain provisions with respect to exculpation and
indemnification that are at least as favorable to the Indemnified Parties as
those contained in the Company Certificate of Incorporation and Bylaws as in
effect on the date hereof, which provisions will not be amended, repealed or
otherwise modified for a period of three (3) years from the Effective Time in
any manner that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers, employees or
agents of the Company, unless such modification is required by law. Parent will
cause the Surviving Corporation to maintain Director and Officer insurance on
the same terms as the current policies with respect to the Indemnified Parties
for the three (3) years following the Effective Time.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the stockholders of the Company by the
requisite vote under applicable law and the Company's Articles of Incorporation.
(b) No Injunctions or Restraints; Illegality; HSR Act. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger shall be in
effect. All waiting periods under the HSR Act shall have expired or been
terminated early.
(c) Tax Opinions. Parent and the Company shall each have received
written opinions from their respective tax counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code; provided, however, that if the counsel to either Parent or the Company
does not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders such
opinion to such party. The parties to this Agreement agree to make reasonable
Tax representations as requested by such counsel for the purpose of rendering
such opinions.
(d) Nasdaq Listing. The shares of Parent Common Stock issuable to
stockholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the Nasdaq Stock Market upon official notice of
issuance.
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(e) California Permit. The California Commissioner of
Corporations shall have issued the California Permit and the exemption provided
by Section 3(a)(10) of the Securities Act shall be available with respect to the
issuance of the Parent Common Stock in the Merger, or the Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement (i) shall have
been true and correct as of the date of this Agreement and (ii) shall have been
true and correct in all material respects as of the Closing, except for (A)
changes contemplated or permitted by this agreement and (B) except for those
representations and warranties that address matters only as of a particular date
(which shall have been true and correct as of such date). The Company shall have
received a certificate with respect to the foregoing signed on behalf of Parent
by a duly authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied (which performance or compliance shall be subject to
Parent's or Merger Sub's ability to cure as provided in Section 8.1(e) below) in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such effect signed on
behalf of the Parent by a duly authorized officer of Parent.
(c) Legal Opinion. The Company shall have received a legal
opinion from Wilson Sonsini Goodrich & Rosati, P.C., legal counsel to the
Company, in form and substance reasonably acceptable to the Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement (i) shall have been true
and correct as of the date of this Agreement and (ii) shall have been true and
correct in all material respects as of the Closing, except for (A) changes
contemplated or permitted by this agreement and (B) except for those
representations and warranties that address matters only as of a particular date
(which shall have been true and correct as of such date). Parent shall have
received a certificate with respect to the foregoing signed on behalf of the
Company by a duly authorized officer of the Company.
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(b) Agreements and Covenants. The Company shall have performed or
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 8.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and Parent and Merger Sub
shall have received a certificate to such effect signed on behalf of the Company
by a duly authorized officer of the Company.
(c) Third Party Consents. Parent shall have been furnished with
evidence satisfactory to it that the Company has obtained the consents,
approvals and waivers set forth in Schedule 2.12(c).
(d) Legal Opinion. Parent shall have received a legal opinion
from Pillsbury Madison & Sutro LLP, legal counsel to the Company, in form and
substance reasonably acceptable to Parent.
(e) Material Adverse Effect. There shall not have occurred any
Material Adverse Effect with respect to the Company since December 31, 1999.
(f) Escrow Agreement. The Stockholders' Representatives (as
defined in the Escrow Agreement) shall have entered into an Escrow Agreement
substantially in the form attached hereto as Exhibit F (the "Escrow Agreement").
(g) Dissenters' Rights. Holders of more than 10% of the
outstanding shares of Company Capital Stock shall not have exercised, nor shall
they have any continued right to exercise, appraisal, dissenters' or similar
rights under applicable law with respect to their shares by virtue of the
Merger.
(h) Resignation of Directors and Officers. All directors and
officers of the Company shall have resigned their respective offices as
directors and officers of the Company effective as of the Effective Time.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement (each as modified by the Company Schedules), and all
of Parent's and Merger Sub's representations and warranties in this Agreement
and in any instrument delivered pursuant to this Agreement, shall survive the
Merger and continue until 5:00 p.m., California time, on the first anniversary
of the Closing Date.
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7.2 Obligation of the Company to Indemnify, Reimburse, etc. Subject to
the provisions of Section 7.4 hereof, the Company, its successors and assigns,
jointly and severally, shall indemnify, reimburse, defend, protect and hold
harmless Parent and Merger Sub and each of their successors and assigns and each
of their respective directors, officers, employees, affiliates, agents, and
their respective successors and assigns (each a "Parent Indemnitee") from and
against any claims, losses, liabilities, damages, causes of action, costs and
expenses (including reasonable attorney's, accountant's, consultant's and
expert's fees and expenses) (collectively "Losses") resulting from, imposed
upon, incurred or suffered by any of them, directly or indirectly, based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty (as modified by the Company Schedules), covenant or
agreement of the Company, contained in this Agreement.
7.3 Obligation of Parent to Indemnify, Reimburse, etc. Subject to the
provisions of Section 7.4 hereof, Parent and Merger Sub and their respective
successors and assigns, jointly and severally, shall indemnify, reimburse,
defend, protect and hold harmless the Stockholders and their successors and
assigns and each of their directors, officers, employees, affiliates, agents,
and their respective successors and assigns (each a "Stockholder Indemnitee")
from and against any Losses resulting from, imposed upon, incurred or suffered
by any of them, directly or indirectly, based upon, arising out of or otherwise
in respect of any inaccuracy in or any breach of any representation or warranty,
but not any covenant or agreement of Parent, contained in this Agreement.
7.4 Limits on Indemnification, Reimbursement, etc..
(a) Absent fraud or willful misconduct of any party (for which
there shall be no limitation of liability of any party), no Parent Indemnitee
and no Stockholder Indemnittee shall have any right to seek or obtain
indemnification, reimbursement or defense under this Agreement or the Escrow
Agreement until Losses which would otherwise be indemnifiable hereunder, and
have been incurred by such party and other indemnitees associated with or
related to such party, exceed $1,000,000, after which such party or parties to
be indemnified hereunder shall be entitled to receive indemnification for all
Losses in excess of $1,000,000. In addition (absent fraud or willful
misconduct), neither Parent nor any Stockholder shall have any liability under
Article VII unless the Losses incurred by a Parent Indemnitee or a Stockholder
Indemnitee, as the case may be, in connection with a claim for indemnification
or reimbursement exceed $25,000, and the Losses related thereto shall be
disregarded for purposes of determining whether the $1,000,000 deductible set
forth in this Section 7.4(a) has been met.
(b) Absent fraud or willful misconduct of the Company, from and
after the Closing, recourse of the Parent Indemnitees to the Loss Escrow Account
(as defined below) in the Escrow Fund shall be the sole and exclusive remedy of
the Parent Indemnitees for Losses relating directly or indirectly, based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty (as modified by the Company Schedules), covenant or
agreement of the Company, contained in this Agreement.
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(c) Absent fraud or willful misconduct, no party hereto shall be
entitled to recover punitive damages with respect to any breach of any
representation or warranty or non-performance of any obligation under this
Agreement (or otherwise relating to the transactions contemplated hereby), and
under no circumstances shall such damages be considered Losses under this
Article VII.
(d) To the extent that any indemnifying party makes or is
required to make any indemnification or reimbursement payment to any indemnified
party, the indemnifying party shall be entitled to exercise, and shall be
subrogated to, any rights and remedies (including rights of indemnity, rights of
contribution and other rights of recovery) that the indemnified party may have
against any other person with respect to any Losses, circumstances or matters to
which such indemnification or reimbursement payment is directly or indirectly
related. Each indemnified party shall permit the indemnifying party to use the
name of the indemnified party in any transaction or in any proceeding or other
matter involving any of such rights or remedies; and the indemnified party shall
take such actions as the indemnifying party may reasonably request for the
purpose of enabling the indemnifying party to perfect or exercise the
indemnifying party's right of subrogation hereunder.
7.5 Escrow Arrangements. Concurrent with the Effective Time, the Escrow
Amount shall be placed in an escrow fund (the "Escrow Fund"), to be governed by
the terms of the Escrow Agreement. Fifty percent (50%) of the Escrow Fund (the
"Loss Escrow Fund") shall be available to compensate Parent and its affiliates
for losses for which Parent or its affiliates are entitled to indemnification
under Article VII; the remainder of the Escrow Fund shall be released, if at
all, upon the happening of the events identified in Section 3 or Section 6(c) of
the Escrow Agreement. The terms and conditions of the Escrow Fund shall be set
forth more fully in the Escrow Agreement. Subject to the terms and conditions of
the Escrow Agreement, fifty percent (50%) of the Loss Escrow Fund shall be
distributed to the Stockholders in accordance with their pro rata interest in
the Escrow Fund on the sixth month anniversary of the Effective Time and the
balance of the Loss Escrow Fund, if any, shall be distributed to the
Stockholders on the one (1) year anniversary of the Effective Time.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by March 31, 2000 (provided that the right to terminate this Agreement
under this clause 8.1(b)(i) shall not be available to any party whose willful
failure to fulfill any obligation hereunder has been the
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<PAGE> 43
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date); provided, however, that if Parent shall file the Form S-4
Registration Statement in accordance with Section 5.1(iii), then the reference
to March 31, 2000 in this sentence shall be replaced with May 31, 2000; (ii)
there shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Merger; or (iii) there shall be any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental entity that would make consummation of the Merger
illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate, as
a result of the Merger, any portion of the business or assets of the Company or
Parent.
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
6.3(a) or 6.3(b), as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 8.1(d) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and as a result of such breach the conditions
set forth in Section 6.2(a) or 6.2(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or Merger
Sub within thirty (30) days through the exercise of its reasonable best efforts,
then for so long as Parent or Merger Sub continues to exercise such reasonable
best efforts the Company may not terminate this Agreement under this Section
8.1(e) unless such breach is not cured within thirty (30) days (but no cure
period shall be required for a breach which by its nature cannot be cured).
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and,
except as set forth in this Section 8.2, there shall be no liability or
obligation on the part of Parent, Merger Sub or the Company, or their respective
officers, directors or stockholders, provided that each party shall remain
liable for any willful breaches of this Agreement prior to its termination; and
provided further that, the provisions
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<PAGE> 44
of Sections 5.3 and 5.4 and Article IX of this Agreement shall remain in full
force and effect and survive any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
the stockholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
and Merger Sub, on the one hand, and the Company, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given (a) on the date of delivery, if delivered
personally or (b) two business days after sent, if sent by commercial delivery
service, or mailed by registered or certified mail (return receipt requested)
or, (c) on the date of delivery, if sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
320 First Street
San Francisco, CA 94105
Attention: Brett Robertson
Telephone No.: (415) 808-8800
Facsimile No.: (415) 808-8883
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Alan K. Austin
Mark L. Reinstra
Telephone No.: (650) 493-9300
Facsimile No.: (650) 461-5375
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<PAGE> 45
(b) if to the Company, to:
55 South Market Street, Suite 1080
San Jose, CA 95113
Attn: Bill Lee
Carlton H. Baab
Telephone No.: (408) 817-1950
Facsimile No.: (408) 287-5256
with a copy to:
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, California 94304
Attn: Jorge del Calvo
Stanley F. Pierson
Telephone No.: (650) 233-4500
Facsimile No.: (650) 233-4545
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. As used in this Agreement, the phrase "to the best of
[a party's] knowledge," "to [a party's] knowledge," "[a party] is not aware,"
and similar phrases shall mean the actual knowledge of the officers and
directors of such party, after careful consideration of the matters set forth in
the representation that is so qualified and a reasonably diligent review of all
files, documents, agreements and other materials in such person's possession or
subject to his or her control. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the schedules and
Exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person (other than the Stockholder Indemnittees and those persons referred
to in Sections 5.14 and 5.15) any rights or remedies hereunder; and (c) shall
not be assigned by operation of law or otherwise except as otherwise
specifically provided, except that Parent and Merger Sub may assign their
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<PAGE> 46
respective rights and delegate their respective obligations hereunder to their
respective affiliates as long as such assignment or delegation does not
adversely affect the rights of the Company stockholders.
9.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 No Implied Representations. Parent and the Company acknowledge that,
except as expressly provided in Articles II and II, and except as expressly
provided in any document delivered by a party hereto to any other party hereto
in connection with the transactions contemplated hereby, none of the parties
(and no other person) has made or is making any representations or warranties
whatsoever, implied or otherwise.
9.7 Other Remedies. Except as otherwise provided herein (including in
Section 7.4), any and all remedies herein expressly conferred upon a party will
be deemed cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by a party of any
one remedy will not preclude the exercise of any other remedy.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.10 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
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<PAGE> 47
9.11 Share Legends. All certificates representing any of the shares of
Parent Common Stock to be issued pursuant to this Agreement shall have endorsed
thereon any legend required by Federal or state securities laws.
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<PAGE> 48
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
REMARQ COMMUNITIES, INC. CRITICAL PATH, INC.
By: /s/ Joseph William Lee By: /s/ David Thatcher
-------------------------------- --------------------------------
Chief Executive Officer Executive Vice President and
Chief Financial Officer
D.V. ACQUISITION CORP.
By: /s/ David Thatcher
--------------------------------
Executive Vice President and
Chief Financial Officer
***REORGANIZATION AGREEMENT***
<PAGE> 1
EXHIBIT 2.6
MERGER AGREEMENT
AND PLAN OF REORGANIZATION
BY AND AMONG
CRITICAL PATH, INC.,
COMPASS HOLDING CORP.,
COMPASS ACQUISITION CORP.,
3034996 NOVA SCOTIA COMPANY,
3034997 NOVA SCOTIA COMPANY,
AND
THE DOCSPACE COMPANY INC.
DATED AS OF NOVEMBER 3, 1999
<PAGE> 2
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 1 Form of Shareholder Implementation Agreement
Exhibit 2 Form of Shareholder Reimbursement Agreement
Exhibit 3 Form of Amalgamation Agreement - First Amalgamation
Exhibit 4 Form of Amalgamation Agreement - Second Amalgamation
Exhibit 5 Exchangeable Share Provisions and Class B Preference Share Provisions
Exhibit 6 Form of Voting and Exchange Trust Agreement
Exhibit 7 Form of Exchangeable Share Support Agreement
Exhibit 8 Form of Escrow Agreement
Exhibit 9 Form of Legal Opinion of Counsel to the Company
Exhibit 10 Form of Noncompetition Agreement
Exhibit 11 Form of Release by Toucan Capital Corp.
</TABLE>
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<PAGE> 3
INDEX OF SCHEDULES
SCHEDULE DESCRIPTION
- -------- -----------
2.2(a)(i) Company Capital Structure
2.2(a)(ii) Company Capital Structure at Initial Closing
2.2(b) Option List
2.4 Governmental and Third Party Consents
2.5 Company Financials
2.8 Tax Returns and Audits
2.10(a) Leased Real Property
2.10(b) Liens on Property
2.11(b) Company Registered Intellectual Property
2.11(g) Licenses of Others Intellectual Property by the Company
2.11(h) Developer of Company Intellectual Property
2.11(i) Contracts, Licenses and Agreements
2.11(k) Indemnification Agreements
2.11(r) Maintenance of Company Intellectual Property
2.12(a) Agreements, Contracts and Commitments
2.12(c) Required Consents
2.15 Litigation
2.19 Brokers/Finders Fees; Third-Party Expenses
2.20 Employee Benefit Plans and Employees
2.21 Change of Control and Non-Compete Payments
3.2 Authority
4.1 Conduct of the Business
6.3(h) Persons who have entered into Noncompetition Agreements
6.3(i) Key Employees
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<PAGE> 4
MERGER AGREEMENT AND PLAN OF REORGANIZATION
This MERGER AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
made and entered into as of November 3, 1999, among Critical Path, Inc., a
California corporation ("Parent"), Compass Holding Corp., a Delaware corporation
and a wholly owned subsidiary of Parent ("Parent Sub"), Compass Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent Sub
("Holding"), 3034996 Nova Scotia Company, a Nova Scotia unlimited liability
company and a wholly owned subsidiary of Holding ("Holding ULC") and 3034997
Nova Scotia Company, a Nova Scotia unlimited liability company and a wholly
owned subsidiary of Holding ULC ("Amalgamation Sub") (collectively Parent,
Parent Sub, Holding, Holding ULC and Amalgamation Sub are referred to as the
"Parent Companies"), and The docSpace Company Inc., an Ontario corporation (the
"Company").
RECITALS
A. The Boards of Directors of each of the Company and the Parent
Companies believe it is in the best interests of each company and their
respective stockholders that the Parent acquire the Company (the "Acquisition"),
subject to the terms and conditions of this Agreement, and in furtherance
thereof, have approved the Acquisition.
B. Pursuant to the Acquisition, among other things, and subject to the
terms and conditions of this Agreement, the following will occur:
(i) the Company will be continued from the corporate laws of the
Province of Ontario to the corporate laws of the Province of Nova Scotia (the
"Continuance");
(ii) Holding ULC will acquire all of the issued and outstanding
common shares of the Company (the "Company Capital Stock") held by the Company's
shareholders who are resident in the United States and shareholders who are
United States persons, identified as such on Schedule 2.2(a)(ii) (the "US
Sellers"), in exchange for cash and shares of Parent common stock ("Parent
Common Stock");
(iii) each of the Company's shareholders who are not United States
residents or persons may elect to contribute all of that shareholder's Company
Capital Stock to a holding company (each, a "Holding Company") to be newly
established to hold those shares (and the securities into which they are
subsequently exchanged as contemplated herein);
(iv) the Company will form a wholly-owned Nova Scotia unlimited
liability company and amalgamate (the "First Amalgamation") with that company to
form an unlimited liability company ("East ULC");
(v) the Company (or its successor East ULC) will amalgamate with
Amalgamation Sub (the "Second Amalgamation") and all of the issued and
outstanding Company
<PAGE> 5
Capital Stock will be converted into Class B non-voting preference shares
("Class B Shares") of the company that formed as a result of the Second
Amalgamation ("Exchangeco"); and
(vi) a reorganization will be effected (the "Reorganization")
pursuant to which (i) the memorandum and articles of association of Exchangeco
will be amended to provide that Class B Shares held by Holding ULC will be
exchanged for common shares of Exchangeco and all Class B Shares held by other
Shareholders will be exchanged for Class A non-voting preference shares of
Exchangeco ("Exchangeable Shares") and cash; (ii) a voting and exchange trust
agreement will be entered into among Parent, Exchangeco and a Canadian trust
company (the "Voting and Exchange Trust Agreement") in substantially the form
attached as Exhibit 6 and (iii) an exchangeable share support agreement will be
entered into between Parent and Exchangeco (the "Support Agreement") in
substantially the form attached as Exhibit 7.
C. The Exchangeable Shares will be exchangeable into Parent Common
Stock, subject to the terms and conditions of the share provisions attaching to
the Exchangeable Shares and the Voting and Exchange Trust Agreement. Pursuant to
the Voting and Exchange Trust Agreement, a holder of Exchangeable Shares will be
entitled to vote as though the holder held the Parent Common Stock issuable upon
exchange of that holder's Exchangeable Shares.
D. Concurrently with the execution of this Agreement, and as a condition
and inducement to the Parent Companies' willingness to enter into this
Agreement, certain affiliates of the Company will enter into a shareholder
implementation agreement in the form attached hereto as Exhibit 1 (the
"Shareholder Implementation Agreement").
E. A portion of the Parent Common Stock and Exchangeable Shares
otherwise receivable by the Company's shareholders in connection with the
Acquisition will be placed in escrow pursuant to an escrow agreement (the
"Escrow Agreement"), in substantially the form attached as Exhibit 8, the
release of which will be contingent upon certain events and conditions.
F. Concurrently with the execution of this Agreement, Parent will enter
into a shareholder reimbursement agreement in the form attached as Exhibit 2
(the "Shareholder Reimbursement Agreement") establishing a fund of $5 million
cash to be used to pay for expenses and tax consequences, if any, of
shareholders of the Company in connection with the establishment of the Holding
Companies.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
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<PAGE> 6
ARTICLE I
THE ACQUISITION
1.1 Implementation Steps by the Company. The Company covenants in favor
of the Parent Companies that:
(a) the Company will adopt or cause to be adopted all directors'
resolutions to be adopted by them which are necessary to approve the
Continuance, the First Amalgamation, the Second Amalgamation (collectively, the
"Amalgamations"), the Amalgamation Agreements in the forms attached hereto as
Exhibit 3 and Exhibit 4 (the "Amalgamation Agreements") and all other
transactions contemplated by this Agreement, the Shareholder Implementation
Agreement and the Amalgamation Agreements;
(b) as soon as reasonably practicable after the execution and
delivery of this Agreement, and in any event within 14 days thereafter, the
Company will obtain the unanimous consent of the shareholders of the Company
(including option holders, warrant holders and others with interests in Company
Capital Stock), to the transactions contemplated by this Agreement and the
Amalgamation Agreements through the execution by each shareholder of the
Shareholder Implementation Agreement, and upon due execution of the Shareholder
Implementation Agreement by all such shareholders of the Company, so notify the
Parent;
(c) in connection with the execution of the Shareholder
Implementation Agreement, and in accordance with applicable law and paragraph
1.1(d), the Company will cause any information required to complete the
transactions contemplated hereby to be sent to each of the Company's
shareholders;
(d) the information submitted to the Company's shareholders in
connection with the execution of the Shareholder Implementation Agreement will
be delivered for review and approval by Parent and will include information
regarding Parent, the terms of the Amalgamations, the Amalgamation Agreements,
the Reorganization and this Agreement and the unanimous recommendation of the
Board of Directors of the Company to execute the Shareholder Implementation
Agreement thereby approving the Continuance, the Amalgamations, the Amalgamation
Agreements, the Reorganization and all other transactions contemplated by this
Agreement and the Amalgamation Agreements;
(e) subject to obtaining the unanimous execution by the shareholders
of the Shareholder Implementation Agreement, the Company will deliver
resolutions of the shareholders of the Company approving this Agreement, the
Related Agreements and the transactions contemplated hereby and thereby
including the Continuance, the Amalgamations and the Reorganization;
(f) the Company and the US Sellers will apply for Section 116
clearance certificates from Revenue Canada;
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<PAGE> 7
(g) subject to obtaining the unanimous execution by the shareholders
of the Shareholder Implementation Agreement and shareholder approval of the
Continuance, and a determination by Revenue Canada as to each of the Section 116
clearance certificates referred to in subsection 1.1(f) above and satisfaction
or waiver (to the extent permitted) of each of the conditions to the Initial
Closing contemplated by Section 6.1, the Company will apply immediately for a
certificate of continuance (the "Certificate of Continuance") continuing the
Company under the Nova Scotia Companies Act (the "Companies Act") and obtain
such Certificate of Continuance from the Registrar of Joint Stock Companies
under the Companies Act (the "Registrar");
(h) in the event that Toucan Capital Corp. ("Toucan") does not
receive a Section 116 clearance certificate from Revenue Canada reasonably
satisfactory to Toucan that provides relief from Canadian withholding taxes and
any applicable bonding, payment or other security obligations on Toucan or its
members, each of the other shareholders of the Company (other than Parent
Companies if any of them is a shareholder) shall execute and deliver to Toucan
an escrow and stockholders indemnity agreement in form and substance
satisfactory to Toucan (the "Double Tax Indemnity Agreement").
(i) subject to the satisfaction and waiver of the conditions to the
Initial Closing contemplated by Section 6.1, and subject to obtaining the
Certificate of Continuance, and, if obtained, immediately thereafter, the
Company will do all such things, provide all such documents and pay all such
fees necessary to approve the Amalgamations, the Amalgamation Agreements and the
transactions contemplated by this Agreement and the Amalgamation Agreements;
(j) subject to obtaining the unanimous execution by the shareholders
of the Shareholder Implementation Agreement, the Company will apply to the
appropriate Nova Scotia court under the Companies Act (the "Court") for an order
approving the First Amalgamation ("First Approval Order");
(k) subject to obtaining the First Approval Order, the Company (or
its successor East ULC) will file with the Registrar the First Amalgamation
Agreement and the First Approval Order, together with proof of compliance with
any terms and conditions that may have been imposed by the Court in the First
Approval Order; and
(l) subject to the completion of the First Amalgamation, the Company
(or its successor East ULC) will jointly apply with Holding ULC and Amalgamation
Sub to the Court for an order approving the Second Amalgamation (the "Second
Approval Order").
1.2 Implementation Steps by the Parent Companies. The Parent Companies
covenant in favor of the Company that:
(a) they will adopt or cause to be adopted all directors'
resolutions to be adopted by them which are necessary to approve this Agreement,
the Related Agreements, the Amalgamations, the Amalgamation Agreements and the
transactions contemplated by this Agreement and the Amalgamation Agreements;
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<PAGE> 8
(b) Amalgamation Sub will cause to be adopted a shareholder
resolution sufficient to approve the Second Amalgamation, the Second
Amalgamation Agreement and the transactions contemplated by this Agreement and
the Second Amalgamation Agreement, including the adoption of the Exchangeable
Share Provisions;
(c) subject to the approval by the shareholders of the Company of
the Second Amalgamation and the Second Amalgamation Agreement by the execution
of the Shareholder Implementation Agreement, Amalgamation Sub will jointly apply
with the Company (or its successor East ULC) to the Court for the Second
Approval Order;
(d) subject to obtaining the Second Approval Order, the Parent
Companies will file with the Registrar the Second Amalgamation Agreement and the
Second Approval Order, together with proof of compliance with any terms and
conditions that may have been imposed by the Court in the Second Approval Order.
1.3 First Amalgamation Agreement. The First Amalgamation Agreement will,
with such other matters as are necessary to effect the First Amalgamation, and
subject to the terms and conditions of this Agreement and exhibits hereto,
provide that on the First Amalgamation each common share of the issued and
outstanding Company Capital Stock immediately prior to the First Amalgamation
shall be converted into and exchanged for one validly issued, fully paid and
non-assessable voting common share of East ULC ("East ULC Common Share"). Each
stock certificate of the Company evidencing ownership Company Capital Stock
shall continue to evidence ownership of such East ULC Common Shares.
1.4 Second Amalgamation Agreement. The Second Amalgamation Agreement
will, with such other matters as are necessary to effect the Second
Amalgamation, and subject to the terms and conditions of this Agreement and
exhibits hereto, provide that on the Second Amalgamation:
(a) Conversion of Amalgamation Sub Common Shares. Each common share
of Amalgamation Sub issued and outstanding immediately prior to the Second
Amalgamation shall be converted into and exchanged for one validly issued, fully
paid and non-assessable voting common share of Exchangeco ("Exchangeco Common
Share"). Each stock certificate of Amalgamation Sub evidencing ownership of any
such shares shall continue to evidence ownership of such Exchangeco Common
Shares.
(b) Conversion of Company Common Shares. Each Company Common Share
(or common share of its successor East ULC) issued and outstanding immediately
prior to the Second Amalgamation, including those held by the Parent Companies,
shall be converted into one validly issued, fully paid and non-assessable Class
B Non-Voting Preference Share of Exchangeco ("Class B Shares").
(c) Adjustments to Conversion of Company Common Shares. The
conversion of Company Common Shares pursuant to paragraph 1.4(b) shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
capital stock of Exchangeco or Company Capital Stock), reorganization,
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<PAGE> 9
recapitalization or other like change with respect to capital stock of
Exchangeco or Company Capital Stock occurring after the date hereof and prior to
the Final Closing.
1.5 Reorganization of Capital of Exchangeco. Immediately after the
Second Amalgamation, Exchangeco shall effect a capital reorganization whereby
each outstanding Class B Share held by the Parent Companies shall be transferred
to Exchangeco in exchange for Exchangeco Common Shares and all other Class B
Shares shall be transferred by the holder thereof to Exchangeco in exchange for
that amount of cash and that number of fully paid and non-assessable
Exchangeable Shares as determined in accordance with Section 1.6. The terms and
provisions of the Exchangeable Shares, including the basis on which the
shareholders shall have the right to exchange Exchangeable Shares of Exchangeco
for shares of Parent Common Stock, shall be as set forth in the provisions
attaching to the Exchangeable Shares set forth in the form attached as Exhibit 5
and the voting and exchange trust agreement set forth in the form attached as
Exhibit 6 (the "Voting and Exchange Trust Agreement").
1.6 Allocation of Consideration. The aggregate purchase price to be paid
by Parent in connection with the Acquisition will be $30,000,000 cash (subject
to reduction as described below) and 4,092,280 shares of Parent Common Stock.
Within fifteen days of the date of this Agreement, the Company shall deliver to
Parent and Holding ULC a schedule (the "Initial Closing Schedule") which shall
set forth:
(A)(i) a listing of all of the US Sellers together with the
number of shares of Company Capital Stock held by each, and (ii) the aggregate
amount of cash to be paid by Holding ULC to each US Seller in consideration for
the acquisition of their shares of Company Capital Stock at the Initial Closing
(as to each US Seller, the "Initial Closing Cash Payment"), and (iii) the
aggregate number of shares of Parent Common Stock to be issued to each US Seller
in consideration for their shares of Company Capital Stock at the Initial
Closing (as to each US Seller, the "Initial Closing Parent Shares"). In no event
shall the aggregate of all Initial Closing Cash Payments to be paid to the US
Sellers exceed $30,000,000 less the amount outstanding as of the Initial Closing
Date under the Convertible Promissory Note (the "Convertible Promissory Note")
dated August 3, 1999 (the "Aggregate Cash Purchase Price") and in no event shall
the aggregate of all Initial Closing Parent Shares to be issued to the US
Sellers exceed 4,092,280 shares of Parent Common Stock (the "Aggregate Share
Number"). The aggregate amount of purchase price consideration payable to all US
Sellers identified on the Initial Closing Schedule, either in the form of cash
or shares of Parent Common Stock (valued for this purpose at $39.098 per share)
or a combination of the two, allocated to each share of Company Capital Stock to
be acquired by Holding ULC at the Initial Closing will be equal; however, the
form of consideration (cash or shares) to be allocated to each shareholder may
be different;
(B)(i) a listing of all of the non-US Sellers together with the
number of shares of Company Capital Stock held by each, and (ii) the aggregate
amount of cash to be issued by Exchangeco to each non-US Seller upon exchange of
their Class B Shares in the Reorganization (as to each non-US Seller, the
"Reorganization Cash Payment"), and (iii) the aggregate number of Exchangeable
Shares to be issued to each non-US Seller upon exchange of
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<PAGE> 10
their Class B Shares in the Reorganization (as to each non-US Seller, the
"Reorganization Exchangeable Shares"). In no event shall the aggregate of all
Reorganization Cash Payments to be paid to the non-US Sellers exceed the
Aggregate Cash Purchase Price less the aggregate amount of cash paid as Initial
Closing Cash Payments and in no event shall the aggregate of all Reorganization
Exchangeable Shares to be issued to the non-US Sellers exceed the Aggregate
Share Number less the aggregate number of Initial Closing Parent Shares issued
to US Sellers in connection with the Initial Closing. The aggregate amount of
purchase price consideration, either in the form of cash or Exchangeable Shares
(the Parent Common Stock into which the Exchangeable Shares may be converted is
valued for this purpose at $39.098 per share) or a combination of the two,
allocated to each share of Company Capital Stock to be converted to Class B
Shares and subsequently to Exchangeable Shares shall be equal; however, the form
of consideration (cash or shares) to be allocated to each share may be
different.
Parent acknowledges that the Company has informed Parent of Company's
intention to set forth on the Initial Closing Schedule an allocation among its
shareholders of the Aggregate Cash Purchase Price to reflect first the payment
of any required purchase price withholding tax, second the payment of the tax
liabilities of the US Sellers associated with the Acquisition and third the
payment of the tax liabilities of the non-US Sellers associated with the
Acquisition, with any remaining cash consideration being allocated among all of
the Company's shareholders based upon their respective equity interests in the
Company. Notwithstanding the foregoing, the relevant Parent Companies shall be
obligated to distribute the Aggregate Cash Purchase Price that is payable under
this Section 1.6 only according to the allocation set forth on the Initial
Closing Schedule.
1.7 Purchase of Company Capital Stock from U.S. Sellers. Upon the
Initial Closing (as defined in Section 7.1), Holding ULC will acquire each
issued and outstanding share of Company Capital Stock held by US Sellers in
exchange for the cash and number of shares of Initial Closing Parent Shares per
share of Company Capital Stock payable to the U.S. Sellers in the amounts set
forth on the Initial Closing Schedule; however, all such cash and Parent Common
Stock will be held in escrow in accordance with the provisions set forth in
Section 7.2 and the acquisition of all Company Capital Stock by Holding ULC from
the US Sellers will be unwound if the Second Amalgamation is not completed; and
provided further, however that such amounts identified on Initial Closing
Schedule shall be adjusted to reflect fully the effect of any stock split,
reverse split, stock dividend (including any dividend or distribution of
securities convertible into capital stock of Exchangeco or Company Capital
Stock), reorganization, recapitalization or other like change with respect to
capital stock of Exchangeco or Company Capital Stock occurring after the date
hereof and prior to the Initial Closing. If at the time of the unwinding the
First Amalgamation shall have occurred, the Company and the shareholders of the
Company (or its successor East ULC) shall take such actions as are necessary to
cause East ULC to file a valid and timely election to be treated as an
association taxable as a corporation for United States federal income tax
purposes.
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<PAGE> 11
1.8 Escrow Amount. In addition to the foregoing, Exchangeco shall be
entitled to withhold a percentage of the Exchangeable Shares issuable to non-US
Sellers (other than Exchangeable Shares that may be issuable to any Parent
Companies) and a percentage of the Parent Common Stock issuable to the US
Sellers (collectively the "Escrow Amount") such that the total percentage of the
shares so withheld equal 11.875 percent of the aggregate number of Parent Common
Stock issuable (i) to the US Sellers and (ii) issuable to non-US Sellers holding
Exchangeable Shares on the exchange of the Exchangeable Shares, on the terms and
conditions contained in the Escrow Agreement. The Escrow Amount will be withheld
on a pro rata basis among all the shareholders of the Company based upon their
respective equity interests in the Company.
1.9 Taking of Necessary Action; Further Action. If, at any time after
the Final Closing, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest Exchangeco with full right, title
and possession to all assets, property, rights, privileges, powers and
franchises of the Company (or its successor East ULC) and Amalgamation Sub, the
resolutions passed by the Company and Amalgamation Sub will provide that the
officers and directors of the Company and Amalgamation Sub are fully authorized
in the name of their respective corporations or otherwise to take, and will
take, all such lawful and necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the following representations and warranties to
the Parent Companies, subject to such exceptions as are specifically disclosed
in the disclosure letter (referencing the appropriate section number) supplied
by the Company to Parent (the "Company Schedules") and dated as of the date
hereof. Any information disclosed on the Company Schedules under any section
number set forth therein shall be deemed to be disclosed and incorporated into
any other section under the Company Schedules where such disclosure would on its
face and without reference to any separate or independent document or
information reasonably be deemed to apply.
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the Province
of Ontario, Canada. The Company has the corporate power to own its properties
and to carry on its business as now being conducted. The Company is duly
qualified to do business and in good standing in each other jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, prospects, assets (including intangible assets), financial condition
or results of operations (hereinafter referred to as a "Material Adverse
Effect") of the Company. The Company has delivered a true, correct and complete
copy of its Articles of Amalgamation and By-laws, each as amended to date, to
Parent.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of an
unlimited number of common shares, of which forty-two (42) shares are issued and
outstanding as of the date of this
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<PAGE> 12
Agreement. The Company Capital Stock is held by the persons, with the domicile
addresses and in the amounts set forth on Schedule 2.2(a)(i). Immediately prior
to the Initial Closing, there will be 10,000,000 common shares issued and
outstanding to be held by the persons and in the amounts set forth on Schedule
2.2(a)(ii). All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Amalgamation or By-laws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) Except for the Company Convertible Promissory Note described in
Schedule 2.2(b), there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which it is bound obligating the Company to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of the Company. Except for the Company Convertible
Promissory Note described in Schedule 2.2(b), there are no options, warrants,
calls, rights, commitments or agreements of any character, written or oral, to
which the Company is a party or by which it is bound obligating the Company to
grant, extend, accelerate the vesting of, change the price of, otherwise amend
or enter into any such option, warrant, call, right, commitment or agreement. As
a result of the Second Amalgamation, Parent will be the record and sole
beneficial owner of all Company Capital Stock and rights to acquire or receive
Company Capital Stock from the Company.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the entering into by all shareholders of
the Company of the Shareholder Implementation Agreement, each of the Company and
East ULC has or will have prior to the Final Closing, all requisite corporate
power and authority to enter into this Agreement and the Related Agreements (as
defined below) and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Related Agreements
and the consummation of the transactions contemplated hereby and thereby have,
or will have prior to the Final Closing, been duly authorized by all necessary
corporate action on the part of the Company and East ULC, subject only to the
entering into by all shareholders of the Company of the Shareholder
Implementation Agreement. The Company's Board of Directors has unanimously
approved this Agreement and the Related Agreements and the transactions
contemplated hereby and thereby. This Agreement has been, and, when executed and
delivered, each of the Related Agreements shall be duly executed and delivered
by the Company or East ULC, as applicable, and constitutes the valid and binding
obligation of the Company, or East ULC, as applicable, enforceable against the
Company or East ULC, as applicable, in accordance with its terms. Subject only
to the entering into by all shareholders of the Company of the Shareholder
Implementation Agreement, the execution and delivery of this Agreement by the
Company does not, and the execution and delivery of the Related Agreements by
the Company will not, and, as of the Amalgamations and the Reorganization, the
consummation of the transactions contemplated hereby and thereby will not,
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<PAGE> 13
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under (any
such event, a "Conflict") (i) any provision of the Articles of Amalgamation or
By-laws or similar constating documents of the Company or East ULC when formed
or (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or East
ULC, as applicable, or its properties or assets, except in those instances where
such Conflict would not have a Material Adverse Effect on the Company or East
ULC, as applicable. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party (so as not to trigger any Conflict), is required by or with respect
to the Company in connection with the execution and delivery of this Agreement
or any Related Agreement or the consummation of the transactions contemplated
hereby or thereby, except for (i) obtaining consent from the Ontario Ministry of
Finance and obtaining the Certificate of Continuance; (ii) obtaining the
Approval Orders for the Amalgamations and the related filings with the
Registrar, all under the Companies Act, (iii) such consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal, state and provincial securities laws and (iv)
such other consents, waivers, authorizations, filings, approvals and
registrations which are set forth on Schedule 2.4. For purposes of this
Agreement, the term "Related Agreements" means the Shareholder Implementation
Agreement, the Escrow Agreement, the Shareholder Reimbursement Agreement, the
Voting and Exchange Trust Agreement, the Exchangeable Share Support Agreement
and the Amalgamation Agreements.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
audited balance sheet as of July 31, 1999 (the "Balance Sheet") and the related
audited statements of operations and cash flows for the twelve-month period then
ended (collectively, the "Company Financials"). The Company Financials have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") applied on a basis consistent throughout the periods indicated and
consistent with each other. The Company Financials present fairly the financial
condition and operating results of the Company as of the dates and during the
periods indicated therein. The aggregate value of the assets in Canada of the
Company together with each of its affiliates (as such term is defined in the
Competition Act (Canada)) determined in accordance with the Competition Act,
does not exceed Canadian $35 million. The aggregate gross revenues from sales
in, from or into Canada of the Company together with it each of its respective
affiliates (as such term is defined in the Competition Act), determined in
accordance with, and for the period prescribed by the Competition Act (Canada)
does not exceed Canadian $35 million.
2.6 No Undisclosed Liabilities. The Company does not have any liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with Canadian generally accepted accounting principles), which individually or
in the aggregate, (i) has not been reflected in the Balance Sheet or the
footnotes thereto, or (ii) has not arisen in the ordinary course of the
Company's business since July 31, 1999,
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<PAGE> 14
consistent with past practices and in the aggregate do not exceed $25,000 (it
being the understanding of the parties that the representations contained in
this Section 2.6 are not intended to expand the scope of any representation
(including the representation contained in Section 2.11(n)) contained elsewhere
in this Agreement).
2.7 No Changes. Since July 31, 1999, there has not been, occurred or
arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Amalgamation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company of $25,000 in
any individual case or $50,000 in the aggregate;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person except in each case in the ordinary course of
business or as otherwise contemplated by this Agreement;
(j) sale, lease, license or other disposition of any of the assets
or properties of the Company, except in the ordinary course of business as
conducted on that date and consistent with past practices;
(k) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness (other than indebtedness to Parent or its
affiliates), guaranteeing by the Company
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<PAGE> 15
of any indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others except for advances to employees
for travel and business expenses in the ordinary course of business, consistent
with past practices;
(m) waiver or release of any material right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company in an amount in excess of $1,000;
(n) commencement or notice or, to the Company's knowledge, threat of
commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
(o) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.11 below) or of
infringement by the Company of any third party's Intellectual Property rights;
(p) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
(q) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company;
(r) event or condition of any character that has or could be
reasonably expected to have a Material Adverse Effect on the Company; or
(s) negotiation or agreement by the Company or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports. Except as set forth in Schedule
2.8:
(i)The Company has filed all tax returns required to be filed by
it in all applicable jurisdictions and the Company has paid all Governmental
Charges (as defined below).
(ii) Adequate provision has been made in the Company's
Financials for all Governmental Charges, and all professional fees related
thereto, payable in respect of the business or assets of the Company for all
periods up to the date of the balance sheet comprising part of the Company's
Financials.
(iii) Canadian federal and provincial income tax assessments
have been issued to the Company covering all past periods up to and including
the fiscal year ended 1999 and such assessments, if any amounts were owing prior
to the date hereof in respect thereof, have been paid, and only the fiscal years
subsequent to 1996 remain open for reassessment of additional taxes, interest or
penalties.
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<PAGE> 16
(iv) Assessments for all other applicable Governmental Charges
have been issued and any amounts owing thereunder have been paid, and only the
time period subsequent to 1996 remains open for reassessment of additional
Governmental Charges.
(v)There are no actions, proceedings or claims of any kind in
progress, pending or threatened against the Company in respect of any
Governmental Charges and, in particular, there are no currently outstanding
reassessments or written enquiries which have been issued or raised by any
governmental authority relating to any such Governmental Charges.
(vi) The Company has withheld or collected and remitted all
amounts required to be withheld or collected and remitted by it in respect of
any Governmental Charges.
(vii) Correct and complete copies of all federal and provincial
tax returns, including schedules thereto, filed by the Company since 1996 and
all written communications with or from any Governmental Entity relating thereto
have been made available to Parent.
(viii) "Governmental Charges" means all taxes, levies,
assessments, reassessments and other charges together with all related
penalties, interest and fines, due and payable to any domestic or foreign
government (federal, provincial, municipal or otherwise) or to any regulatory
authority, agency, commission or board of any domestic or foreign government, or
imposed by any court or any other law, regulation or rulemaking entity having
jurisdiction in relevant circumstances;
2.9 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
reasonably could be expected to have the effect of prohibiting or impairing any
business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. Without
limiting the foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all real property
currently, or at any time in the past, leased by the Company, the name of the
lessor and the date of the lease and each amendment thereto and, with respect to
any current lease, the aggregate annual rental and/or other fees payable under
any such lease. All such current leases are in full force and effect, are valid
and enforceable by the Company in accordance with their respective terms, and
there is not, under any of such leases, any existing default by the Company or
event of default (or event which with notice or lapse of time, or both, would
constitute a default).
(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and
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<PAGE> 17
mixed, used or held for use in its business, free and clear of any Liens (as
defined below), except as reflected in the Company Financials or in Schedule
2.10(b) and except for Liens for taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby ("Permitted Encumbrances"). For purposes of this Agreement, the
term "Lien" shall mean any lien, pledge, charge, claim, security interest or
other encumbrance of any sort.
2.11 Intellectual Property.
(a) For the purposes of this Section 2.11, the following terms have
the following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all Canadian and
United States and foreign patents and utility models and applications
therefor and all reissues, divisions, renewals, extensions,
provisionals, continuations and continuations-in-part thereof, and
equivalent or similar rights anywhere in the world in inventions and
discoveries ("Patents"); (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists,
and all documentation embodying or evidencing any of the foregoing;
(iii) all copyrights, copyrights registrations and applications therefor
and all other rights corresponding thereto throughout the world
("Copyrights"); (iv) all mask works, mask work registrations and
applications therefor, and any equivalent or similar rights in
semiconductor masks, layouts, architectures or topology ("Maskworks");
(v) all industrial designs and any registrations and applications
therefor throughout the world; (vi) all trade names, logos, common law
trademarks and service marks, trademark and service mark registrations
and applications therefor and all goodwill associated therewith
throughout the world ("Trademarks"); (vii) all databases and data
collections and all rights therein throughout the world; and (viii) all
computer software including all source code, object code, firmware,
development tools, files, records and data, all media on which any of
the foregoing is recorded; (ix) all World Wide Web addresses, sites and
domain names; and (x) any similar, corresponding or equivalent rights to
any of the foregoing anywhere in the world.
"Business" means the business of the Company, including the manufacture,
use, licensing, distribution and sale of any products or technology or
the provision of any services by the Company, as currently conducted or
as reasonably is contemplated to be conducted by the Company in the
future.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by or licensed to the Company.
"Registered Intellectual Property" shall mean all Canadian, United
States, international and foreign: (i) Patents, including applications
therefor; (ii) registered Trademarks, applications to register
Trademarks, including intent-to-use applications, or other registrations
or
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<PAGE> 18
applications related to Trademarks; (iii) Copyrights registrations and
applications to register Copyrights; (iv) Mask Work registrations and
applications to register Mask Works; and (v) any other Company
Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued by, filed
with, or recorded by, any state, government or other public legal
authority at any time.
(b) Schedule 2.11(b) lists all Registered Intellectual Property in
whole or in part owned by, assigned to, or filed in the name of, the Company
(the "Company Registered Intellectual Property").
(c) Each item of Company Intellectual Property that is owned by the
Company, including all Company Registered Intellectual Property listed on
Schedule 2.11(b), is free and clear of any Lien other than a Permitted
Encumbrance (it being the understanding of the parties that nothing in this
subsection shall be deemed to constitute a representation or warranty as to any
matter covered by subsection (n) of this Section 2.11 or any other subsection of
this Section 2.11).
(d) The Company: (i) is the exclusive owner of all Trademarks,
including trade names, trade dress and similar designations of origin used in
connection with the operation or conduct of the Business and (ii) owns
exclusively, and has good title to, all copyrighted works that are software
products of the Company or other works of authorship that the Company otherwise
purports to own (it being the understanding of the parties that nothing in this
subsection shall be deemed to constitute a representation or warranty as to any
matter covered by subsection (n) of this Section 2.11 or any other subsection of
this Section 2.11).
(e) The Company has not transferred ownership of, or granted any
license of or right to use or authorized the retention of any rights to use, any
Intellectual Property that is, or was, Company Intellectual Property, to any
other person except in the ordinary course of the Company's business.
(f) The Company Intellectual Property constitutes all the
Intellectual Property used in and/or necessary to the conduct of the Business
including (i) the making, using, selling, marketing, or importing of any product
or device, (ii) the practice of any process, (iii) the offering or performance
of any service, or (iv) the copying, display, performance, distribution,
creation of derivative works of, or the exploitation of any device or work,
including any of the foregoing with respect to products, technology or services
currently under development by Company.
(g) The contracts, licenses and agreements listed on Schedule
2.11(g) include all material contracts, licenses and agreements pursuant to
which any person, including any affiliate of Company, has licensed any
Intellectual Property to the Company. The Company is neither in breach of, nor
has it failed to perform under any of the foregoing contracts, licenses and
agreements and, to the knowledge of the Company, no other party to such
contracts, licenses and agreements is in breach of or has failed to perform
thereunder.
(h) The contracts, licenses and agreements listed on Schedule
2.11(h) include all contracts and agreements pursuant to which any person,
including any third party developer or
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<PAGE> 19
consultant, has developed any device or technology, authored any work, or
otherwise created any thing in which any Intellectual Property rights might
arise, either separately or jointly with the Company or any other person, which
the Company uses or possess or which the Company believes it owns.
(i) The contracts, licenses and agreements listed on Schedule
2.11(i) include all material contracts, licenses and agreements pursuant to
which the Company has licensed or transferred to any third person or any
affiliate of the Company any material Company Intellectual Property. The Company
is neither in breach of, nor has it failed to perform under any of the foregoing
contracts, licenses and agreements and, to the knowledge of the Company, no
other party to such contracts, licenses and agreements is in breach of or has
failed to perform thereunder.
(j) The consummation of the transactions contemplated by this
Agreement and the Related Agreements will not cause or obligate the Company (i)
to grant to any third party any rights or licenses with respect to any
Intellectual Property of the Company; or (ii) pay any royalties or other amounts
in excess of those being paid by Company prior to the Initial Closing or Final
Closing.
(k) Schedule 2.11(k) lists all agreements, licenses and contracts
pursuant to which Company has agreed to indemnify, hold harmless, or otherwise
agree to be liable for any losses cost or damages of, a third party with respect
to any Intellectual Property or product or service of Company.
(l) As of the Initial Closing Date and the Final Closing Date, all
material Company Intellectual Property that is owned by the Company, including
any item thereof, will be fully transferable, alienable or licensable by the
Company without restriction and without payment of any kind to any third party.
(m) The consummation of the transactions contemplated by this
Agreement will not result in the loss of, or otherwise adversely affect, any
ownership rights of Company in any Company Intellectual Property or result in
the breach or termination of any license, contract or agreement to which Company
is a party respecting any material Company Intellectual Property.
(n) The operation of the Business, including (i) the making, using,
selling, marketing, or importing of any product or device, (ii) the practice of
any process, (iii) the offering or performance of any service, or (iv) the
copying, distribution, performance, display, creation of derivative works of, or
the exploitation of any device or work, including any of the foregoing with
respect to products, technology or services currently under development by
Company, does not, and, to the knowledge of the Company, will not when conducted
in substantially the same manner following the Final Closing by the Company,
infringe or misappropriate the Intellectual Property of any person, violate the
rights of any person, or constitute unfair competition or trade practices under
the laws of any jurisdiction, and the Company has not received notice from any
person claiming that such operation or any act, product, technology or service
of the Business infringes or misappropriates the Intellectual Property of any
person or constitutes unfair competition or trade practices under the laws of
any jurisdiction (nor is the Company aware of any basis therefor).
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<PAGE> 20
Without limiting the foregoing, the Company has not misappropriated the trade
secrets of, or, to the knowledge of the Company, infringed the Copyright or Mask
work of any third party.
(o) There are no contracts, licenses or agreements between the
Company and any other person with respect to Company Intellectual Property under
which there is any dispute known to the Company regarding the scope of such
agreement, or performance under such contract, license or agreement including
with respect to any payments to be made or received by the Company thereunder.
(p) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property that is owned by the Company.
(q) No Company Intellectual Property that is owned by the Company or
any product, technology or service of the Business is subject to any proceeding
or outstanding decree, order, judgment, agreement or stipulation that restricts
in any manner the use, transfer or licensing thereof by the Company or could
affect the validity, use or enforceability of such Company Intellectual
Property.
(r) Schedule 2.11(r) lists all action, including the payment of any
fees, that must, or should be performed by, or on behalf of, the Company in the
ninety-day period following the Final Closing Date, with respect to any
application for, perfection of, preservation of, or continuation of any rights
of Company with respect to any Company Intellectual Property, including the
filing of any patent applications, response to Patent Office actions or payment
of fees, including renewal fees.
(s) The Company has not claimed small business status, or other
particular status in the application for any Registered Company Intellectual
Property which claim of status was not at the time made, or which has since
become inaccurate or false or that will no longer be true and accurate as a
result of the Initial Closing and Final Closing.
(t) Except for software products licensed to the Company under those
agreements set forth on Schedule 2.11(g), all software products of the Company
were written and created solely by either (i) employees of the Company acting
within the scope of their employment or (ii) by third parties who have validly
assigned or validly waived all of their rights, including Intellectual Property
rights in such products to the Company, and no third party owns or has any
rights to such software products or any Intellectual Property rights therein.
(u) The Company has no knowledge of any facts or circumstances that
would be reasonably expected to render any Company Intellectual Property invalid
or unenforceable. Without limiting the foregoing, Company knows of no
information, materials, facts, or circumstances, including any information or
fact that would constitute prior art, that would render any of the Company
Registered Intellectual Property invalid or unenforceable, or would adversely
effect any pending application for any Company Registered Intellectual Property
and the Company has not misrepresented, or failed to disclose, and is not aware
of any misrepresentation or failure to disclose, any fact or circumstances in
any application for any Company Register Intellectual Property that
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would constitute fraud or a material misrepresentation with respect to such
application or that would otherwise effect the validity or enforceability of any
Company Registered Intellectual Property.
(v) The Company has taken all steps reasonable under the
circumstances to protect the confidentiality and trade secret status of any
material confidential information of the Company and knows of no basis on which
it could be claimed that the Company has failed to protect the confidentiality
of any material Confidential Information of the Company.
(w) All employees of the Company have entered into a valid and
binding agreement with the Company sufficient to vest title in the Company of
all Intellectual Property created by such employee in the scope of his or her
employment with the Company.
2.12 Agreements, Contracts and Commitments. Except as set forth on
Schedule 2.12(a), the Company does not have, is not a party to nor is it bound
by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty,
(ix) any agreement containing any covenant limiting the freedom
of the Company to engage in any line of business or to compete with any person,
(x) any agreement relating to capital expenditures and involving
future payments in excess of $25,000,
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(xi) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise outside the ordinary course of
the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of raw
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
(xvi) any agreement pursuant to which the Company has granted or
may grant in the future, to any party a source-code license or option or other
right to use or acquire source-code, or
(xvii) any other agreement that involves $25,000 or more or is
not cancelable without penalty of $10,000 or more within thirty (30) days of the
date on which notice of cancellation is given.
The Company has not breached, violated or defaulted under, or received
notice that it has breached, violated or defaulted under, any of the terms or
conditions of any agreement, contract or commitment required to be set forth on
Schedule 2.12(a) (any such agreement, contract or commitment, a "Contract"),
where such breach, violation or default could have a Material Adverse Effect on
the Company. Each Contract is in full force and effect and is not subject to any
default thereunder of which the Company has knowledge by any party obligated to
the Company pursuant thereto. Schedule 2.12(c) identifies each Contract that
requires a consent, waiver or approval to preserve all rights of, and benefits
to, Exchangeco under such Contract as a result of entering into this Agreement
or effecting the Amalgamation or the other transactions contemplated by this
Agreement (each a "Required Consent").
2.13 Interested Party Transactions. To the Company's knowledge, no
officer, director or stockholder of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an economic interest),
has or has had, directly or indirectly, (i) an economic interest in any entity
which furnished or sold, or furnishes or sells, services or products that the
Company furnishes or sells, or proposes to furnish or sell, (ii) an economic
interest in any entity that purchases from, or sells or furnishes to, the
Company, any goods or services or (iii) a beneficial interest in any contract or
agreement set forth in Schedule 2.12(a); provided, that ownership of no more
than one percent (1%) of the outstanding voting stock of a publicly traded
corporation shall not be deemed an "economic interest in any entity" for
purposes of this Section 2.13.
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2.14 Compliance with Laws. The Company has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, provincial, state or local
statute, law or regulation.
2.15 Litigation. There is no action, suit or proceeding of any nature
pending or to the Company's knowledge threatened against the Company, its
properties or any of its officers or directors, in their respective capacities
as such. Except as set forth in Schedule 2.15, to the Company's knowledge, there
is no investigation pending or threatened against the Company, its properties or
any of its officers or directors in their respective capacities as such by or
before any governmental entity. Schedule 2.15 sets forth, with respect to any
pending or threatened action, suit, proceeding or investigation, the forum, the
parties thereto, the subject matter thereof and the amount of damages claimed or
other remedy requested. No Governmental Entity has at any time challenged or
questioned the legal right of the Company to manufacture, offer or sell any of
its products in the present manner or style thereof.
2.16 Insurance. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
2.17 Minute Books. The minute books of the Company provided to counsel
for Parent are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
stockholders or actions by written consent since the time of incorporation of
the Company.
2.18 Environmental Matters.
(a) Definitions. In this section,
(i) "Environment" means the ambient air, all layers of the
atmosphere, surface water, underground water, all land, all living organisms and
the interacting natural systems that include components of air, land, water,
organic and inorganic matter and living organisms, and includes indoor spaces;
(ii) "Environmental Law" means all federal, provincial,
municipal or local statutes, regulations, by-laws, Environmental Permits, orders
or rules, and any policies or guidelines of any governmental or regulatory body
or agency, and any requirements or obligations arising under the common law,
relating to the Environment, the transportation of dangerous goods and
occupational health and safety;
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<PAGE> 24
(iii) "Environmental Permits" means all permits, licenses,
approvals, consents, authorizations, registrations and certificates issued by or
provided to, as the case may be, any government, governmental or regulatory body
or agency pursuant to an Environmental Law;
(iv) "Premises" means all real property, buildings and
facilities, including any part of any such property, building or facility,
owned, leased, or operated by the Company in connection with its business; and
(v) "Substance" means any substance or material which under any
Environmental Law is defined to be "hazardous", "toxic", "deleterious",
"caustic", "dangerous", a "contaminant", a "pollutant", a "dangerous good", a
"waste", a "source of contamination" or a source of a "pollutant".
(b) Hazardous Activities.
(i) The Company has not emitted, discharged, deposited or
released or caused or permitted to be emitted, discharged, deposited or
released, any Substances on or to the Premises, or in connection with the
operation of the business of the Company, except in compliance with
Environmental Law;
(ii) to the knowledge of the Company, the soil and subsoil, and
the surface and ground water in, on or under the Premises do not contain any
Substances, nor do the Premises contain any underground storage tanks; all
Substances which have been or are being treated or stored on the Premises have
been generated, treated and stored in compliance with Environmental Law;
(iii) to the knowledge of the Company, no polychlorinated
biphenyls, asbestos containing materials, lead or ureaformaldehyde is or has
ever been on, at, in or under the Premises; and
(iv) the Company has not permitted the Premises to be used for
the disposal of any Substance.
(c) Permits. The Company holds all Environmental Permits necessary
for the conduct of its business. All Environmental Permits obtained by the
Company in connection with its business (including any applicable expiry dates)
are valid and in full force and effect.
(d) Proceedings. There are no proceedings against or involving the
Company, either in progress, pending, or, to the knowledge of the Company,
threatened which allege the violation of, or non-compliance with, any
Environmental Law by the Company.
2.19 Brokers' and Finders' Fees; Third Party Expenses. The Company has
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby. Schedule
2.19 sets forth the principal terms and conditions of any agreement, written or
oral, with respect to such fees. Schedule 2.19 sets forth the Company's current
reasonable
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<PAGE> 25
estimate of all Third Party Expenses (as defined in Section 5.4) expected to be
incurred by the Company in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions contemplated
hereby.
2.20 Employee Matters and Benefit Plans. The Company is not a party to
or bound by any:
(a) written contract or commitment for the employment of any
employee, officer or agent;
(b) oral contract or commitment for the employment of any employee,
officer or agent, except for contracts of indefinite hire terminable by the
Company without cause on reasonable notice as determined by the laws of the
applicable jurisdiction;
(c) contract with or commitment to any trade union, council of trade
unions, employee bargaining agent or affiliated bargaining agent (collectively
called "labour representatives") and the Company has not conducted negotiations
with respect to any such future contracts or commitments; no labour
representatives hold bargaining rights with respect to any employees of the
Company; no labour representatives have applied to have the Company declared a
related employer pursuant to the Labour Relations Act (Ontario); and there are
no current or threatened attempts to organize or establish any trade union or
employee association with respect to the Company; or
(d) bonus, pension, profit sharing, deferred compensation,
retirement, hospitalization, disability, insurance or similar plan or practice,
formal or informal, with respect to any of its employees or others, other than
the Canada Pension Plan, the Ontario Health Insurance Plan and other similar
health plans established and administered by any other province and workers'
compensation insurance provided pursuant to statute.
There is no work stoppage or other concerted action, grievance or dispute
existing or, to the knowledge of the Company, threatened against the Company.
Correct and complete copies of all the contracts, commitments and plans set out
in Schedule 2.20 and all related documents or, where oral, correct and complete
written summaries of the terms thereof have been made available to Parent. For
the purpose of the foregoing, related documents means, in the case of pension,
profit sharing, deferred compensation, retirement, hospitalization, disability
or insurance or similar plans, all documentation establishing or creating such
plans, all amendments thereto and all documentation related thereto including
without limitation, trust agreements, funding agreements and other similar
agreements, the most recent financial statements and the most recent actuarial
report, if any, related thereto and all reports, returns and filings in respect
of such plans made with any regulatory agency within the 3 years prior to the
date hereof.
2.21 Change of Control and Non-Compete Payments. Schedule 2.21 sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees, officers
and directors of the Company as a result of or in connection with the
Amalgamations.
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2.22 Year 2000 Compliance. All of the Company's internal computer
systems and each Constituent Component (as defined below) of those systems and
all computer-related products and services and each Constituent Component of
those products and services of the Company fully comply with the Year 2000
Qualification Requirements. "Year 2000 Qualification Requirements" means that
the internal computer systems and each Constituent Component (as defined below)
of those systems and all computer-related products of each Constituent Component
(as defined below) of those products of the Company and each of its subsidiaries
(i) have been reviewed to confirm that they store, process (including sorting
and performing mathematical operations, calculations and computations), input
and output data containing date and information correctly regardless of whether
the date contains dates and times before, on or after January 1, 2000, (ii) have
been designed to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interface values that reflect the
century, (iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century formulas, and will not cause
an abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover, and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component" means
all software (including operating systems, programs, packages and utilities),
firmware, hardware, networking components, and peripherals provided as part of
the configuration.
2.23 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Schedules), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement, or furnished in or in connection with documents mailed or delivered
to the stockholders of the Company in connection with soliciting their consent
to this Agreement and the Amalgamations, and other transactions contemplated
hereby, contains or will contain at the time of the Amalgamations, any untrue
statement of a material fact, or omits or will omit at the time of the
Amalgamations to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT COMPANIES
The Parent Companies represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Each of Parent Sub and Holding are corporations duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each of Holding ULC and Amalgamation Sub are corporations duly organized,
validly existing and in good standing under the laws of Nova Scotia. Each of the
Parent Companies have the corporate power to own its respective properties and
to carry on its respective businesses as now being conducted and is duly
qualified to do business and is in good standing in each jurisdiction
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in which the failure to be so qualified would have a material adverse effect on
their respective ability to consummate the transactions contemplated hereby.
3.2 Authority. The Parent Companies have all requisite corporate power
and authority, and all necessary shareholder approvals to enter into this
Agreement and the Related Agreements and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Related Agreements and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of the Parent Companies. This Agreement has been, and the Related
Agreements when executed and delivered will be have been duly executed and
delivered by the Parent Companies and constitute the valid and binding
obligations of the Parent Companies, enforceable in accordance with their terms.
The execution and delivery of this Agreement and the Related Agreements by
Parent and Amalgamation Sub does not, and, the consummation of the transactions
contemplated hereby and thereby will not, Conflict with (i) any provision of the
Articles of Incorporation or Bylaws of Parent or any of similar constating
documents of the other Parent Companies or (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Parent Companies or their respective properties or assets. No
consent, waiver, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity or any third party (so as
not to trigger any Conflict), is required by or with respect to the Parent
Companies in connection with the execution and delivery of this Agreement or any
of the Related Agreements or the consummation of the transactions contemplated
hereby and thereby, except for (i) obtaining the Certificate of Continuance,
(ii) obtaining the Approval Orders for the Amalgamations and the related filings
with the Registrar, all under the Companies Act, (iii) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal, state and provincial securities laws
and (iv) such other consents, waivers, authorizations, filings, approvals and
registrations which are set forth on Schedule 3.2.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 150,000,000 shares of
Common Stock, of which 43,429,673 shares were issued and outstanding as of
October 29, 1999, and 5,000,000 shares of Preferred Stock, none of which is
issued or outstanding as of October 29, 1999. The authorized capital stock of
Amalgamation Sub consists of 1,000 shares of Common Stock, 1,000 shares of
which, as of the date hereof, are issued and outstanding and are held by Holding
ULC. All such shares have been duly authorized, and all such issued and
outstanding shares have been validly issued, are fully paid and nonassessable
and are free of any liens or encumbrances other than any liens or encumbrances
created by or imposed upon the holders thereof. All shares of capital stock of
each of Parent Sub, Holding and Holding ULC are beneficially owned by Parent.
(b) The shares of Parent Common Stock to be issued in connection
with the Initial Closing will, when issued in accordance with the terms of this
Agreement, be duly authorized, validly issued, fully paid and non-assessable.
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(c) The shares of Parent Common Stock to be issued pursuant to the
Exchangeable Share Provisions pursuant to the terms of this Agreement will, when
issued in accordance with, the terms of the Exchangeable Share Provisions, if
applicable, be duly authorized, validly issued, fully paid and nonassessable.
(d) The Exchangeable Shares to be issued in the Reorganization will,
when issued in accordance with the terms of this Agreement, be duly authorized,
validly issued, fully paid and non-assessable.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC") for all periods subsequent to March 31, 1998, all in the
form so filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, except to the extent corrected by a subsequently filed
document with the SEC. The financial statements of Parent, including the notes
thereto, included in the SEC Documents (the "Parent Financial Statements")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with U.S. generally accepted
accounting principles consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial position of Parent
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal audit
adjustments).
3.5 Amalgamation Sub. Since the date of its incorporation, Amalgamation
Sub has neither engaged in or transacted any business or activity of any nature
other than activities related to its corporate organization and the execution
and delivery of this Agreement and the Related Agreements. Amalgamation Sub has
no assets or liabilities or obligations of any kind whatsoever, and other than
this Agreement and the Related Agreements, is not a party to any contract,
agreement or undertaking of any nature.
ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
4.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of (i) the termination of
this Agreement and (ii) the Final Closing, the Company agrees (except to the
extent that Parent shall otherwise consent in writing) to carry on its business
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay its debts and Governmental Charges when due, to pay
or perform other obligations when due, and, to the extent consistent with such
business, to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organization, keep
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<PAGE> 29
available the services of its present officers and key employees and preserve
their relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it, all with the goal of
preserving unimpaired its goodwill and ongoing businesses at the time of the
Amalgamations. The Company shall promptly notify Parent of any event or
occurrence or emergency not in the ordinary course of its business, and any
material event involving the Company or its business. Except as expressly
contemplated by this Agreement or disclosed in Schedule 4.1, the Company shall
not, without the prior written consent of Parent (which consent shall not be
unreasonably withheld):
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to end-user licenses in the
ordinary course of business);
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Except for the issuance of shares of Company Capital Stock upon
exercise or conversion of the Convertible Promissory Note, issue, grant, deliver
or sell or authorize or propose the issuance, grant, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of Amalgamation
or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof;
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<PAGE> 30
(j) Acquire or agree to acquire any assets in an amount in excess of
$25,000 in the case of a single transaction or in excess of $50,000 in the
aggregate in any 30-day period;
(k) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy, in an amount in excess of $15,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Company Financial Statements
(or the notes thereto) or incurred after the date of the Company Financials by
the Company in the ordinary course of business or expenses consistent with the
provisions of this Agreement incurred in connection with any transaction
contemplated and permitted hereby;
(q) Make or change any material election in respect of Governmental
Charges, adopt or change any accounting method in respect of Governmental
Charges, enter into any closing agreement, settle any claim or assessment in
respect of Governmental Charges, or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of
Governmental Charges;
(r) Enter into any strategic alliance, development or joint
marketing agreement; or
(s) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (r) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of (i) the Final Closing and (ii)
the date of termination of this Agreement pursuant to the provisions of Section
8.1 hereof, the Company will not (nor will the Company permit any of the
Company's officers, directors, agents, representatives
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or affiliates to) directly or indirectly, take any of the following actions with
any party other than Parent and its designees: (a) solicit, conduct discussions
with or engage in negotiations with any person, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital stock or
assets, (b) provide information with respect to it to any person, other than
Parent, relating to the possible acquisition of the Company (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its capital stock or assets, (c) enter into an agreement
with any person, other than Parent, providing for the acquisition of the Company
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any material portion of its capital stock or assets or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
capital stock or assets by any person, other than by Parent. In addition to the
foregoing, if the Company receives prior to the Amalgamation or the termination
of this Agreement any offer or proposal relating to any of the above, the
Company shall immediately notify Parent thereof, including information as to the
identity of the offeror or the party making any such offer or proposal and the
specific terms of such offer or proposal, as the case may be, and such other
information related thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Access to Information. Subject to any applicable contractual
confidentiality obligations (which the Company shall use its best efforts to
cause to be waived) each party shall afford the others and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Amalgamation to (a) all of its properties,
books, contracts, agreements and records, and (b) all other information
concerning the business, properties and personnel (subject to restrictions
imposed by applicable law) of it as the others may reasonably request. No
information or knowledge obtained in any investigation pursuant to this Section
5.1 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Amalgamation.
5.2 Confidentiality. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of the confidentiality agreements between
Parent and the Company previously entered into.
5.3 Expenses. Except as otherwise contemplated by the Shareholder
Reimbursement Agreement, whether or not the transactions contemplated hereby are
consummated, all fees and expenses incurred in connection with the transactions
contemplated hereby including, without limitation, all legal, accounting,
financial advisory, consulting and all other fees and expenses of third parties
("Third Party Expenses") incurred by a party in connection with the negotiation
and effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
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5.4 Public Disclosure. Upon execution and delivery of this Agreement by
the parties hereto, Parent and the Company shall release a jointly prepared
announcement describing the Acquisition. Except as aforesaid, unless otherwise
required by law (including, without limitation, securities laws) or, as to
Parent, by the rules and regulations of the National Association of Securities
Dealers, Inc., prior to the Final Closing, no disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party hereto unless approved by Parent and the Company prior to release,
provided that such approval shall not be unreasonably withheld.
5.5 Consents. The Company shall use its best efforts to obtain the
consents, waivers and approvals under any of the Contracts identified on
Schedule 2.12(c) as may be required in connection with the transactions
contemplated hereby.
5.6 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and capital
stock; and further provided that the Company shall not be obligated to complete
the Initial Closing before January 4, 2000.
5.7 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent or Amalgamation Sub, respectively, contained in this Agreement to be
untrue or inaccurate at or prior to the Initial Closing except as contemplated
by this Agreement (including the Company Schedules) and (ii) any failure of the
Company or Parent, as the case may be, to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.7 shall not limit or otherwise affect any remedies available to
the party receiving such notice.
5.8 NMS Listing. Parent shall cause to be listed on the Nasdaq National
Market the shares of Parent Common Stock issuable, and those required to be
reserved for issuance, in connection with the transactions contemplated hereby
and upon the exchange of the Exchangeable Shares, upon official notice of
issuance.
5.9 Cooperation With Financial Statements. The Company will use its best
efforts to cause the Company's management and its independent auditors to
facilitate on a timely basis (i) the
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preparation of historical and pro forma financial statements as required by
Parent to comply with applicable SEC regulations, and (ii) the review of the
Company's 1997 and 1998 audit work papers, including the examination of selected
interim financial statements and data.
5.10 Employee Benefits.
(a) Parent shall take such reasonable actions as are necessary to
allow eligible employees of the Company to participate in the benefit programs
of Parent, or alternative benefits programs substantially comparable to those
applicable to employees of Parent on similar terms, as soon as practicable after
the Final Closing. Employees of the Company who are employed by Parent or the
Company following the Final Closing shall be granted credit for service with the
Company prior to the Final Closing for all purposes as if such service with the
Company was service with Parent or a subsidiary of Parent.
(b) Parent shall reserve an aggregate of $5,000,000 in cash, which
will be distributed to those employees of the Company to be identified by mutual
agreement of the Parent and the Company in the amounts mutually agreed upon by
Parent and the Company prior to the Initial Closing and distributed in
accordance with the terms of such agreement.
5.11 Registration Rights. Upon the issuance and release from the Interim
Escrow of Parent Common Stock to US Sellers at the Final Closing and upon the
issuance of Parent Common Stock to holders (collectively, including the US
Sellers, the "Holders") of Exchangeable Shares pursuant to the terms of the
Exchangeable Share Provisions, the Holders shall have registration rights with
respect to such shares of Parent Common Stock (the "Registrable Securities")
subject to the following terms and conditions:
(a) Registration on Form S-3. Within five (5) business days after
Parent becomes a registrant entitled to use a Form S-3 registration statement or
any successor form thereto to register the resale (which shall not be through an
underwritten public offering) of the Registrable Securities (the "S-3 Date"),
Parent shall use reasonable best efforts to cause the Registrable Securities to
be registered so as to permit the resale thereof, and in connection therewith
shall prepare and file a Form S-3 registration statement or any successor form
thereto providing for an offering to be made on a continuous basis pursuant to
Rule 415 under the Securities Act (the "Registration Statement") with the SEC
under the Securities Act of 1933, as amended (the "Securities Act") to effect
such registration within five (5) business days after the S-3 Date, and
thereafter Parent shall use its reasonable best efforts to cause the
Registration Statement to be declared effective under the Securities Act as soon
as practicable after the filing thereof; provided, however, that if Parent shall
furnish to the Chief Executive Officer of the Company and to Toucan, to the
attention of the name and at the address provided by Toucan in writing to the
Parent, a certificate signed by the Chief Executive Officer of Parent stating
that, in the good faith judgment of the Board of Directors or Chief Executive
Officer of Parent, it would be seriously detrimental to Parent and its
shareholders for the Registration Statement to be filed on or before the date
filing would otherwise be required, and it is therefore in the best interests of
Parent to defer the filing of the Registration Statement, then Parent may delay
the filing of the Registration Statement, once but not more than once, for a
period not in excess of forty-five (45) days.
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(b) Expenses of Registration. Parent shall pay all Registration
Expenses (as hereafter defined) in connection with any registration,
qualification or compliance pursuant to this Section 5.13, and each Holder shall
pay all Selling Expenses (as hereafter defined) and other expenses that are not
Registration Expenses relating to the Registrable Securities resold by such
Holder. For purposes of this Section 5.13(b), "Registration Expenses" shall mean
all expenses, except as otherwise stated below, incurred by Parent in complying
with Sections 5.13(a) and 5.13(c), including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for Parent, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration.
For purposes of this Section 5.13(b), "Selling Expenses" shall mean all selling
discounts commissions and stock transfer or other Governmental Charges
applicable to the Registrable Securities and all fees and disbursements of
counsel for any Holder.
(c) Registration Procedures. In the case of any registration
effected by Parent pursuant to this Section 5.13, Parent will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. Parent will:
(i) Use reasonable best efforts to keep such registration
effective until the earlier of (A) all Holders having completed the distribution
described in the registration statement relating thereto or (B) the sixth
anniversary of the date of the Final Closing;
(ii) Promptly prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by the Registration Statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(iv) Subject to Section 5.13(h)(ii) hereof, notify each Holder
of Registrable Securities covered by the Registration Statement at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act of the happening of any event as a result of which the prospectus included
in the Registration Statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and at the request of any such Holder,
prepare and furnish to such Holder a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing;
(v) Cause all such Registrable Securities registered pursuant to
the Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by Parent are then listed or quoted,
and in connection therewith, file with the
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Nasdaq National Market an application for listing of additional shares with
respect to the Registrable Securities;
(vi) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to the Registration Statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of the Registration Statement;
(vii) Use its reasonable best efforts to register or qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdiction within the United States and
Puerto Rico as shall be reasonably appropriate for the distribution of the
Registrable Securities covered by the Registration Statement; provided, however,
that Parent shall not be required in connection therewith or as a condition
thereto to qualify to do business in or file a general consent to service of
process in any jurisdiction wherein it would not but for the requirements of
this paragraph be obligated to do so; and
(viii) Otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of at least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(d) Information by Holder. Each Holder of Registrable Securities
shall furnish to Parent such information regarding such Holder and the
distribution proposed by such Holder as Parent may reasonably request in
connection with any registration, qualification or compliance referred to in
this Section 5.13, but only to the extent that such information is required in
order for Parent to comply with its obligations under all applicable securities
and other laws and to ensure that the Registration Statement relating to such
Registrable Securities conforms to the applicable requirements of the Securities
Act and the rules and regulations thereunder. Each Holder covenants that it will
promptly notify Parent of any changes in the information set forth in the
Registration Statement or otherwise provided by such Holder to Parent regarding
such Holder or such Holder's plan of distribution as a result of which the
Registration Statement or any prospectus relating to the Registrable Securities
contains or would contain an untrue statement of a material fact regarding such
Holder or its intended method of distribution of such Registrable Securities or
omits to state any material fact regarding such Holder or its intended method of
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein, not misleading.
(e) Indemnification and Contribution.
(i) Parent agrees to indemnify and hold harmless each Holder
from and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which such Holder may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement, alleged untrue statement, omission or alleged
omission of a material fact in the Registration Statement, any prospectus
included in the Registration Statement, or
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any amendment or supplement to the Registration Statement or any such
prospectus, and Parent will, as incurred, reimburse such Holder for any legal or
other expenses reasonably incurred in investigating, defending or preparing to
defend any such action, proceeding or claim; provided, however, that Parent
shall not be liable in any such case to the extent that such loss, claim, damage
or liability arises out of, or is based upon (A) an untrue statement or alleged
untrue statement made in such Registration Statement in reliance upon and in
conformity with written information furnished to Parent by such Holder in an
instrument executed by such Holder and specifically stated to be for use in the
preparation of the Registration Statement, (B) the failure of such Holder to
comply with any of the covenants and agreements contained in Sections 5.13(f) or
5.13(h) hereof, or (C) any untrue statement in any prospectus that is corrected
in any subsequent prospectus that was delivered to the Holder prior to the
pertinent sale or sales by the Holder.
(ii) Each Holder, severally and not jointly, agrees to indemnify
and hold harmless Parent from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which Parent may
become subject (under the Securities Act or otherwise) insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of, or are based upon (A) an untrue statement, alleged untrue
statement, omission or alleged omission of a material fact in the Registration
Statement, any prospectus included in the Registration Statement, or any
amendment or supplement to the Registration Statement or any such prospectus in
reliance upon and in conformity with written information furnished to Parent by
such Holder in an instrument executed by such Holder and specifically stated to
be for use in preparation of the Registration Statement, provided, however, that
no Holder shall be liable in any such case for any untrue statement included in
any Prospectus which statement has been corrected in a writing delivered to
Parent at least two business days before the sale from which such loss arose,
(B) the failure of such Holder to comply with any of the covenants and
agreements contained in Sections 5.13(f) or 5.13(h) hereof, or (C) any untrue
statement in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to the Holder prior to the pertinent sale or sales by the Holder;
and each Holder, severally and not jointly, will, as incurred, reimburse Parent
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim. In no event shall
the amount payable by any Holder to Parent pursuant to this Section 5.13(e)(ii)
by reason of a sale of Parent Common Stock by such Holder exceed the amount of
the gross proceeds to such Holder from the sale of Parent Common Stock from
which such liability arose.
(iii) Promptly after receipt by any indemnified person under
subsections (i) or (ii) above of a notice of a claim or the beginning of any
action in respect of which indemnity is to be sought against an indemnifying
person pursuant to this Section 5.13(e), such indemnified person shall notify
the indemnifying person in writing of such claim or of the commencement of such
action (provided, however, that no failure to provide such notice shall relieve
any indemnifying person of any liability hereunder except to the extent that
such indemnifying person is prejudiced thereby), and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After
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notice from the indemnifying person to such indemnified person of the
indemnifying person's election to assume the defense thereof, the indemnifying
person shall not be liable to such indemnified person for any legal expenses
subsequently incurred by such indemnified person in connection with the defense
thereof; provided, however, that, if the indemnifying person shall propose that
the same counsel represent it and the indemnified person, and if counsel for the
indemnified person shall reasonably have concluded that there is an actual
conflict of interest posed by the representation proposed by the indemnifying
person, the indemnified person shall be entitled to retain its own counsel
reasonably satisfactory to the indemnifying person at the expense of such
indemnifying person; provided, however that if more than one indemnified person
makes a claim against an indemnifying person based on substantially similar
facts, the indemnifying person shall not be responsible for the fees of more
than one counsel for all indemnified persons whose claims are based on
substantially similar facts.
(iv) If the indemnification provided for in this Section 5.13(e)
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (i) or (ii) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof), in such proportion as is
appropriate to reflect the relative fault of each such party, as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by Parent on the one hand or a
Holder on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Parent and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 5.13(e)(iv) were determined by any method
of allocation which does not take account of the equitable considerations
referred to above in this Section 5.13(e)(iv). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or
actions in respect thereof) referred to above in this Section 5.13(e)(iv) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action,
proceeding or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(v) The obligations of the Parent and the Holders under this
Section 5.13(e) shall be in addition to any liability which Parent and the
respective Holders may otherwise have and shall extend, upon the same terms and
conditions, to each director and officer of Parent or any Holder, and to each
person, if any, who controls Parent or any Holder within the meaning of the
Securities Act or the Exchange Act.
(f) Restrictions on Transferability. The shares of Parent Common
Stock issuable pursuant to the terms of the Exchangeable Share Provisions in a
transaction exempt from the registration requirements of the Securities Act (the
"Restricted Shares") shall not be transferable except (A) in accordance with the
Registration Statement, in which case Holder must comply with
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the requirement of delivering a current prospectus, (B) in accordance with Rule
144, or (C) pursuant to an exemption from the registration requirements of the
Securities Act. Parent shall be entitled to give stop transfer instructions to
its transfer agent with respect to the Restricted Shares in order to enforce the
foregoing restrictions.
(g) Restrictive Legend. Each certificate representing Restricted
Shares shall bear substantially the following legends (in addition to any
legends required under applicable securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM.
ADDITIONALLY, THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED IN THE MERGER AGREEMENT AND PLAN OF
REORGANIZATION AMONG THE ISSUER, COMPASS ACQUISITION CORP., COMPASS HOLDING
CORP. 3034996 NOVA SCOTIA COMPANY, 3034997 NOVA SCOTIA COMPANY AND THE DOCSPACE
COMPANY INC. DATED NOVEMBER 3, 1999 (THE "AGREEMENT"), AND NO TRANSFER OF SHARES
SHALL BE VALID OR EFFECTIVE ABSENT COMPLIANCE WITH SUCH RESTRICTIONS. COPIES OF
THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
REGISTERED HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.
The legend contained in this Section 5.13(g) shall be removed from a
certificate in connection with any sale in compliance with the terms of this
Agreement and pursuant to the Registration Statement, but shall not be removed
in any other circumstance without Parent's prior written consent (which consent
shall not be unreasonably withheld or delayed and shall be granted if such
legend is no longer appropriate).
(h) Transfer of Shares After Registration.
(i) Restriction. Restricted Shares are not transferable on the
books of Parent unless the certificate submitted to Parent's transfer agent
evidencing such Restricted Shares is accompanied by a separate certificate, in
form and substance reasonably satisfactory to Parent, executed by an officer of,
or other person duly authorized by, the Holder for purposes of establishing
compliance with this Agreement.
(ii) Notice to Parent of Proposed Sale and Right of Parent to
Suspend Use of Registration Statement. If any Holder shall propose to sell any
Registrable Securities pursuant to the Registration Statement, it shall notify
Parent of its intent to do so at least three (3) full business days prior to
such sale. Such notice shall be deemed to constitute a representation that any
information previously supplied by such Holder (including without limitation the
information referred to in Section 5.13(d) hereof) is accurate as of the date of
such notice. At any time within
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such three (3) business-day period, Parent may refuse to permit the Holder to
resell any Registrable Securities pursuant to the Registration Statement (the
"Suspension Right"); provided, however, that in order to exercise its Suspension
Right, Parent must deliver a certificate (the "Suspension Notice") in writing to
the Holder to the effect that, in the good faith judgement of the Board of
Directors or Chief Executive Officer of Parent, a delay in such sale is
necessary because a sale pursuant to such Registration Statement in its
then-current form would be seriously detrimental to Parent and its shareholders
and therefore it is in the best interests of Parent to delay the sale under the
Registration Statement. In no event shall such delay exceed forty-five (45)
calendar days (a "Suspension Period"), and provided further, however, that in no
event shall Parent be permitted to exercise its Suspension Right more than three
times in any single calendar year. The date on which a Suspension Notice is
delivered by the Company to the first Holder desiring to sell Registrable
Securities who is so notified in any Suspension Period shall be considered the
start of such Suspension Period and shall constitute one exercise of a
Suspension Right under this subsection, provided, however, any subsequent
Suspension Notice delivered during a Suspension Period shall not be considered a
separate exercise of Parent's Suspension Right. Each Suspension Notice shall set
forth (a) the date on which the Suspension Period covered by such Suspension
Notice commenced and (b) the number of times Parent has exercised its Suspension
Right previously during the same calendar year. Parent agrees that any
Suspension Right imposed on the Holders will be imposed consistently among all
Holders requesting to sell any Registrable Securities during any Suspension
Period.
(i) Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the SEC which may at any time permit the
sale of the Registrable Securities to the public without registration, or
pursuant to a registration on Form S-3, Parent agrees to use its reasonable best
efforts to:
(i) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the Amalgamation;
(ii) File with the SEC in a timely manner all reports and other
documents required of Parent under the Securities Act and the Exchange Act; and
(iii) So long as a Holder owns any Registrable Securities, to
furnish to that Holder forthwith upon request a written statement by Parent as
to its compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of Parent, and such other reports and documents of Parent as
such Holder may reasonably request in availing itself of any rule or regulation
of the SEC allowing such Holder to sell any such Registrable Securities without
registration.
(j) Transfer of Registration Rights. The rights and obligations of
any Holder under this Section 5.13 may be assigned to a transferee or assignee
in connection with any transfer or assignment of Registrable Securities by a
Holder; provided that: (i) such transfer may otherwise be effected in accordance
with applicable securities laws, (ii) Parent is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned under, (iii) each
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transferee shall agree to be bound by all of the provisions of this Section
5.13; and (iv) such assignment shall be effective only if immediately following
such transfer the further disposition of such Registrable Securities by the
transferee or assignee is restricted under the Securities Act.
5.12 Securities Compliance. The Parent Companies and the Company shall
use all reasonable efforts to obtain all orders required from the applicable
Canadian securities authorities to permit (a) the issuance of the Exchangeable
Shares in exchange for Company Capital Stock; (b) the issuance of Parent Common
Stock upon exchange of the Exchangeable Shares in accordance with their terms or
the Voting and Exchange Trust Agreement; and (c) the sale of the Parent Common
Stock outside of Canada, in each case without qualification with or approval of
or the filing of any document, including any prospectus or similar document, or
the taking of any proceeding with, or the obtaining of any further order, ruling
or consent from, any governmental entity or regulatory authority under the
Canadian federal and provincial securities or other laws applicable to residents
of Ontario, British Columbia, Alberta and Nova Scotia or pursuant to the rules
and regulations of any regulatory authority administering such laws, or the
fulfillment of any other legal requirement in any such jurisdiction (other than,
with respect to such first resales, any restrictions on transfer by reason of,
among other things, a holder being a "control person" of Parent or the Company
for purposes of Canadian federal, provincial or territorial securities laws).
5.13 Directors and Officers. Parent agrees that all rights to
indemnification or exculpation existing as of the date of this Agreement in
favor of the directors, officers, employees and other agents of the Company in
the Company's Articles of Amalgamation or By-laws, or any agreement between the
Company and such persons that has been provided to Parent's counsel prior to the
date hereof, shall survive the Amalgamations and shall continue in full force
and effect and Parent agrees to assume, effective at the time of the Final
Closing, all such liability of the Company with respect to such indemnification.
This Section 5.13 shall survive the Amalgamations, is intended to benefit the
indemnified parties, shall be binding upon all successors and assigns of
Exchangeco and Parent, and shall be enforceable by the indemnified parties.
5.14 Tax Matters. The parties agree that they will use their respective
commercially reasonable efforts to cause the Amalgamations, the Reorganization
and the issuance of the Exchangeable Shares in connection with the
Reorganization to the Company's shareholders who are Canadian resident taxpayers
to be tax-deferred for Canadian income tax purposes and not to take any action
reasonably expected to be inconsistent therewith.
ARTICLE VI
CONDITIONS TO THE CLOSINGS
6.1 Initial Closing Conditions. The conditions to the obligations of the
parties at the Initial Closing (as defined in Section 7.1) are as follows:
(a) Conditions to Obligations of Each Party. The respective
obligations of each party to this Agreement to complete the Initial Closing
shall be subject to the satisfaction, on or before the Initial Closing Date (as
defined in Section 7.1), of the following conditions, each of which
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may only be waived by the mutual consent of Parent on behalf of the Parent
Companies and the Company:
(i) Shareholder Approval. This Agreement and the Related
Agreements and the transactions contemplated hereby and thereby shall have been
approved and adopted by all of the shareholders option holders, warrant holders,
or other holders of interests to shares in the Company by the execution of the
Shareholder Implementation Agreement.
(ii) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the transactions contemplated by this
Agreement and the Related Agreements shall be in effect.
(iii) Nasdaq Listing. The shares of Parent Common Stock issuable
to stockholders of the Company pursuant to the Exchangeable Share Provisions and
to the US Sellers in connection with the Initial Closing and such other shares
required to be reserved for issuance in connection with this Agreement and the
Second Amalgamation shall have been authorized for listing on the Nasdaq Stock
Market upon official notice of issuance.
(b) Additional Conditions to Obligations of the Company. The
obligations of the Company to complete the Initial Closing shall be subject to
the satisfaction at or prior to the Initial Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company:
(i) Representations and Warranties. The representations and
warranties of the Parent Companies contained in this Agreement shall have been
true and correct in all material respects as of the date of this Agreement. In
addition, the representations and warranties of the Parent Companies contained
in this Agreement shall be true and correct in all material respects on and as
of the Initial Closing Date except for (i) changes contemplated or permitted by
this Agreement, and (ii) except for those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such particular date). The Company shall have received a
certificate with respect to the foregoing signed on behalf of Parent by a duly
authorized officer of Parent.
(ii) Agreements and Covenants. The Parent Companies shall have
performed or complied (which performance or compliance shall be subject to the
ability of the Parent Companies to cure as provided in Section 9.1(e) below) in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Initial
Closing Time, and the Company shall have received a certificate to such effect
signed by a duly authorized officer of Parent.
(iii) Shareholder Reimbursement Agreement. Parent and the
Company shall have entered into the Shareholder Reimbursement Agreement.
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(iv) Tax Opinion. The Company and shareholders of the Company
shall have received a tax opinion from Arthur Andersen in a form satisfactory to
the Company.
(v)Secretary's Certificate. Parent shall have delivered a
Secretary's Certificate to the Company, in form and substance reasonably
satisfactory to the Company.
(vi) Section 116 Certificate. A determination by Revenue Canada
shall have been received by each US Seller regarding such shareholder's
application for a Section 116 clearance certificate, as contemplated by
subsections (f) and (g) of Section 1.1 hereof, and in the event that Toucan does
not receive a Section 116 clearance certificate from Revenue Canada reasonably
satisfactory to Toucan that provides relief from Canadian withholding taxes and
any applicable bonding, payment or other security obligations on Toucan or its
members, each of the other shareholders of the Company (other than any of the
Parent Companies if any of them is a shareholder) shall have executed and
delivered the Double Tax Indemnity Agreement (with the understanding of the
parties being that this condition shall not be waivable by the Company without
the prior written consent of Toucan).
(c) Additional Conditions to the Obligations of the Parent
Companies. The obligations of the Parent Companies to complete the Initial
Closing shall be subject to the satisfaction at or prior to the Initial Closing
Date of each of the following conditions, any of which may be waived, in
writing, exclusively by Parent:
(i)Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement. In addition,
the representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the Initial
Closing Time except for (i) changes contemplated by this Agreement, and (ii)
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such particular
date). Parent shall have received a certificate with respect to the foregoing
signed on behalf of the Company by a duly authorized officer of the Company.
(ii) Agreements and Covenants. The Company shall have performed
or complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 9.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and Parent and
Amalgamation Sub shall have received a certificate to such effect signed by a
duly authorized officer of the Company. All conditions in favor of the Parent
Companies to the Initial Closing set out in the Shareholder Implementation
Agreement shall have been satisfied.
(iii) Third Party Consents. Parent shall have been furnished
with evidence satisfactory to it that the Company has obtained the consents,
approvals and waivers set forth in Schedule 2.12(c).
(iv) Board Approval. The Board of Directors of the Company shall
have adopted all necessary resolutions, and all other necessary corporate action
shall have been taken by
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the Company, to permit the consummation of the Amalgamations as contemplated by
this Agreement.
(v) Board Recommendation. The Board of Directors of the Company
shall have made and shall not have modified or amended, in any material respect,
an affirmative recommendation that the holders of the Company Common Shares
execute the Shareholder Implementation Agreement.
(vi) Legal Opinion. The Parent Companies shall have received a
legal opinion from Gowling, Strathy & Henderson, legal counsel to the Company,
in substantially the form attached hereto as Exhibit 9.
(vii) Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets (including intangible assets)
financial condition or results of operations of the Company since July 31, 1999.
(viii) Noncompetition Agreements; Invention Assignment. Each
person listed on Schedule 6.3(h) shall have executed and delivered to Parent a
Noncompetition and Nonsolicitation Agreement in substantially the form of
Exhibit 10 (the "Non-Competition Agreements") and all of such agreements shall
be in full force and effect. Each employee of the Company listed on the Company
Schedules as not having executed a valid and binding agreement with the Company
sufficient to vest title in the Company of all Intellectual Property created by
such employee in the scope of his or her employment with the Company shall have
executed such an agreement, in a form satisfactory to Parent's counsel, acting
reasonably.
(ix) Key Employees. Each person listed on Schedule 6.3(i) shall
have accepted an offer of employment with Parent.
(x) Escrow Agreement. Parent, the Company, Escrow Agent and the
Stockholders' Representative (as defined in the Escrow Agreement) shall have
entered into the Escrow Agreement.
(xi) Resignation of Directors and Officers. All directors and
officers of the Company shall have resigned their respective offices as
directors and officers of the Company effective as of the Final Closing.
(xii) Release by Toucan. Toucan, the Company and Parent shall
have entered into a full and final release of any and all claims any of them may
have against one another and each of their directors, officers and employees in
the form attached as Exhibit 11 or other form satisfactory to Parent's counsel.
(xiii) Repayment of Convertible Promissory Note. The Company
shall have repaid to the Company the amount outstanding under the Convertible
Promissory Note or, to the extent the amount outstanding has not been so repaid,
the Aggregate Cash Purchase Price shall be reduced by the amount outstanding on
the Initial Closing Date as is provided for in Section 1.6.
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6.2 Final Closing Conditions. The respective obligations of the parties
to complete the Final Closing (as defined in Section 7.3) shall be subject to
the receipt by the relevant parties of the documents referred to in Section 7.3.
ARTICLE VII
CLOSING PROCEDURE
7.1 Initial Closing
The Initial Closing will take place on the date that is three (3)
business days after the Company has notified the Parent that all parties have
signed the Shareholder Implementation Agreement and each of the conditions to
the Initial Closing set forth in Section 6.1 have been satisfied or waived, and
in any event no later than January 4, 2000 (the "Initial Closing Date") at 9:00
a.m. Eastern Standard Time (the "Initial Closing Time") at the offices of Tory
Haythe in Toronto, Ontario, or at such other time or place as may be agreed upon
by the parties, at which time and place:
(a) Each of the Parent Companies will execute and deliver or cause
to be delivered each of the following to the Company, as applicable to that
Parent Company:
(i) this Agreement and each of the Related Agreements to be
signed on behalf of each of the applicable Parent Companies, and the Voting and
Exchange Trust Agreement to be signed on behalf of the Trustee, which, in the
case of certain of the agreements, will be effective as of the Reorganization;
(ii) a cheque, wire transfer or banker's draft payable to U.S.
counsel to the Parent, in trust, on behalf of the US Sellers as payment of the
cash portion payable to the US Sellers in accordance with Section 1.6;
(iii) a cheque, wire transfer or banker's draft payable to the
escrow agent, to be agreed to by the parties, on behalf of the Company
shareholders in the amount of $5,000,000 in respect of the Shareholder
Reimbursement Agreement;
(iv) share certificates representing shares of Parent Common
Stock registered in the name of the US Sellers in accordance with their
respective holdings of Company Capital Stock in the manner contemplated by
Section 1.6;
(v) a share certificate representing one share of Parent Special
Voting Stock registered in the name of the Trustee;
(vi) an executed copy of the officer's certificate required by
sections 6.1(b)(i) and (ii);
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(vii) unsigned and unsworn copies of the definitive forms of the
Second Amalgamation Agreement, together with all resolutions and other ancillary
documents and instruments necessary or desirable to effect the Second
Amalgamation;
(viii) unsigned copies of the definitive form of the amendments
to the memorandum and articles of association of Exchangeco together with all
resolutions and other ancillary documents and instruments necessary or desirable
to effect the Reorganization; and
(ix) the following documents in form and substance satisfactory
to the Company shall have been delivered to the Company:
(A) a duly certified copy of the constating documents of
each of the Parent Companies, the resolutions authorizing the execution and
delivery of this Agreement, the Related Agreements and all such other documents,
instruments and agreements as may be required to be delivered in connection
herewith or therewith and the entering into and performance of all transactions
contemplated herein and therein; and
(B) such other documents relating to this Agreement or the
Related Agreements and the transactions contemplated herein, therein or in
respect thereof as the Company may reasonably require.
(b) The Company will execute and deliver or cause to be delivered to
the Parent:
(i) this Agreement, each of the Related Agreements and the
Non-Competition Agreements to be signed, as applicable, on behalf of the Company
and each of the applicable Shareholders, which, in the case of certain of the
agreements, will be effective as of the Reorganization;
(ii) share certificates representing shares of Company Capital
Stock registered in the name of the Shareholders in accordance with their
respective holdings of Company Capital Stock, each duly endorsed in blank for
transfer;
(iii) an executed copy of the officer's certificate required by
sections 6.1(c)(i) and (ii) and the consents, approvals and waivers required by
section 6.1(c)(iii);
(iv) legal opinion of Gowling, Strathy & Henderson in the form
attached to this Agreement as Exhibit 10;
(v) resignations of each of the directors and officers of the
Company, effective as of the Final Closing;
(vi) release of Toucan required by section 6.1(c)(xii);
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(vii) documents evidencing filing of the Articles of
Continuance, or if the filing has not occurred, signed copies of the Articles of
Continuance of the Company together with all ancillary documents and instruments
necessary or desirable to effect the Continuance;
(viii) unsigned and unsworn copies of the definitive forms of
the First Amalgamation Agreement, together with all resolutions and other
ancillary documents and instruments executed or filed to effect the First
Amalgamation;
(ix) unsigned and unsworn copies of the definitive forms of the
Second Amalgamation Agreement, together with all resolutions and other ancillary
documents and instruments necessary or desirable to effect the Second
Amalgamation;
(x) unsigned copies of the definitive form of the amendments to
the memorandum and articles of association of Exchangeco together with all
resolutions and other ancillary documents and instruments required to effect the
Reorganization;
(xi) the following documents in form and substance satisfactory
to the Parent shall have been delivered to the Parent:
(A) a duly certified copy of the constating documents of the
Company, the resolutions authorizing the execution and delivery of this
Agreement, the Related Agreements and all such other documents, instruments and
agreements as may be required to be delivered in connection herewith or
therewith and the entering into and performance of all transactions contemplated
herein and therein; and
(B) such other documents relating to this Agreement or the
Related Agreements and the transactions contemplated herein, therein or in
respect thereof as the Company may reasonably require;
(xii) in the event that Toucan does not receive a Section 116
clearance certificate from Revenue Canada reasonably satisfactory to Toucan that
provides relief from Canadian withholding taxes and any applicable bonding,
payment or other security obligations on Toucan or its members, each of the
other shareholders of the Company (other than the Parent Companies if any of
them is a shareholder) shall execute and deliver to Toucan a Double Tax
Indemnity Agreement but under no circumstances shall Parent assume or incur any
liability with respect thereto.
7.2 Interim Escrow
Provided the conditions set forth in section 6.1 have been satisfied, or
waived by the parties as provided in this Agreement, all cheques, stock
certificates and documents tabled at the Initial Closing shall be held in escrow
by counsel to the Parent and released in accordance with an Interim Escrow
Agreement containing the following terms:
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(a) All shares of Parent Common Stock will initially be held by US
counsel to the Parent and all funds will initially be deposited by US counsel to
the Parent in an interest bearing trust account.
(b) The shares of the Company Capital Stock tendered by the US
Sellers will be deemed to have been transferred to Holding ULC and the US
Sellers will cease to be shareholders of the Company at the completion of the
Initial Closing.
(c) The certificate representing the share of Special Voting Stock
of the Parent will be held by counsel to the Parent.
(d) If the Continuance has not occurred, all documents required to
effect the Continuance will be dated the date after the Initial Closing Date and
will be released to Nova Scotia counsel to the Company and filed with the
Registrar under the Companies Act so as to effect the Continuance promptly after
the Initial Closing.
(e) Promptly upon counsel to the Parent receiving confirmation from
Nova Scotia counsel to the Company as to the completion of the Continuance, all
documents required to effect the First Amalgamation will be released from
escrow, dated, signed and sworn by the applicable parties, as the case may be,
and will be delivered to Nova Scotia counsel to the Company who will apply to
and obtain from the Supreme Court of Nova Scotia an order under section 134 of
the NS Act and file the order with the Registrar under the Companies Act.
(f) Promptly upon counsel to the Parent receiving confirmation from
Nova Scotia counsel to the Parent as to the completion of the First Amalgamation
and all applicable securities commission orders having been obtained
satisfactory to counsel to the Parent and Company, each acting reasonably, all
documents required to effect the Second Amalgamation will be released from
escrow, dated, signed and sworn by the applicable parties, as the case may be,
and will be delivered to Nova Scotia counsel to the Parent who will apply to and
obtain from the Supreme Court of Nova Scotia an order under section 134 of the
NS Act and file the order with the Registrar under the Companies Act.
(g) Promptly upon counsel to the Parent receiving confirmation from
Nova Scotia counsel to the Parent as to the completion of the Second
Amalgamation, all documents required to effect the Reorganization will be
released from escrow, dated and signed by the applicable parties and will be
delivered to Nova Scotia counsel to the Parent who will file same with the
Registrar under the Companies Act.
(h) All other documents and items will be released from the Interim
Escrow Agreement upon the Final Closing as described in section 7.3.
7.3 Final Closing
The Final Closing shall take place on the next business day after the
Reorganization is completed (the "Final Closing Date") at 9:00 a.m. Eastern
Standard Time (the "Final Closing Time")
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at the offices of Tory Haythe in Toronto, Ontario, or at such other time or
place as may be agreed upon by the parties, at which time and place:
(a) the following documents in form and substance satisfactory to
the Company and the Parent shall have been delivered:
(i) documents evidencing filing of the Articles of Continuance;
(ii) court approval of the First Amalgamation and a copy of the
order as filed with the Registrar under the Companies Act;
(iii) court approval of the Second Amalgamation and a copy of
the order as filed with the Registrar under the Companies Act; and
(iv) a copy of the amendment to the memorandum and articles of
association of Exchangeco effecting the Reorganization, as filed with the
Registrar under the Companies Act;
(b) all certificates representing Exchangeable Shares, cash and
shares of Holding Companies will be released to the Shareholders entitled
thereto, subject to any applicable withholding tax, by delivery to Company
counsel unless otherwise directed, less Exchangeable Shares which are held as
part of the Escrow Amount;
(c) all certificates representing Parent Common Stock and cash held
by counsel pursuant to section 7.2(a) (including interest earned thereon) will
be released to the Shareholders entitled thereto, subject to any applicable
withholding tax, by delivery to Company counsel unless otherwise directed, less
Parent Company Stock which is held as part of the Escrow Amount;
(d) Common shares of Exchangeco will be released to Holding ULC;
(e) Copies of the Related Agreements, the Non-Competition Agreements
and any other agreements, documents or instrument held pursuant to the Interim
Escrow Agreement will be released, as applicable, to the Company, each of the
applicable Parent Companies, and shareholders by delivery to Company counsel (as
to the shareholders) unless otherwise directed, and
(f) The certificate representing the share of Special Voting Stock
of the Parent held by counsel to the Parent shall be released to the Trustee.
7.4 Failure to Consummate Final Closing
If for any reason, the Final Closing does not occur by January 31, 2000,
the Interim Escrow Agreement will terminate and:
(a) All documents and funds remaining in escrow will be returned to
the party depositing them to the extent those documents continue to remain in
escrow. Interest earned on any funds will be paid to the party to whom the funds
are returned.
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(b) Each share of the Company Capital Stock originally tendered by a
US Seller will be transferred by Holding ULC to that US Seller, provided that,
if the Company (or a successor entity) is then an unlimited liability company,
Holding ULC will transfer the Company Capital Stock to one or more companies
owned by the US Sellers, as directed by the Stockholder Representative. If at
the time of the unwinding the First Amalgamation shall have occurred, the
Company and the shareholders of the Company shall take such actions as are
necessary to cause East ULC to file a valid and timely election to be treated as
an association taxable as a corporation for United States federal income tax
purposes.
(c) The parties will have their respective rights and remedies under
this Agreement and the Shareholder Implementation Agreement.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; ESCROW
8.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement (each as modified by the Company Schedules), and all
of the Parent Companies' representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement, shall survive the Final
Closing and continue until 5:00 p.m., California time, on the first anniversary
of the Final Closing Date.
8.2 Obligation of the Company to Indemnify, Reimburse, etc. Subject to
the provisions of Section 8.4 hereof, the Company, its successors and assigns,
jointly and severally, shall indemnify, reimburse, defend, protect and hold
harmless each of the Parent Companies and each of their successors and assigns
and each of their respective directors, officers, employees, affiliates, agents,
and their respective successors and assigns (each a "Parent Indemnitee") from
and against any claims, losses, liabilities, damages, causes of action, costs
and expenses (including reasonable attorney's, accountant's, consultant's and
expert's fees and expenses) (collectively "Losses") resulting from, imposed
upon, incurred or suffered by any of them, directly or indirectly, based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Company (as such
representations and warranties may be updated by the Company to reflect changes
in the subject matter thereof as permitted or contemplated by the terms of this
Agreement).
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8.3 Obligation of Parent to Indemnify, Reimburse, etc.
(a) Subject to the provisions of Section 8.4 hereof, Parent and
Amalgamation Sub and their respective successors and assigns, jointly and
severally, shall indemnify, reimburse, defend, protect and hold harmless the
Company and its successors and assigns and each of its shareholders, directors,
officers, employees, affiliates, agents, and their respective successors and
assigns (each a "Company Indemnitee") from and against any Losses resulting
from, imposed upon, incurred or suffered by any of them, directly or indirectly,
based upon, arising out of or otherwise in respect of any inaccuracy in or
breach of any representation, warranty, covenant or agreement of Parent.
(b) In addition to the foregoing, upon the completion of the Final
Closing, Parent and its successors and assigns, jointly and severally, shall
indemnify, reimburse, defend, protect and hold harmless the Holding Companies
from and against any Losses resulting from, imposed upon, incurred or suffered
by any of them as a result of the ownership interests in Exchangeco, an
unlimited liability company, following the Final Closing that the respective
Holding Companies would not have been subject to had Exchangeco been organized
as a corporation or limited partnership, provided in no event will the amount of
the indemnity in respect of a Holding Company exceed the net value after tax of
the Parent Common Stock held by such Holding Company to the Shareholder(s) of
that Holding Company.
8.4 Limits on Indemnification, Reimbursement, etc. Absent fraud or
willful misconduct of any party (for which there shall be no limitation of
liability of any party), no Parent Indemnitee and no Company Indemnitee shall
have any right to seek indemnification, reimbursement or defense under this
Agreement or the Escrow Agreement until Losses which would otherwise be
indemnifiable hereunder have been incurred by such party and other indemnitees
associated with or related to such party exceed $400,000. For purposes of the
foregoing, only losses that individually exceed $5,000 shall be counted towards
the $400,000 deductible amount.
8.5 Escrow Arrangements. Concurrent with the Final Closing, the Escrow
Amount shall be placed in an escrow fund (the "Escrow Fund"), to be governed by
the terms of the Escrow Agreement. The Escrow Fund shall be available to
compensate Parent and its affiliates for Losses for which Parent or its
affiliates are entitled to indemnification under Article VIII. The parties
acknowledge that after the Effective Date and absent fraud or willful
misconduct, the maximum amount payable under the indemnification obligations of
the Company under Section 8.2 is the Escrow Amount. The terms and conditions of
the Escrow Fund shall be set forth more fully in the Escrow Agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. Except as provided in Section 9.2 below, this Agreement
may be terminated and the Final Closing abandoned at any time prior to the Final
Closing:
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(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) if the Second Amalgamation has
not occurred by January 31, 2000 (provided that the right to terminate this
Agreement under this clause 9.1(b) shall not be available to any party whose
willful failure to fulfill any obligation hereunder has been the cause of, or
resulted in, the failure of the Second Amalgamation to occur on or before such
date); (ii) there shall be a final nonappeallable order of a federal, state or
provincial court in effect preventing consummation of the Second Amalgamation;
or (iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Second Amalgamation by any
governmental entity that would make consummation of the Second Amalgamation
illegal;
(c) by Parent if the Initial Closing has not occurred prior to
January 4, 2000 (provided that the right to terminate this Agreement under this
clause 9.1(c) shall not be available to Parent if its willful failure to fulfill
any obligation hereunder has been the cause of, or resulted in, the failure of
the Initial Closing to occur on or before such date);
(d) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Second Amalgamation, by any Governmental Entity, which would: (i) prohibit
Parent's or the Company's ownership or operation of any portion of the business
of the Company or (ii) compel Parent or the Company to dispose of or hold
separate, as a result of the Second Amalgamation, any portion of the business or
assets of the Company or Parent;
(e) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
6.3(a) or 6.3(b), as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 8.1(d) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(f) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Amalgamation Sub and as a result of such breach the
conditions set forth in Section 6.2(a) or 6.2(b), as the case may be, would not
then be satisfied; provided, however, that if such breach is curable by Parent
or Amalgamation Sub within thirty (30) days through the exercise of its
reasonable best efforts, then for so long as Parent or Amalgamation Sub
continues to exercise such reasonable best efforts the Company may not terminate
this Agreement under this Section 9.1(e) unless such breach is not cured within
thirty (30) days (but no cure period shall be required for a breach which by its
nature cannot be cured).
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Where action is taken to terminate this Agreement pursuant to this
Section 9.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
9.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 9.1, this Agreement shall forthwith become void and,
except as set forth in Section 9.3, there shall be no liability or obligation on
the part of the Parent Companies or the Company, or their respective officers,
directors or stockholders, provided that each party shall remain liable for any
breaches of this Agreement prior to its termination; and provided further that,
the provisions of Sections 5.2, 5.3 and 5.4 and Article X of this Agreement
shall remain in full force and effect and survive any termination of this
Agreement.
9.3 Amendment. Except as is otherwise required by applicable law or the
Shareholder Implementation Agreement after the shareholders of the Company
approve this Agreement, this Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
9.4 Extension; Waiver. At any time prior to the Final Closing, Parent
and Amalgamation Sub, on the one hand, and the Company, on the other, may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to any of the Parent Companies, to:
320 First Street
San Francisco, CA 94105
Attention: Chief Executive Officer
Telephone No.: (415) 543-2800
Facsimile No.: (415) 808-0777
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with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark L. Reinstra
Telephone No.: (650) 493-9300
Facsimile No.: (650) 461-5375
(b) if to the Company, to:
156 Front Street West
Suite 505
Toronto, Ontario M5J2L6
Attention: Evan Chrapko
Telephone No.: (416) 640-4640
Facsimile No.: (416) 640-4650
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Steve Tonsfeldt
Telephone No.: (650) 854-4488
Facsimile No.: (650) 233-8386
10.2 Interpretation. The words "include," "includes" and "including"
when used herein shall be deemed in each case to be followed by the words
"without limitation." The word "agreement" when used herein shall be deemed in
each case to mean any contract, commitment or other agreement, whether oral or
written, that is legally binding. As used in this Agreement, the phrase "to the
best of [a party's] knowledge," "to [a party's] knowledge," "[a party] is not
aware," and similar phrases shall mean the knowledge of such party, or of the
officers and directors of such party, after careful consideration of the matters
set forth in the representation that is so qualified and a reasonably diligent
review of all files, documents, agreements and other materials in such person's
possession or subject to his or her control. Unless otherwise expressly stated,
all references in this Agreement to "dollars" or "$" shall be deemed to be
references to the currency of the United States. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
10.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
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10.4 Entire Agreement; Assignment. This Agreement, the schedules and
Exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) except with respect to Sections 5.13,
8.2 and 8.3, are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided, except that each of the
Parent Companies may assign its respective rights and delegate its respective
obligations hereunder to its respective affiliates.
10.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
10.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof;
provided, however, that matters relating to the Amalgamations and the
Continuance and the corporate governance and organization of the Company shall
be governed by the laws of the Provinces of Ontario and Nova Scotia, as
applicable. Each of the parties hereto agrees that process may be served upon
them in any manner authorized by the laws of the State of California and the
Province of Ontario for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
10.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
10.9 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or Canada or any state
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<PAGE> 55
or province having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
10.10 Share Legends. All certificates representing any of the shares of
Parent Common Stock to be issued pursuant to this Agreement shall have endorsed
thereon any legend required by Federal or state securities laws.
(Remainder of page intentionally left blank)
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<PAGE> 56
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized respective officers, all as of the date first
written above.
THE DOCSPACE COMPANY INC. CRITICAL PATH, INC.
By /s/ Evan Chrapko By /s/ Brett Robertson
----------------------------- ---------------------------------------
Evan Chrapko Name: Brett Robertson
President and Chief Title: Vice President Strategic
Executive Officer Development and General Counsel
COMPASS HOLDING CORP.
By /s/ Brett Robertson
---------------------------------------
Name: Brett Robertson
Title: Vice President Strategic
Development and General Counsel
COMPASS ACQUISITION CORP.
By /s/ Brett Robertson
---------------------------------------
Name: Brett Robertson
Title: Vice President Strategic
Development and General Counsel
3034996 NOVA SCOTIA COMPANY
By /s/ Brett Robertson
---------------------------------------
Name: Brett Robertson
Title: Vice President Strategic
Development and General Counsel
3034997 NOVA SCOTIA COMPANY
By /s/ Brett Robertson
---------------------------------------
Name: Brett Robertson
Title: Vice President Strategic
Development and General Counsel
***MERGER AGREEMENT AND PLAN OF REORGANIZATION***
<PAGE> 1
EXHIBIT 2.7
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CRITICAL PATH, INC.
WELLFLEET ACQUISITION CORP.
AND
FAXNET CORPORATION
DATED AS OF NOVEMBER 2, 1999
<PAGE> 2
EXECUTION VERSION
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A Form of Voting Agreement
Exhibit B Certificate of Merger
Exhibit C Form of Investment Representation Statement
Exhibit D Form of Legal Opinion of Counsel to Parent
Exhibit E Form of Legal Opinion of Counsel to the Company
Exhibit F Form of Offer Letter
Exhibit G Form of Escrow Agreement
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I THE MERGER.............................................................................1
1.1 The Merger........................................................................1
1.2 Effective Time....................................................................2
1.3 Effect of the Merger..............................................................2
1.4 Certificate of Incorporation; Bylaws..............................................2
1.5 Directors and Officers............................................................2
1.6 Shares to Be Issued; Cash to Be Paid; Effect on Capital Stock.....................2
1.7 Dissenting Shares.................................................................5
1.8 Surrender of Certificates.........................................................5
1.9 No Further Ownership Rights in Company Capital Stock..............................7
1.10 Lost, Stolen or Destroyed Certificates............................................7
1.11 Taking of Necessary Action; Further Action........................................7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................8
2.1 Organization of the Company.......................................................8
2.2 Company Capital Structure.........................................................8
2.3 Subsidiaries......................................................................9
2.4 Authority.........................................................................9
2.5 Company Financial Statements.....................................................10
2.6 No Undisclosed Liabilities.......................................................10
2.7 No Changes.......................................................................10
2.8 Tax and Other Returns and Reports................................................12
2.9 Restrictions on Business Activities..............................................13
2.10 Title to Properties; Absence of Liens and Encumbrances...........................13
2.11 Intellectual Property............................................................14
2.12 Agreements, Contracts and Commitments............................................17
2.13 Interested Party Transactions....................................................18
2.14 Compliance with Laws.............................................................19
2.15 Litigation.......................................................................19
2.16 Insurance........................................................................19
2.17 Minute Books.....................................................................19
2.18 Environmental Matters............................................................19
2.19 Brokers' and Finders' Fees; Third Party Expenses.................................20
2.20 Employee Matters and Benefit Plans...............................................20
2.21 Change of Control and Non-Compete Payments.......................................23
2.22 Year 2000 Compliance.............................................................23
2.23 Transaction Bonus................................................................24
2.24 Representations Complete.........................................................24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.............................24
3.1 Organization, Standing and Power.................................................24
3.2 Authority........................................................................24
3.3 Capital Structure................................................................25
</TABLE>
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<PAGE> 4
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
3.4 SEC Documents; Parent Financial Statements.......................................25
3.5 Representations Complete.........................................................25
3.6 Regulatory Approvals.............................................................26
3.7 Litigation.......................................................................26
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................................................26
4.1 Conduct of Business of the Company...............................................26
4.2 No Solicitation..................................................................28
4.3 Investment Representation Statements.............................................29
ARTICLE V ADDITIONAL AGREEMENTS.................................................................29
5.1 Information Statement; Stockholder Meeting.......................................29
5.2 Access to Information............................................................30
5.3 Confidentiality..................................................................31
5.4 Expenses.........................................................................31
5.5 Public Disclosure................................................................31
5.6 Consents.........................................................................31
5.7 Company Warrants.................................................................31
5.8 FIRPTA Compliance................................................................31
5.9 Reasonable Efforts...............................................................31
5.10 Notification of Certain Matters..................................................32
5.11 Additional Documents and Further Assurances......................................32
5.12 Form S-8.........................................................................32
5.13 NMS Listing......................................................................32
5.14 Cooperation With Financial Statements............................................32
5.15 Employee Benefits................................................................32
5.16 Registration Rights..............................................................33
5.17 401(k) Plan......................................................................38
5.18 Promissory Note..................................................................38
5.19 Company 1999 Bonus Plan..........................................................38
5.20 Satisfaction of Company Liabilities..............................................38
ARTICLE VI CONDITIONS TO THE MERGER.............................................................39
6.1 Conditions to Obligations of Each Party to Effect the Merger.....................39
6.2 Additional Conditions to Obligations of the Company..............................39
6.3 Additional Conditions to the Obligations of Parent and Merger Sub................40
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION; ESCROW................41
7.1 Survival of Representations and Warranties.......................................41
7.2 Obligation of the Company to Indemnify, Reimburse, etc...........................41
7.3 Obligation of Parent to Indemnify, Reimburse, etc................................41
7.4 Claims for Indemnification.......................................................42
7.5 Defense by the Indemnifying Party................................................42
</TABLE>
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<PAGE> 5
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7.6 Limits on Indemnification, Reimbursement, etc....................................43
7.7 Escrow Arrangements..............................................................43
7.8 General Limitations..............................................................43
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER..................................................43
8.1 Termination......................................................................43
8.2 Effect of Termination............................................................44
8.3 Fees and Expenses................................................................45
8.4 Amendment........................................................................45
8.5 Extension; Waiver................................................................45
ARTICLE IX GENERAL PROVISIONS...................................................................45
9.1 Notices..........................................................................45
9.2 Interpretation...................................................................47
9.3 Counterparts.....................................................................47
9.4 Entire Agreement; Assignment.....................................................47
9.5 Severability.....................................................................47
9.6 Other Remedies...................................................................47
9.7 Governing Law....................................................................48
9.8 Rules of Construction............................................................48
9.9 Specific Performance.............................................................48
9.10 Share Legends....................................................................48
</TABLE>
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<PAGE> 6
EXECUTION VERSION
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of November 2, 1999, among Critical Path, Inc., a California
corporation ("Parent"), Wellfleet Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of Parent ("Merger Sub"), and FaxNet Corporation, a
Delaware corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") and all outstanding
options, warrants and other rights to acquire or receive shares of Company
Capital Stock shall be converted into the right to receive a combination of cash
and shares of Common Stock of Parent ("Parent Common Stock").
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Voting Agreements in substantially
the form attached hereto as Exhibit A (the "Voting Agreements").
D. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions.
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
F. The parties intend for the Merger to be accounted for financial
accounting purposes as a purchase.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporations Law ("Delaware Law"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation and as a
<PAGE> 7
wholly-owned subsidiary of Parent. The Company as the surviving corporation
after the Merger is hereinafter sometimes referred to as the "Surviving
Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days, following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Epstein Becker & Green, P.C., 75 State Street, Boston, Massachusetts, unless
another place or time is agreed to by Parent and the Company. The date upon
which the Closing actually occurs is herein referred to as the "Closing Date."
On the Closing Date, the parties hereto shall cause the Merger to be consummated
by filing a Certificate of Merger in substantially the form attached hereto as
Exhibit B (the "Certificate of Merger") with the Secretary of State of the State
of Delaware, in accordance with the relevant provisions of applicable law. The
date and time the Merger becomes effective in accordance with the provisions of
Delaware Law is the "Effective Time". The parties currently intend that the
Closing Date will occur on or prior to December 31, 1999.
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Certificate of Incorporation of Merger Sub
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of Incorporation;
provided, however, that the name of the Surviving Corporation shall be FaxNet
Corporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Shares to Be Issued; Cash to Be Paid; Effect on Capital Stock. The
number of shares of Parent Common Stock to be issued in exchange for the
acquisition by Parent of all outstanding Company Capital Stock, all unexpired
and unexercised options and warrants to acquire Company Capital Stock (other
than unvested Company Options (as defined below)) shall be 2,845,282 shares (the
"Aggregate Share Number"). No adjustment (i.e., credit) shall be made in the
exchange ratio as a result of any cash proceeds received by the Company from the
date hereof to the Closing Date pursuant to the exercise of options or warrants
to acquire Company Capital Stock as such adjustment has been taken into account
in calculating the Aggregate Share Number. The amount of cash that shall be paid
by Merger Sub in the Merger pursuant to this Agreement shall be $20,000,000 (the
"Aggregate Cash Consideration"). Notwithstanding anything herein to the
contrary, in the event that the Aggregate Cash Consideration would otherwise
equal 20% or more of the aggregate consideration to be received by the Company
stockholders as a result of the Merger
-2-
<PAGE> 8
(excluding the portion of the Aggregate Share Number equal to the Escrow Amount
and the Special Escrow Amount, and assuming the Parent Common Stock constituting
the Aggregate Share Number has a value equal to 90% of the closing price for a
share of Parent Common Stock on the Nasdaq National Market on the trading day
immediately preceding the Closing Date), then, in such event, (x) the Aggregate
Cash Consideration shall be reduced to an amount equal to 19.99 % of the
aggregate consideration (determined as set forth above) and (y) the Aggregate
Share Number shall be increased by an amount equal to the amount by which the
Aggregate Cash Consideration is reduced, divided by the 15-day trailing average
closing price per share for a share of Parent Common Stock as reported on the
Nasdaq National Market for the fifteen trading days immediately preceding the
date of this Agreement.
(i) Conversion of Company Common Stock. Subject to the terms and
conditions of this Agreement, as of the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, the Company or the holder of
any shares of the Company Capital Stock, each share of Common Stock of the
Company ("Company Common Stock") issued and outstanding immediately prior to the
Effective Time (other than any shares of Company Common Stock to be canceled
pursuant to Section 1.6(b) and any Dissenting Shares (as defined and to the
extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into the right to receive Parent Common Stock and cash
in the amount identified on Schedule 1.6(a) hereto upon surrender of the
certificate representing such share of Company Common Stock in the manner
provided in Section 1.8.
(b) Cancellation of Parent-Owned and Company-Owned Stock. Each share
of Company Capital Stock owned by Merger Sub, Parent, the Company or any direct
or indirect wholly-owned subsidiary of Parent or of the Company immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Stock Options and Warrants to Purchase Company Capital Stock.
(i) At the Effective Time, all options to purchase Company
Common Stock then outstanding under the Company's 1996 Employee and Consultant
Stock Option Plan (the "Option Plan") shall be assumed by Parent in accordance
with provisions described below.
(1) At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each a "Company Option") under the
Option Plan or otherwise, whether vested or unvested, shall be, in connection
with the Merger, assumed by Parent. Each Company Option so assumed by Parent
under this Agreement shall continue to have, and be subject to, the same terms
and conditions set forth in the Option Plan and/or as provided in the respective
option agreements governing such Company Option immediately prior to the
Effective Time, except that (A) such Company Option shall be exercisable for
that number of whole shares of Parent Common Stock equal to the product of the
number of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied by the
Option Exchange Ratio (as identified on Schedule 1.6(c) hereto) rounded down to
the nearest whole share and (B) the per share exercise price for the shares of
Parent Common Stock issuable upon exercise of such assumed Company Option shall
be equal to the quotient determined by dividing the exercise price per share of
Company Common Stock at which such Company Option was exercisable immediately
prior to the Effective Time by the Option Exchange Ratio, rounded up to the
nearest whole cent.
(2) It is the intention of the parties that the Company
Options assumed by Parent qualify following the Effective Time as incentive
stock options as defined in Section 422 of the
-3-
<PAGE> 9
Code to the extent the Company Options qualified as incentive stock options
immediately prior to the Effective Time.
(3) Promptly following the Effective Time, Parent will issue
to each holder of an outstanding Company Option a document evidencing the
foregoing assumption of such Company Option by Parent.
(ii) At the Effective Time, each outstanding warrant to purchase
Company Capital Stock (a "Company Warrant") that has not been fully exercised
shall be assumed by Parent. Each Warrant so assumed by Parent under this
Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the applicable warrant agreement immediately prior to
the Effective Time (including, without limitation, any repurchase rights or
vesting provisions), except that (i) each Company Warrant shall be exercisable
(or shall become exercisable in accordance with its terms) for that number of
whole shares of Parent Common Stock equal to the product of the number of shares
of Company Capital Stock that were issuable upon exercise of such Company
Warrant immediately prior to the Effective Time multiplied by the Warrant
Exchange Ratio (as identified on Schedule 1.6(c)), rounded to the nearest whole
number of shares of Parent Common Stock and (ii) the per share exercise price
for the Parent Common Stock issuable upon exercise of such assumed Company
Warrant shall be equal to the quotient determined by dividing the exercise price
per share of Company Capital Stock at which such Company Warrant was exercisable
immediately prior to the Effective Time by the Warrant Exchange Ratio, rounded
to the nearest whole cent.
(d) Capital Stock of Merger Sub. Each share of Common Stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(e) Adjustments to Exchange Ratio. The number of shares issuable
pursuant to this Section 1.6 shall be adjusted to reflect fully the effect of
any stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Capital Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Capital Stock occurring after the date
hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof, each holder of shares of Company Capital
Stock who would otherwise be entitled to a fraction of a share of Parent Common
Stock (after aggregating all fractional shares of Parent Common Stock to be
received by such holder) shall be entitled to receive from Parent an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) $45.096.
(g) Aaron Eisendrath-Haelbig Warrant. For purposes of this Section
1.6, Parent and the Company agree that the Warrant dated March 31, 1999 issued
by the Company to Aaron Eisendrath-Haelbig shall be deemed to be null and void
as of the Effective Time. In the event that such Warrant is not terminated prior
to the six-month anniversary of the Closing Date, Parent shall be deemed to have
asserted a claim with respect to such warrant against that portion of the Escrow
Fund which would otherwise be released to the Company stockholders pursuant to
the Escrow Agreement on such six-month anniversary. Thereafter the shares of
Parent Common Stock representing such portion of the Escrow Fund shall continue
to be held in escrow pursuant to the Escrow Agreement.
-4-
<PAGE> 10
(h) Definitions.
(i) Escrow Amount. The "Escrow Amount" shall be 266,099 shares
of Parent Common Stock.
(ii) Special Escrow Amount. The "Special Escrow Amount" shall be
776,122 shares of Parent Common Stock.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder who has demanded and
perfected dissenters' rights for such shares in accordance with Delaware Law and
who, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive Parent Common Stock pursuant to Section 1.6, but
the holder thereof shall only be entitled to such rights as are granted by
Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any holder
of shares of Company Capital Stock who demands appraisal of such shares under
Delaware Law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Parent Common Stock and
cash in lieu of fractional shares as provided in Section 1.6, without interest
thereon, upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demands for appraisal of any shares of Company Capital Stock, withdrawals of
such demands, and any other instruments served pursuant to Delaware Law and
received by the Company and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for appraisal under
Delaware Law. The Company shall not, except with the prior written consent of
Parent, voluntarily make any payment with respect to any demands for appraisal
of capital stock of the Company or offer to settle or settle any such demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. American Stock Transfer & Trust Company shall
serve as the exchange agent (the "Exchange Agent") in the Merger.
(b) Parent and Merger Sub to Provide Cash and Common Stock. On or
prior to the Effective Time, Parent shall deliver to the Exchange Agent for
exchange in accordance with this Article I, the aggregate number of shares of
Parent Common Stock issuable pursuant to Section 1.6 in exchange for outstanding
shares of Company Capital Stock and shall cause Merger Sub to deliver to the
Exchange Agent an amount in cash equal to the Aggregate Cash Consideration;
provided that, on behalf of the holders of Company Capital Stock, Parent shall
deposit into an escrow account a number of shares of Parent Common Stock equal
to the Escrow Amount out of the aggregate number of shares of Parent Common
Stock otherwise issuable pursuant to Section 1.6 and this Section 1.8(b);
provided further, that, in the event that the Company shall have failed to
extend the term of the Amended and Restated Services Agreement dated March 12,
1997, as further amended to date, between the Company and U.S. West
Communications (the "U.S. West Agreement") to a period ending not earlier than
March 12, 2001, on substantially those terms set forth on Schedule 1.8(b), then,
on behalf of the holders of Company Capital Stock, Parent shall deposit into
such
-5-
<PAGE> 11
escrow account an additional number of shares of Parent Common Stock equal to
the Special Escrow Amount out of the aggregate number of shares of Parent Common
Stock otherwise issuable pursuant to Section 1.6 and this Section 1.8(b). The
portion of the Escrow Amount and Special Escrow Amount, respectively,
contributed on behalf of each holder of Company Capital Stock shall be in
proportion to the aggregate number of shares of Parent Common Stock which such
holder would otherwise be entitled to receive under Section 1.6 by virtue of
ownership of outstanding shares of Company Capital Stock.
(c) Exchange Procedures. Promptly after the execution of this
Agreement, the Company shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which represent outstanding
shares of Company Capital Stock, (i) the Information Statement contemplated by
Section 5.1, which shall include an allocation of the cash and Parent Common
Stock consideration to be paid in exchange for the shares of Company Capital
Stock, together with a Stockholders' Letter Agreement appointing Keith Cooper
and Robert C. Roeper as "Stockholders' Representatives", (ii) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (iii) instructions for
delivering the Certificates to Epstein Becker & Green, P.C. ("EBG") to be held
until the Effective Time and, at the Effective Time, surrendered in exchange for
cash and/or certificates representing shares of Parent Common Stock. Upon
surrender, by EBG pursuant to the letter of transmittal at the Effective Time or
by EBG or directly by the holder of such Certificate if after the Effective
Time, of a Certificate for cancellation to the Exchange Agent or to such other
agent or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock (less the number of shares of Parent Common Stock,
if any, to be deposited in the Escrow Fund (as defined in Section 7.7 below) on
such holder's behalf pursuant to Section 7.7 hereof), and any cash consideration
to be received plus cash in lieu of fractional shares in accordance with Section
1.6, to which such holder is entitled pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. As soon as practicable
after the Effective Time, and subject to and in accordance with the provisions
of Article VII hereof, Parent shall cause to be distributed to the Escrow Agent
a certificate or certificates representing that number of shares of Parent
Common Stock equal to the Escrow Amount and Special Escrow Amount, if
appropriate, which shall be registered in the name of the Escrow Agent. Such
shares shall be beneficially owned by the holders on whose behalf such shares
were deposited in the Escrow Fund and shall be available to compensate Parent as
provided in Article VII. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Company Capital Stock
will be deemed from and after the Effective Time, for all corporate purposes,
other than the payment of dividends, to evidence the ownership of the number of
full shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted and the right to receive the applicable
amount of cash consideration for such shares of Company Capital Stock and cash
in lieu of the issuance of any fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a
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<PAGE> 12
record date after the Effective Time theretofore paid with respect to such whole
shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation (or any
officer or director thereof) or any party hereto shall be liable to a holder of
shares of Parent Common Stock or Company Capital Stock for any amount properly
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
1.9 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Capital Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such shares of Parent Common Stock, cash and cash for
fractional shares, if any, as may be required pursuant to Section 1.6; provided,
however, that Parent may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
1.11 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub,
subject to such exceptions as are specifically disclosed in the disclosure
letter (referencing the appropriate section number) supplied by the Company to
Parent (the "Company Schedules") and dated as of the date hereof, as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, assets (including intangible assets), financial condition or results
of operations of the Company; provided that in evaluating whether such an event
would constitute a material adverse effect, the effect shall be measured against
the business, assets (including intangible assets), financial condition and
results of operations of the Company on a normalized basis taking into account
the state of such matters over the twelve month period preceding the date of
this Agreement (hereinafter referred to as a "Material Adverse Effect"). The
Company has delivered a true, correct and complete copy of its Certificate of
Incorporation and Bylaws, each as amended to date, to Parent.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of (i)
19,226,125 shares of Common Stock, of which 2,787,637 shares are issued and
outstanding, and (ii) 23,875 shares of Preferred Stock, of which 2,500 are
designated Series A Preferred, all of which are issued and outstanding, 3,125
shares are designated Series B Preferred, all of which are issued and
outstanding, 1,000 shares are designated Series C Preferred, all of which are
issued and outstanding, 5,250 shares are designated Series D Preferred Stock,
all of which are issued and outstanding, and 12,000 shares are designated Series
E Preferred, all of which are issued and outstanding. The Company Capital Stock
is held by the persons and in the amounts set forth on Schedule 2.2(a). All
outstanding shares of Company Capital Stock are duly authorized, validly issued,
fully paid and non-assessable and not subject to preemptive rights created by
statute, the Certificate of Incorporation or Bylaws of the Company or any
agreement to which the Company is a party or by which it is bound. On or at the
Effective Time, each outstanding share of Preferred Stock of the Company, other
than shares for which dissenter's rights have been exercised, shall be converted
into Common Stock of the Company in such number of shares of Common Stock of the
Company as is set forth on Schedule 2.2(a).
(b) The Company has reserved 2,150,000 shares of Common Stock for
issuance to directors, employees and consultants pursuant to the Option Plan, of
which 1,512,598 shares are subject to outstanding, unexercised options and
433,065 shares remain available for future grant. The Company has reserved no
shares of Common Stock for issuance upon exercise of outstanding Company Options
granted outside the Option Plan. Schedule 2.2(b) sets forth for each outstanding
Company Option the name of the holder of such option, the number of shares of
Common Stock subject to such option, the exercise price of such option and the
vesting schedule for such option, including the extent vested to date and
whether the exercisability of such option will be accelerated and become
exercisable by the transactions contemplated by
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this Agreement. Schedule 2.2(b) also sets forth for each outstanding Company
Warrant the name of the holder of such warrant, the number of shares of Company
Capital Stock subject to such warrant, the exercise price of such warrant and
the vesting schedule for such warrant, including the extent vested to date and
whether the exercisability of such warrant will be accelerated and become
exercisable by the transactions contemplated by this Agreement. Except as
described in Schedule 2.2(b), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which the
Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of the Company. Except
for the Company Options and Company Warrants described in Schedule 2.2(b), there
are no options, warrants, calls, rights, commitments or agreements of any
character, written or oral, to which the Company is a party or by which it is
bound obligating the Company to grant, extend, accelerate the vesting of, change
the price of, otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. Except as disclosed on Schedule 2.2(b), the
holders of Company Options and Company Warrants have been or will be given, or
shall have properly waived, any required notice prior to the Merger. Solely as a
result of the Merger, no person will have rights to acquire or receive Company
Capital Stock, other than as held by Parent or as set forth on Schedule 2.2(b).
2.3 Subsidiaries. Except as set forth on Schedule 2.3, the Company does
not have and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
2.4 Authority. Subject only to the approval of the Merger and this
Agreement by the Company's stockholders, the Company has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The vote required of the Company's
stockholders to duly approve the Merger and this Agreement is the affirmative
vote of the holders of a majority of the issued and outstanding shares of
Company Common Stock of the Company voting as one group and the holders of a
majority of the issued and outstanding shares of the Company Preferred Stock,
each such series voting as a separate group, except that the separate
affirmative vote of the holders of 55% of the issued and outstanding shares of
Series D Preferred voting as a separate group is required. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company, subject only to the approval of the Merger by the Company's
stockholders. The members of the Company's Board of Directors present at a
meeting held October 27, 1999, have unanimously approved the Merger and this
Agreement, such that the Merger and this Agreement have been approved by the
required number of directors of the Company's Board of Directors. This Agreement
has been duly executed and delivered by the Company and constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance or other
laws affecting the rights of creditors generally. Except as set forth on
Schedule 2.4, subject only to the approval of the Merger and this Agreement by
the Company's stockholders, the execution and delivery of this Agreement by the
Company does not, and, as of the Effective Time, the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (any such event, a "Conflict") (i)
any provision of the Certificate of Incorporation or Bylaws of the Company or
(ii) any mortgage, indenture, lease, contract or other agreement or, to the
knowledge of the Company, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Company or its properties or assets, except in those instances where such
Conflict would have no Material Adverse Effect. No consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other federal, state, county,
local or foreign governmental authority, instrumentality, agency or commission
("Governmental Entity") or any third party (so as not to trigger any Conflict),
is required by or with respect to the Company in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated
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<PAGE> 15
hereby, except for (i) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, (ii) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws, (iii)
expiration or early termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (iv) such other consents, waivers, authorizations, filings, approvals
and registrations which are set forth on Schedule 2.4.
2.5 Company Financial Statements. Schedule 2.5(a) sets forth (i) the
Company's audited consolidated balance sheet as of December 31,1998, and the
related consolidated statements of operations, of changes in redeemable
preferred stock and stockholders' equity and of cash flows for the twelve-month
period then ended (collectively, the "Year-End Financials") and (ii) the
Company's unaudited balance sheet dated as of September 30, 1999 (the "Balance
Sheet") and the unaudited statements of operations and cash flows for the
nine-month period ended September 30, 1999 (collectively, the "Interim
Financials"). Except as set forth on Schedule 2.5(b), the Year-End Financials
and Interim Financials have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent throughout the
periods indicated and consistent with each other. Except as set forth on
Schedule 2.5(c), the Year-End Financials and Interim Financials present fairly
the financial condition and operating results of the Company as of the dates and
during the periods indicated therein, subject, in the case of the unaudited
financial statements, to normal year-end adjustments and footnotes, which will
not be material in amount or significance.
2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, the
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with generally accepted accounting
principles), which individually or in the aggregate, (i) has not been reflected
in the Balance Sheet, or (ii) has not arisen in the ordinary course of the
Company's business since September 30, 1999, consistent with past practices and
in the aggregate do not exceed $150,000.
2.7 No Changes. Except as set forth in Schedule 2.7, since September 30,
1999, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company;
(c) capital expenditure or commitment by the Company of $25,000 in
any individual case or $50,000 in the aggregate;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) notice of a claim of wrongful discharge or, to the Company's
knowledge, labor trouble or unlawful labor practice or action;
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<PAGE> 16
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person except as otherwise contemplated by this
Agreement or in the ordinary course of business;
(j) sale, lease, license or other disposition of any of the assets
or properties of the Company, except in the ordinary course of business as
conducted on that date and consistent with past practices;
(k) amendment or termination or notice of non-renewal of any
material contract, agreement or license to which the Company is a party or by
which it is bound, except for an amendment to the U.S. West Agreement or in the
ordinary course of business;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others except for advances to employees for travel and
business expenses or use of the Company's existing lines of credit in the
ordinary course of business, consistent with past practices;
(m) waiver or release of any material right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company;
(n) commencement or notice or, to the Company's knowledge, threat of
commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
(o) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.11 below) or of
infringement by the Company of any third party's Intellectual Property rights;
(p) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities, other than those options to purchase a total of
166,000 shares of Company Common Stock granted at a meeting of the Company's
Board of Directors held October 27, 1999;
(q) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company; or
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<PAGE> 17
(r) negotiation or agreement by the Company or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or, collectively, "Taxes", means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have prepared and
filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
concerning or attributable to the Company or its operations and such Returns are
true and correct and have been completed in accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will have paid
all Taxes shown as due on the Company's Returns and will have accrued all Taxes
it is required to accrue and (B) will have withheld with respect to its
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld.
(iii) The Company has not been delinquent in the payment of any
material Tax nor is there any Tax deficiency outstanding, proposed or assessed
against the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of the Company
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v)The Company does not have any liabilities for unpaid federal,
state, local or foreign Taxes which have not been accrued or reserved against on
the Balance Sheet, whether asserted or unasserted, contingent or otherwise, and
the Company has no knowledge of any basis for the assertion of any such
liability attributable to the Company, its assets or operations.
(vi) The Company has provided to Parent copies of all federal
and state income and all state sales and use Tax Returns for all periods since
the date of Company's incorporation.
(vii) There are (and as of immediately following the Closing
there will be) no liens, pledges, charges, claims, security interests or other
encumbrances of any sort ("Liens") on the assets of the Company relating to or
attributable to Taxes.
(viii) The Company has no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company.
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(ix) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(x)As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or 162 of the Code.
(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
(xiii) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xiv) Neither Company nor any of its subsidiaries (a) has been a
member of an affiliated group (within the meaning of Section 1504(a) of the
Code) filing a consolidated federal income Tax Return (other than a group the
common parent of which was Company) or (b) has any liability for the Taxes of
any person (other than Company or any of its Subsidiaries) under Treas. Reg. ss.
1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract, or otherwise.
(xv) Neither the Company nor any of its subsidiaries has
constituted either a "distributing corporation" or a "controlled corporation" in
a distribution of stock qualifying for tax-free treatment under Section 355 of
the Code (x) in the two years prior to the date of this Agreement or (y) in a
distribution which could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
2.9 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or, to the Company's knowledge, otherwise binding
upon the Company, which has or reasonably could be expected to have the effect
of prohibiting or impairing any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or the conduct
of business by the Company as presently conducted by the Company, or, to the
knowledge of the Company, as proposed to be conducted after the Merger. Without
limiting the foregoing, except as disclosed on Schedule 2.9, the Company has not
entered into any agreement under which the Company is restricted from selling,
licensing or otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all real property currently
leased by the Company, the name of the lessor and the expiration date of the
lease and the aggregate annual rental fees payable under any such lease. All
such current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, to the Company's knowledge, any existing default or event of default (or
event which with notice or lapse of time, or both, would constitute a default).
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(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Year-End Financials or Interim Financials or in
Schedule 2.10(b) and except for liens for taxes not yet due and payable, liens
in favor of equipment lessors secured by personal equipment, and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
2.11 Intellectual Property.
(a) For the purposes of this Section 2.11, the following terms have
the following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United
States and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof, and equivalent or similar rights anywhere
in the world in inventions and discoveries ("Patents); (ii) all
inventions (whether patentable or not), invention disclosures,
improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation
embodying or evidencing any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor and all other rights
corresponding thereto throughout the world ("Copyrights"); (iv) all
industrial designs and any registrations and applications therefor
throughout the world; (v) all trade names, logos, common law trademarks
and service marks, trademark and service mark registrations and
applications therefor and all goodwill associated therewith throughout
the world ("Trademarks"); (vi) all databases and data collections and
all rights therein throughout the world; and (vii) all computer software
including all source code, object code, firmware, development tools,
files, records and data, all media on which any of the foregoing is
recorded; (viii) all World Wide Web addresses, sites and domain names;
and (ix) any similar, corresponding or equivalent rights to any of the
foregoing anywhere in the world.
"Business" means the business of the Company, including the manufacture,
use, licensing, distribution and sale of any products or technology or
the provision of any services by the Company, as currently conducted.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by or licensed to the Company.
"Registered Intellectual Property" shall mean all United States and
foreign: (i) Patents, including applications therefor; (ii) registered
Trademarks, applications to register Trademarks, including intent-to-use
applications, or other registrations or applications related to
Trademarks; (iii) Copyrights registrations and applications to register
Copyrights; and (iv) any other Company Intellectual Property that is the
subject of an application, certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government or
other public legal authority at any time.
(b) Schedule 2.11(b) lists all Registered Intellectual Property in
whole or in part owned by, assigned to, or filed in the name of, the Company
(the "Company Registered Intellectual Property").
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<PAGE> 20
(c) Except as set forth on Schedule 2.11(c), each item of Company
Intellectual Property, including all Company Registered Intellectual Property
listed on Schedule 2.11(b) , that is owned by the Company is free and clear of
any encumbrance, including any lien or security interest.
(d) The Company: (i) has the right to use, either by ownership or
license all Trademarks, including trade names, trade dress and similar
designations of origin used in connection with the operation or conduct of the
Business and (ii) owns exclusively, and has good title to, all copyrighted works
that are software products created by the Company or other works of authorship
that the Company otherwise purports to own except as would not constitute a
Material Adverse Effect.
(e) Except as set forth on Schedule 2.11(e), the Company has not
transferred ownership of, or granted any license of or right to use or
authorized the retention of any rights to use, any Intellectual Property that
is, or was, Company Intellectual Property, to any other person, other than
nonexclusive licenses .
(f) The Company Intellectual Property constitutes all the
Intellectual Property used in and/or necessary to the conduct of the Business
including (i) the making, using, selling, marketing, or importing of any product
or device, (ii) the practice of any process, (iii) the offering or performance
of any service, or (iv) the copying, display, performance, distribution,
creation of derivative works of, or the exploitation of any device or work,
including any of the foregoing with respect to products, technology or services
currently under development by Company.
(g) The contracts, licenses and agreements listed on Schedule
2.12(a) include all material contracts, licenses and agreements pursuant to
which any third party has licensed any Intellectual Property to the Company.
(h) The contracts, licenses and agreements listed on Schedule
2.12(a) include all contracts and agreements pursuant to which any Person,
including any third party developer or consultant, has developed any device or
technology, authored any work, or otherwise created any thing in which any
Intellectual Property rights might arise, either separately or jointly with the
Company, which the Company uses or possesses or which the Company believes it
owns and the failure of the Company to use, possess or own such Intellectual
Property right would have a Material Adverse Effect.
(i) The contracts, licenses and agreements listed on Schedule
2.12(a) include all material contracts, licenses and agreements pursuant to
which the Company has licensed or transferred to any third person any material
Company Intellectual Property other than licenses to third party end-users
entered into in the ordinary course of business. The Company is neither in
breach of, nor has it failed to perform under any of the foregoing contracts,
licenses and agreements and, to the knowledge of the Company, no other party to
such contracts, licenses and agreements is in breach of or has failed to perform
thereunder where such breach or failure to perform would result in a Material
Adverse Effect.
(j) The consummation of the transactions contemplated by this
Agreement will not cause or obligate the Surviving Corporation (i) to grant to
any third party any rights or licenses with respect to any Intellectual Property
of the Surviving Corporation or, to the knowledge of the Company, the Parent; or
(ii) pay any royalties or other amounts in excess of those being paid by Company
prior to the Closing.
(k) Except as set forth on Schedule 2.12(a), the consummation of the
transactions contemplated by this Agreement will not result in the loss of, or
otherwise Materially Adversely Effect, any
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<PAGE> 21
ownership rights of Company in any Company Intellectual Property or result in
the breach or termination of any license, contract or agreement to which Company
is a party respecting any material Company Intellectual Property.
(l) The operation of the Business, including (i) the making, using,
selling, marketing, or importing of any product or device, (ii) the practice of
any process, (iii) the offering or performance of any service, or (iv) the
copying, distribution, performance, display, creation of derivative works of, or
the exploitation of any device or work, including any of the foregoing with
respect to products, technology or services currently under development by
Company, does not, and will not when conducted in substantially the same manner
following the Closing by the Surviving Corporation, infringe or misappropriate
the Intellectual Property of any person, violate the rights of any person, or
constitute unfair competition or trade practices under the laws of any
jurisdiction, and the Company has not received written notice from any person
claiming that such operation or any act, product, technology or service of the
Business infringes or misappropriates the Intellectual Property of any person or
constitutes unfair competition or trade practices under the laws of any
jurisdiction (nor is the Company aware of any basis therefor). Without limiting
the foregoing, to the knowledge of the Company, it has not misappropriated the
trade secrets of, or infringed the Copyright of any third party.
(m) Except as disclosed on Schedule 2.15, there are no contracts,
licenses or agreements between the Company and any other person with respect to
Company Intellectual Property under which there is any dispute known to the
Company regarding the scope of such agreement, or performance under such
contract, license or agreement including with respect to any payments to be made
or received by the Company thereunder.
(n) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property.
(o) Except as disclosed on Schedule 2.11, no Company Intellectual
Property is subject to any proceeding or outstanding decree, order, judgment,
agreement or stipulation that restricts in any manner the use, transfer or
licensing thereof by the Company or may affect the validity, use or
enforceability of such Company Intellectual Property.
(p) Schedule 2.11 lists all action, including the payment of any
fees, that must, or should be performed by, or on behalf of, the Company in the
ninety-day period following the Closing Date, with respect to any application
for, perfection of, preservation of, or continuation of any rights of Company
with respect to any Company Intellectual Property, including the filing of any
patent applications, response to Patent Office actions or payment of fees,
including renewal fees.
(q) The Company has not claimed small business status, or other
particular status in the application for any Registered Company Intellectual
Property which claim of status was not at the time made, or which has since
become inaccurate or false or that will no longer be true and accurate as a
result of the Closing.
(r) All software products of the Company were written and created
solely by either (i) employees of the Company acting within the scope of their
employment, (ii) by third parties who have validly licensed the Intellectual
Property rights in such products to the Company, or (iii) by third parties who
have validly assigned their Intellectually Property rights in such products to
the Company.
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(s) To Company's Knowledge, the Company has no information,
materials, facts, or circumstances, including any information or fact that would
constitute prior art, that would render any of the Company Registered
Intellectual Property invalid or unenforceable, or would adversely effect any
pending application for any Company Registered Intellectual Property and the
Company has not misrepresented, or failed to disclose, and has no knowledge of
any misrepresentation or failure to disclose, any fact or circumstances in any
application for any Company Registered Intellectual Property that would
constitute fraud or a material misrepresentation with respect to such
application or that would otherwise effect the validity or enforceability of any
Company Registered Intellectual Property.
(t) The Company has taken all steps reasonable under the
circumstances to protect the confidentiality and trade secret status of any
material confidential information of the Company and knows of no basis on which
it could be claimed that the Company has failed to protect the confidentiality
of any material Confidential Information of the Company.
(u) Except as set forth on Schedule 2.11(u), all employees of the
Company have entered into a valid and binding agreement with the company
sufficient to vest title in the Company of all Intellectual Property created by
such employee in the scope of his or her employment with the Company, except
where the failure of an employee to have entered into such an agreement is not
reasonably expected to be material to the Company.
2.12 Agreements, Contracts and Commitments.
(a) Except as set forth on Schedule 2.12(a), the Company does not
have, is not a party to nor is it bound by:
(i)any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations other than as required by
statute, which are described on Schedule 2.12(a)
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization,
(v)any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually
in excess of $150,000,
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(viii) any agreement of indemnification or guaranty, other than
indemnification granted to third party licensees of the Company in the ordinary
course of business except with respect to consequential damages,
(ix) any agreement containing any covenant limiting the freedom
of the Company to engage in any line of business or to compete with any person,
(x)any agreement relating to capital expenditures and involving
future payments in excess of $150,000,
(xi) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise outside the ordinary course of
the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order for raw materials or contract for the
purchase of raw materials involving $50,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
(xvi) any agreement pursuant to which the Company has granted or
may grant in the future, to any party a source-code license or option or other
right to use or acquire source-code, or
(xvii) any other agreement that involves $250,000 or more or is
not cancelable without penalty within thirty (30) days.
(b) Except for such alleged material breaches, violations and
defaults and events that would constitute a material breach, violation or
default with the lapse of time, giving of notice, or both, as are all noted in
Schedule 2.12(b), the Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract or commitment required to be set
forth on Schedule 2.12(a) or Schedule 2.11 (any such agreement, contract or
commitment, a "Contract"). Each Contract is in full force and effect and, except
as otherwise disclosed in Schedule 2.12(b), is not subject to any default
thereunder of which the Company has knowledge by any party obligated to the
Company pursuant thereto.
(c) Schedule 2.12(c) identifies each Contract that requires a
consent, waiver or approval to preserve all rights of, and benefits to, the
Surviving Corporation under such Contract as a result of entering into this
Agreement or effecting the Merger or the other transactions contemplated by this
Agreement (each a "Required Consent").
2.13 Interested Party Transactions. Except as set forth on Schedule
2.13, to the Company's knowledge, no officer, director or shareholder of the
Company (nor any ancestor, sibling, descendant or spouse of any of such persons,
or any trust, partnership or corporation in which any of such persons has or has
had an economic interest), has or has had, directly or indirectly, (i) an
economic interest in any entity which furnished or sold, or furnishes or sells,
services or products that the Company furnishes or sells, or proposes
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<PAGE> 24
to furnish or sell, (ii) an economic interest in any entity that purchases from,
or sells or furnishes to, the Company, any goods or services or (iii) a
beneficial interest in any contract or agreement set forth in Schedule 2.12(a);
provided, that (x) ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation shall not be deemed an "economic
interest in any entity" for purposes of this Section 2.13.
2.14 Compliance with Laws. The Company has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation.
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
action, suit or proceeding of any nature pending or to the Company's knowledge
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such. Except as set forth in
Schedule 2.15, to the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any governmental entity. Schedule 2.15 sets forth, with
respect to any pending or threatened action, suit, proceeding or investigation,
the parties thereto, the subject matter thereof and the remedy requested. No
governmental entity has at any time challenged or questioned the legal right of
the Company to manufacture, offer or sell any of its products in the present
manner or style thereof.
2.16 Insurance. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
2.17 Minute Books. The minute books of the Company provided to counsel
for Parent are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors and shareholders or actions by
written consent since the time of incorporation of the Company.
2.18 Environmental Matters.
(a) Hazardous Material. The Company has not: (i) operated any
underground storage tanks, and has no knowledge of the existence, at any time,
of any underground storage tank (or related piping or pumps), at any property
that the Company has at any time owned, operated, occupied or leased; or (ii)
released any amount of any substance that has been designated by any
Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, the Federal Water
Pollution Control Act, as amended, the Clean Air Act, as amended, and the
regulations promulgated pursuant to said laws, (a "Hazardous Material") in a
manner prohibited by law. No Hazardous Materials are present, as a result of the
deliberate actions or omissions of the Company, in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
that the Company has at any time owned, operated, occupied or leased.
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<PAGE> 25
(b) Hazardous Materials Activities. The Company has not transported,
stored, used, manufactured, disposed of, released or , to its knowledge, exposed
its employees or others to Hazardous Materials in violation of any law in effect
on or before the Closing Date, nor has the Company disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or all of
the foregoing being collectively referred to as "Hazardous Materials
Activities") in violation of any rule, regulation, treaty or statute promulgated
by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. There are no environmental approvals, permits,
licenses, clearances or consents (the "Environmental Permits") necessary for the
conduct of the Company's Hazardous Material Activities and other businesses of
the Company as such activities and businesses are currently being conducted.
(d) Environmental Liabilities. To the Company's knowledge, there is
no fact or circumstance which would involve the Company in any action,
proceeding, revocation proceeding, amendment procedure, writ, injunction or
claim concerning any Environmental Permit, Hazardous Material or any Hazardous
Materials Activities of the Company. To the Company's knowledge, there is no
fact or circumstance which could involve the Company in any environmental
litigation or impose upon the Company any environmental liability.
2.19 Brokers' and Finders' Fees; Third Party Expenses. Except for
payments to The Beacon Group for services rendered in connection with the
transactions contemplated by this Agreement, the Company has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
2.20 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate"
set forth in Section 2.20(a)(i) below (such definition shall only apply to this
Section 2.20), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iii) "DOL" shall mean the Department of Labor;
(iv) "Company Employee Plan" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
severance, deferred compensation, performance awards, stock or stock-related
awards, fringe benefits or other employee benefits, whether formal or informal,
funded or unfunded and whether or not legally binding, including without
limitation, each "employee benefit plan", within the meaning of Section 3(3) of
ERISA which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Affiliate for the benefit of any
"Employee" (as defined
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below), and pursuant to which the Company or any Affiliate has or may have any
material liability or obligation;
(v)"Employee" shall mean any current, former, or retired
employee or officer of the Company or any Affiliate;
(vi) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(vii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(viii) "International Employee Plan" shall mean each Company
Employee Plan that has been adopted or maintained by the Company or any
Affiliate, whether informally or formally, with respect to which the Company or
any Affiliate will or may have any liability, for the benefit of Employees who
perform services outside the United States;
(ix) "IRS" shall mean the Internal Revenue Service;
(x)"Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA;
(xi) "PBGC" shall mean the Pension Benefit Guaranty Corporation;
and
(xii) "Pension Plan" shall refer to each Company Employee Plan
which is an "employee pension benefit plan", within the meaning of Section 3(2)
of ERISA.
(b) Schedule. Schedule 2.20(b) contains an accurate and complete
list of each Company Employee Plan. The Company does not have any plan or
commitment, whether legally binding or not, to establish any new Company
Employee Plan, to modify any Company Employee Plan (except to the extent
required by law consistent with an understanding to be reduced to writing or to
conform any such Company Employee Plan to the requirements of any applicable
law, in each case as previously disclosed to Parent in writing, or as required
by this Agreement), nor does it have any intention or commitment to do any of
the foregoing, unless so disclosed to Parent.
(c) Documents. The Company has provided to Parent (i) correct and
complete copies of all documents embodying or relating to each Company Employee
Plan including any and all amendments thereto and all related trust documents;
(ii) the most recent annual actuarial valuations, if any, prepared for each
Company Employee Plan; (iii) the three most recent annual reports and financial
statements (Series 5500 and all schedules thereto), if any, required under ERISA
or the Code in connection with each Company Employee Plan or related trust; (iv)
if the Company Employee Plan is funded, the most recent annual and periodic
accounting of the Company Employee Plan's assets, if required by law; (v) the
most recent summary plan description together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (vi) all IRS determination letters, and all applications
and correspondence to or from the IRS or the DOL with respect to any pending
application or advisory or opinion letter; (viii) all material written
agreements and contracts relating to each Company Employee Plan, including, but
not limited to, administrative service agreements, group annuity contracts and
group insurance contracts; (vii) all communications material to any Employee or
Employees relating to any Company Employee Plan and any proposed Company
Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules
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<PAGE> 27
or other events which would result in any material liability to the Company;
(viii) all COBRA forms and related notices (or such forms and notices as
required under comparable law) for the past 12 months; (ix) all policies
pertaining to fiduciary liability insurance covering the fiduciaries for each
Company Employee Plan; (x) the two (2) most recent complete plan years
discrimination tests for the Company's 401(k) Plan; and (xi) any and all
registration statements, annual reports (Form 11-K and all attachments thereto)
and prospectuses prepared in connection with a Company Employee Plan.
(d) Employee Plan Compliance. Except as set forth on Schedule
2.20(d), (i) each Company Employee Plan has been established and maintained in
all material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) no "prohibited transaction", within the
meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with
respect to any Company Employee Plan; (iii) there are no actions, suits or
claims pending, or, to the knowledge of the Company, threatened or anticipated
(other than routine claims for benefits) against any Company Employee Plan or
against the assets of any Company Employee Plan; and (iv) each Company Employee
Plan under its applicable terms can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to the Company, Parent or any of its Affiliates (other than ordinary
administration expenses typically incurred in a termination event); (v) there
are no inquiries or proceedings pending or, to the knowledge of the Company or
any Affiliates, threatened by the IRS or DOL with respect to any Company
Employee Plan; and (vi) neither the Company nor any Affiliate is subject to any
penalty or tax with respect to any Company Employee Plan under Section 402(i) of
ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to
or been obligated to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Schedule
2.20(g), no Company Employee Plan provides, or has any liability to provide,
life insurance, medical or other employee benefits to any Employee upon his or
her retirement or termination of employment for any reason, except as may be
required by COBRA or other applicable statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) that such Employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) Health Care Compliance. Neither the Company nor any Affiliate
has, prior to the Effective Time, in any material respect violated any of the
health care continuation requirements of COBRA, the requirements of FMLA, the
requirements of the Health Insurance Portability and Accountability Act of 1996,
the requirements of the Women's Health and Cancer Rights Act, the requirements
of the Newborns' and Mothers' Health Protection Act of 1996, or any amendment to
each such Act, or any similar provisions of state law applicable to its
Employees.
(i) Effect of Transaction.
(i) Except as set forth on Schedule 2.20(h)(i), the execution of
this Agreement and the consummation of the transactions contemplated hereby will
not (either alone or upon the occurrence
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of any additional or subsequent events) constitute an event under the terms of
any Company Employee Plan that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any Employee.
(ii) Except as set forth on Schedule 2.20(h)(ii), no payment or
benefit which will or may be made by the Company or Parent or any Affiliates
with respect to any Employee will be characterized as an "excess parachute
payment", within the meaning of Section 280G(b)(2) of the Code.
(j) Employment Matters. The Company (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for Employees (other than routine payments to be made in the
normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
pending or, to the knowledge of the Company, threatened. Except as set forth in
Schedule 2.20(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in liability to the Company. To its knowledge, the Company has
not engaged in any unfair labor practices within the meaning of the National
Labor Relations Act which would, individually or in the aggregate, directly or
indirectly result in a liability to the Company. Except as set forth in Schedule
2.20(j), the Company is not presently, nor has it been in the past, a party to,
or bound by, any collective bargaining agreement or union contract with respect
to Employees and no collective bargaining agreement is being negotiated by the
Company.
(l) International Employee Plan. The Company does not now, nor has
it ever had the obligation to, maintain, establish, sponsor, participate in, or
contribute to any International Employee Plan.
2.21 Change of Control and Non-Compete Payments. Schedule 2.21 sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees, officers
and directors of the Company as a result of or in connection with the Merger.
2.22 Year 2000 Compliance. All of the Company's internal computer
systems and each Constituent Component (as defined below) of those systems and
all computer-related products and services and each Constituent Component of
those products and services of the Company and each of its subsidiaries (i) that
fully comply with the Year 2000 Qualification Requirements are set forth on
Schedule 2.22(a); (ii) that do not fully comply with the Year 2000 Qualification
Requirements are set forth on Schedule 2.22(b); and (iii) as to which the
Company is uncertain as to whether they fully comply with the Year 2000
Qualification Requirements are set forth on Schedule 2.22(c). "Year 2000
Qualification Requirements" means that the internal computer systems and each
Constituent Component (as defined below) of those systems and all
computer-related products of each Constituent Component (as defined below) of
those products of the Company (i) have been reviewed to confirm that they store,
process (including sorting and performing
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mathematical operations, calculations and computations), input and output data
containing date and information correctly regardless of whether the date
contains dates and times before, on or after January 1, 2000, (ii) have been
designed to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interface values that reflect the
century, (iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century formulas, and will not cause
an abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover, and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component" means
all software (including operating systems, programs, packages and utilities),
firmware, hardware, networking components, and peripherals provided as part of
the configuration.
2.23 Transaction Bonus. The Company has no liability under the 1999
Bonus Plan of the Company other than as set forth on Section 5.19 hereto. In
addition, the Company has adopted no other bonus plan or arrangement that
provides for the payment of remuneration that is contingent upon, or based upon,
the closing of the transactions contemplated hereby.
2.24 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Schedules), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement, or furnished in or in connection with documents mailed or delivered
to the shareholders of the Company in connection with soliciting their consent
to this Agreement and the Merger (including the Information Statement required
under Section 5.1), contains or will contain at the Effective Time, any untrue
statement of a material fact, or omits or will omit at the Effective Time to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were made,
not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and Merger
Sub has the corporate power to own its properties and to carry on its business
as now being conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would have
a material adverse effect on the ability of Parent and Merger Sub to consummate
the transactions contemplated hereby.
3.2 Authority. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms. The execution and delivery of this
Agreement by the Parent and the Merger Sub does not, and, as of the Effective
Time, the consummation of the transactions contemplated hereby will not,
conflict with, or result in an Conflict under (i) any provision of the Articles
of
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<PAGE> 30
Incorporation or Bylaws of the Parent or Merger Sub or (ii) any mortgage,
indenture, lease, contract or other agreement filed by Parent with the
Securities and Exchange Commission or, to the knowledge of the Parent,
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Parent or Merger
Sub or its properties or assets, except in those instances where such Conflict
would have no Material Adverse Effect on the Parent and its subsidiaries taken
as a whole or have a Material Adverse Effect on Parent's or Merger Sub's ability
to consummate the transactions contemplated herein. No consent, waiver,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity or any third party (so as not to trigger any
Conflict), is required by or with respect to the Parent or Merger Sub in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) the filing of the
Certification of Merger with the Secretary of State of the State of Delaware,
(ii) such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, and (iii) such other consents, waivers, authorizations,
filings, approvals and registrations which are set forth on Schedule 3.2.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 150,000,000 shares of
Common Stock, of which 43,429,673 shares were issued and outstanding as of
October 29, 1999, and 5,000,000 shares of Preferred Stock, none of which is
issued or outstanding as of October 29, 1999. The authorized capital stock of
Merger Sub consists of 1,000 shares of Common Stock, 1,000 shares of which, as
of the date hereof, are issued and outstanding and are held by Parent. All such
shares have been duly authorized, and all such issued and outstanding shares
have been validly issued, are fully paid and nonassessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will, when issued in accordance with the terms of this Agreement, be duly
authorized, validly issued, fully paid and nonassessable.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC")for all periods subsequent to January 1, 1999, all in the
form so filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein not misleading, except to the extent corrected by a
subsequently filed document with the SEC. The financial statements of Parent,
including the notes thereto, included in the SEC Documents comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
consistently applied (except as may be indicated in the notes thereto) and
present fairly the consolidated financial position of Parent at the dates
thereof and of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal audit adjustments).
3.5 Representations Complete. None of the representations or warranties
made by Parent or Merger Sub (as modified by the Schedule 3.2), nor any
statement made in any certificate furnished by Parent pursuant to this
Agreement, or furnished by Parent specifically for inclusion in the Information
Statement prepared pursuant to Section 5.1, contains or will contain at the
Effective Time, any untrue statement of a
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material fact, or omits or will omit at the Effective Time to state any material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which they were made, not misleading.
3.6 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Parent or Merger Sub and which are necessary for
the consummation of the transactions contemplated by this Agreement have been,
or will be prior to the Closing, obtained and satisfied.
3.7 Litigation. There are no legal actions, suits, arbitration or other
legal or administrative proceedings or governmental investigations pending or,
to Parent's knowledge, threatened, against the Parent or Merger Sub which would
impair the ability of the Parent or Merger Sub to consummate the transactions
contemplated herein.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of (i) the termination of
this Agreement pursuant to the provisions of Section 8.1 hereof, and (ii) the
Effective Time, the Company agrees (except to the extent that Parent shall
otherwise consent in writing) to carry on its business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, to pay
its debts and Taxes when due, to pay or perform other obligations when due, and,
to the extent consistent with such business, to use all reasonable efforts
consistent with past practice and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve their relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and ongoing businesses
at the Effective Time. The Company shall promptly notify Parent of any event or
occurrence or emergency not in the ordinary course of its business, and any
material adverse event involving the Company or its business. Except as
expressly contemplated by this Agreement or disclosed in Schedule 4.1, the
Company shall not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to licenses in the ordinary
course of business);
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company, except in the ordinary course of
business;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its
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capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of the
Company, or , except as contemplated by Section 5.15, repurchase, redeem or
otherwise acquire, directly or indirectly, any shares of its capital stock (or
options, warrants or other rights exercisable therefor);
(g) Except for the issuance of shares of Company Capital Stock upon
exercise or conversion of presently outstanding Company Options, Company
Warrants or Company Preferred Stock, issue, grant, deliver or sell or authorize
or propose the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, except for no more than an aggregate of 166,000 options
granted to new and/or current employees of the Company in the ordinary course of
business; provided, that under no circumstances shall the Company grant any
options to officers or directors of the Company, except for 20,000 options
granted to Peter Charland; and, provided, further that under no circumstances
shall such options contain provisions that provide for the acceleration of
vesting upon the Closing or upon such employees' termination after the Closing;
(h) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof;
(j) Acquire or agree to acquire any assets in an amount in excess of
$75,000 in the case of a single transaction or in excess of $150,000 in the
aggregate in any 30-day period;
(k) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
(l) Incur any indebtedness for borrowed money (other than under the
Company's existing lines of credit or equipment lease lines in an amount not to
exceed $180,000) or guarantee any such indebtedness or issue or sell any debt
securities of the Company or guarantee any debt securities of others;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers (except to the extent required in
the ordinary course of business and consistent with past practice), pay or agree
to pay any special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its employees;
(o) Modify or agree to modify the terms of vesting of any
outstanding Company Options or restricted Company Capital Stock;
(p) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business or consistent with past practice;
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(q) Pay, discharge or satisfy, in an amount in excess of $25,000 (in
any one case) or $50,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Company Financial Statements
(or the notes thereto) or expenses consistent with the provisions of this
Agreement incurred in connection with any transaction contemplated and permitted
hereby;
(r) Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance, development or joint
marketing agreement; or
(t) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (q) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
For the purposes of this Section 4.1, David Thatcher, or his designee,
shall have authority to provide written consent to any such action on behalf of
the Parent
4.2 No Solicitation.
(a) Subject to Section 4.2(b) below, until the earlier of (i) the
Effective Time and (ii) the date of termination of this Agreement pursuant to
the provisions of Section 8.1 hereof, the Company will not (nor will the Company
permit any of the Company's officers, directors, agents, representatives or
affiliates to) directly or indirectly, take any of the following actions with
any party other than Parent, Merger Sub, agents or representatives of the
Company and any of their designees: (a) solicit, conduct discussions with or
engage in negotiations with any person, relating to the possible acquisition of
the Company (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its capital stock or assets, (b)
provide information with respect to it to any person, other than Parent,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its capital stock or assets, (c) enter into an agreement with any
person, other than Parent, providing for the acquisition of the Company (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise) or
any material portion of its capital stock or assets or (d) make or authorize any
statement, recommendation or solicitation in support of any possible acquisition
of the Company (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
receives prior to the Effective Time or the termination of this Agreement any
offer or proposal relating to any of the above, the Company shall immediately
notify Parent thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as Parent may reasonably request.
(b) Nothing in this Agreement shall prevent the Board of Directors
of the Company from withholding, withdrawing, amending or modifying its
recommendation in favor of the Merger or taking any other action which is
prohibited by Section 4.2(a) if (i) a Superior Offer (as defined below) is made
to the Company and is not withdrawn, (ii) neither the Company nor any of its
representatives shall have violated any
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of the restrictions set forth in Section 5.3, and (iii) the Board of Directors
of the Company concludes in good faith, after consultation with its outside
counsel, that, in light of such Superior Offer, the withholding, withdrawal,
amendment or modification of such recommendation is required in order for the
Board of Directors of the Company to comply with its fiduciary obligations to
the Company and the Company's stockholders under applicable law. Nothing
contained in this Section 4.2 shall limit the Company's obligation to hold and
convene a meeting of the Company's stockholders (regardless of whether the
recommendation of the Board of Directors of the Company shall have been
withdrawn, amended or modified). For purposes of this Agreement, "Superior
Offer" shall mean an unsolicited, bona fide written offer made by a third party
to consummate any of the following transactions: (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company pursuant to which the stockholders of the
Company immediately preceding such transaction hold less than 51% of the equity
interest in the surviving or resulting entity of such transaction; (ii) a sale
or other disposition by the Company of assets (excluding inventory and used
equipment sold in the ordinary course of business) representing in excess of 50%
of the fair market value of the Company's business immediately prior to such
sale, or (iii) the acquisition by any person or group (including by way of a
tender offer or an exchange offer or issuance by the Company), directly or
indirectly, of beneficial ownership or a right to acquire beneficial ownership
of shares representing in excess of 50% of the voting power of the then
outstanding shares of capital stock of the Company, in each case on terms that
the Board of Directors of the Company determines, in its reasonable judgment
(based on a written opinion of an investment bank of nationally recognized
reputation) to be more favorable to Company stockholders from a financial point
of view than the terms of the Merger and the consideration of which reasonably
likely exceeds the value of the consideration in the Merger (after taking into
account all relevant factors, including any conditions to the Superior Offer,
the timing of the consummation of the transaction pursuant to the Superior
Offer, the risk of nonconsummation thereof and the need for any required
governmental or other consents, filings and approvals); provided, however, that
any such offer shall not be deemed to be a "Superior Offer" if any financing
required to consummate the transaction contemplated by such offer is not
committed and is not likely in the judgment of Company's Board of Directors to
be obtained by such third party on a timely basis.
4.3 Investment Representation Statements. The Company will use its best
efforts to have all stockholders of the Company who are to receive any shares of
Parent Common Stock in connection with the Merger execute and deliver to Parent
a Parent Investment Representation Statement in substantially the form attached
hereto as Exhibit C.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Information Statement; Stockholder Meeting.
(a) As promptly as practicable after the execution of this
Agreement, the Company shall prepare, and Parent shall assist in preparing, an
information statement (the "Information Statement") relating to the solicitation
of the consent of the stockholders of the Company to the Merger. The Information
Statement shall substantially comply with the information requirements under to
Rule 502 promulgated under the Securities Act (except for 502(b)(3)) and an
investor suitability questionnaire. Parent shall provide to the Company and its
counsel for inclusion in the Information Statement such publicly available
information concerning Parent, its operations, capitalization, technology, share
ownership and other material as the Company or its counsel may reasonably
request. Each of Parent and the Company shall use its reasonable
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best efforts to cause the Information Statement to be mailed to the Company's
stockholders at the earliest practicable time. Whenever any event occurs which
should be set forth in a supplement to the Information Statement, Parent or the
Company, as the case may be, shall promptly inform the other company of such
occurrence and cooperate in preparing such supplement.
(b) The Company shall retain a "purchaser representative," as such
term is defined in Rule 501(h) under the Securities Act, to represent each
Company stockholder who is not an "accredited investor" as defined in Rule
501(a) under the Securities Act. The Company shall use its best efforts to
solicit and obtain the consent of its stockholders sufficient to approve the
Merger and this Agreement and to enable the Closing to occur as promptly as
practicable. The Company shall further use its best efforts to have each
investor who is not an accredited investor sign an acknowledgement that the
purchaser representative is such investor's purchaser representative in the
transactions contemplated hereby. The materials submitted to the Company's
stockholders, including the Information Statement, shall be subject to prior
review and approval by Parent and shall include the unanimous recommendation of
the Board of Directors of the Company in favor of the Merger and this Agreement.
(c) The Information Statement submitted to the Company's
stockholders in connection with the Stockholders' Meeting shall include a
proposal to constitute and appoint Keith Cooper and Robert C. Roeper to act as
the agents, representatives and attorneys-in-fact for each stockholder (other
than holders of Dissenting Shares) for all purposes and with respect to all
matters arising under this Agreement. The powers and authority of the
Stockholders' Representatives shall include, but not be limited to, the power
and authority to give and accept notices as provided hereunder and carry out the
purposes and intent of this Agreement.
(d) The Stockholders' Representatives shall each be entitled to rely
on any communication or document that they believe to be genuine. The
Stockholders' Representatives shall not be liable to any stockholder of the
Company for any action or omission on their respective parts except for fraud or
willful misconduct. In their capacity as a Stockholders' Representative, Keith
Cooper and Robert C. Roeper will be acting for the convenience of the
non-dissenting stockholders, without compensation, and, in such capacity, they
shall have no duties or liabilities beyond those expressly assumed by them in
this Agreement or as agreed with the Company stockholders. As the Stockholders'
Representatives, Keith Cooper and Robert C. Roeper shall not be required to make
any inquiry or investigation concerning any matter other than those expressly
contemplated hereunder, nor shall they, in such capacity, be deemed to have made
any representation or warranty of any kind to any person. The materials
submitted to the Company stockholders shall include proposed resolutions to be
adopted by the stockholders which shall include the approval of the Merger and
the transactions contemplated herein, the appointment of Keith Cooper and Robert
C. Roeper as Stockholders' Representatives, the establishment and approval of a
Contribution Amount to be utilized by the Stockholders' Representatives in their
capacity as such and in the defense of any claims for indemnification pursuant
to this Agreement, the approval of any payments to employees of the Company
pursuant to Section 280G of the Code and such other matters as the Company may
deem necessary or advisable to submit to the stockholders for approval. In the
event of the death, resignation or incapacity of either Keith Cooper or Robert
C. Roeper, a majority of the Company's stockholders shall elect a successor
stockholders' representative, who shall have all of the rights, powers and
duties of the Stockholders' Representatives set out herein.
5.2 Access to Information. Subject to any applicable contractual
confidentiality obligations (which the Company shall use its best efforts to
cause to be waived) each party shall afford the others and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the
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period prior to the Effective Time to (a) all of its properties, books,
contracts, agreements and records, and (b) all other information concerning the
business, properties and personnel (subject to restrictions imposed by
applicable law) of it as the others may reasonably request. No information or
knowledge obtained in any investigation pursuant to this Section 5.2 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.3 Confidentiality. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of that certain Confidentiality Agreement by
and between Parent and the Company dated as of August 13, 1999.
5.4 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, investment banking, consulting and
all other fees and expenses of third parties ("Third Party Expenses") incurred
by Parent or the Company in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions contemplated
hereby, shall be the obligation of Parent or the Company, as the case may be;
provided, however, that if the Merger is consummated, Parent shall pay at
closing an aggregate of $5,250,000 of the financial advisory fees plus up to and
not more than $50,000 of the out-of-pocket expenses of The Beacon Group incurred
by the Company.
5.5 Public Disclosure. Upon execution and delivery of this Agreement by
the parties hereto, Parent and the Company shall release a jointly prepared
announcement describing the Merger. Except as aforesaid, unless otherwise
required by law (including, without limitation, securities laws) or, as to
Parent, by the rules and regulations of the National Association of Securities
Dealers, Inc., prior to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party hereto unless approved by Parent and the Company prior to release,
which approval shall not be unreasonably withheld.
5.6 Consents. The Company shall use its best efforts to obtain the
Required Consents.
5.7 Company Warrants. The Company shall use its reasonable efforts to
cause the holders of the Company Warrants to exercise such Company Warrants
prior to the Effective Time.
5.8 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.9 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby, to obtain all necessary waivers, consents and approvals and to effect
all necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and capital
stock.
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5.10 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time except as
contemplated by this Agreement (including the Company Schedules) and (ii) any
failure of the Company or Parent, as the case may be, to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.9 (including any description of any breaches of the
representation or warranties in this Agreement contained in an officer
certificate delivered pursuant to Section 6.2(a) or 6.3(a)) shall not limit or
otherwise affect any remedies available to the party receiving such notice.
5.11 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.12 Form S-8. Parent shall file a registration statement on Form S-8
under the Securities Act of 1933, as amended, for the shares of Parent Common
Stock issuable with respect to assumed Company Options within 60 days after the
Closing Date (the "S-8 Registration Statement"). Parent shall use its reasonable
best efforts to maintain the effectiveness of the S-8 Registration Statement
(and maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding. The S-8 Registration
Statement and all amendments and supplements thereto will conform in all
respects with the requirements of the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
5.13 NMS Listing. On or prior to the Effective Time, Parent shall
authorize for listing on the Nasdaq National Market the shares of Parent Common
Stock issuable, and those required to be reserved for issuance, in connection
with the Merger, upon official notice of issuance.
5.14 Cooperation With Financial Statements. The Company will use its
best efforts to cause the Company's management and its independent auditors to
facilitate on a timely basis (i) the preparation of historical and pro forma
financial statements as required by Parent to comply with applicable SEC
regulations, and (ii) the review of the Company's 1997 and 1998 audit work
papers, including the examination of selected interim financial statements and
data.
5.15 Employee Benefits.
(a) Parent shall take such reasonable actions as are necessary to
allow eligible employees of the Company to participate in the benefit programs
of Parent, or alternative benefits programs substantially comparable to those
applicable to employees of Parent on similar terms, as soon as practicable after
the Effective Time. Parent shall (i) on the Closing Date assume the Employment
Contracts listed on Schedule 2.12 and (ii) prior to the Closing Date have made
offers of employment to the Company's current employees on an at-will basis with
at least the same rate of pay and with the same benefits as similarly situated
employees of Parent are entitled.
(b) Parent shall reserve an aggregate of $1,500,000 in cash (the
"Management Incentive Bonus"), which shall be distributed to those persons
identified and in such amounts as are set forth on
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Schedule 5.15; provided that (i) such persons remain employed by the Company or
Parent for a period of not less than one year following the Closing, or have
been terminated by the Company or Parent without cause during such one year
period, and (ii) the Company's net revenues for the fiscal year ending December
31, 2000 are not less than 75% of projected net revenues as represented in the
Company's Descriptive Memorandum dated August 1999 ("Projected Revenues"). In
the event that the Company's net revenues for the fiscal year ending December
31, 2000 are less than 75% of Projected Revenues but not less than 60% of
Projected Revenues, the Management Incentive Bonus shall equal only $750,000. In
the event that any person on such Schedule 5.15 is not employed by the Company
or Parent on the 90-day anniversary of the Closing and not otherwise entitled to
receive any payment hereunder, Keith Cooper shall, in his sole discretion,
during such 90-day period, reallocate any amounts that would have been payable
pursuant to this Section 5.15 to such individuals among some or all of the
persons set forth on Schedule 5.15 provided that such individuals are otherwise
entitled to receive payment hereunder.
5.16 Registration Rights. The holders of Company Capital Stock as of the
Effective Time (the "Holders") shall have registration rights with respect to
Parent Common Stock received in exchange therefor (the "Registrable Securities")
subject to the following terms and conditions:
(a) Registration on Form S-3. Within five (5) business days after
Parent becomes a registrant entitled to use a Form S-3 registration statement or
any successor form thereto to register the resale (which shall not be through an
underwritten public offering) of the Registrable Securities, Parent shall use
reasonable best efforts to cause the Registrable Securities to be registered so
as to permit the resale thereof, and in connection therewith shall prepare and
file a Form S-3 registration statement or any successor form thereto providing
for an offering to be made on a continuous basis pursuant to Rule 415 under the
Securities Act (the "Registration Statement") with the SEC under the Securities
Act of 1933, as amended (the "Securities Act") to effect such registration
within ten (10) business days after the S-3 Date, and thereafter Parent shall
use its reasonable best efforts to cause the Registration Statement to be
declared effective under the Securities Act as soon as practicable after the
filing thereof; provided, however, that if Parent shall furnish to a
Stockholders' Representative a certificate signed by the Chief Executive Officer
of Parent stating that, in the good faith judgment of the Board of Directors or
Chief Executive Officer of Parent, it would be seriously detrimental to Parent
and its stockholders for the Registration Statement to be filed on or before the
date filing would otherwise be required, and it is therefore in the best
interests of Parent to defer the filing of the Registration Statement, then
Parent may delay the filing of the Registration Statement, once but not more
than once, for a period not in excess of thirty (30) days.
(b) Expenses of Registration. Parent shall pay all Registration
Expenses (as hereafter defined) in connection with any registration,
qualification or compliance pursuant to this Section 5.15, and each Holder shall
pay all Selling Expenses (as hereafter defined) and other expenses that are not
Registration Expenses relating to the Registrable Securities resold by him or
her. For purposes of this Section 5.15(b), "Registration Expenses" shall mean
all expenses, except as otherwise stated below, incurred by Parent in complying
with Sections 5.15(a) and 5.15(c), including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for Parent, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration.
For purposes of this Section 5.15(b), "Selling Expenses" shall mean all selling
discounts commissions and stock transfer or other Taxes applicable to the
Registrable Securities and all fees and disbursements of counsel for any Holder.
(c) Registration Procedures. In the case of any registration
effected by Parent pursuant to this Section 5.15, Parent will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. Parent will:
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(i) Use reasonable best efforts to keep such registration
effective until the earlier of (A) all Holders having completed the distribution
described in the registration statement relating thereto or (B) two years from
the Closing Date;
(ii) Promptly prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by the Registration Statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(iv) Notify each Holder of Registrable Securities covered by the
Registration Statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the request of any such Holder, prepare and furnish to such
Holder a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing;
(v) Cause all such Registrable Securities registered pursuant to
the Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by Parent are then listed or quoted,
and in connection therewith, file with the Nasdaq National Market an application
for listing of additional shares with respect to the Registrable Securities;
(vi) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to the Registration Statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of the Registration Statement;
(vii) Use its reasonable best efforts to register or qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdiction within the United States and
Puerto Rico as shall be reasonably appropriate for the distribution of the
Registrable Securities covered by the Registration Statement; provided, however,
that Parent shall not be required in connection therewith or as a condition
thereto to qualify to do business in or file a general consent to service of
process in any jurisdiction wherein it would not but for the requirements of
this paragraph be obligated to do so; and
Otherwise use its reasonable best efforts to comply with all applicable rules
and regulations of the SEC, and make available to its security holders, as soon
as reasonably practicable, an earnings statement covering a period of at least
twelve months, but not more than eighteen months, beginning with the first month
after the effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
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(d) Information by Holder. Each Holder of Registrable Securities
shall furnish to Parent such information regarding such Holder and the
distribution proposed by such Holder as Parent may reasonably request in
connection with any registration, qualification or compliance referred to in
this Section 5.15, but only to the extent that such information is required in
order for Parent to comply with its obligations under all applicable securities
and other laws and to ensure that the Registration Statement relating to such
Registrable Securities conforms to the applicable requirements of the Securities
Act and the rules and regulations thereunder. Each Holder covenants that it will
promptly notify Parent of any changes in the information set forth in the
Registration Statement or otherwise provided by such Holder to Parent regarding
such Holder or such Holder's plan of distribution as a result of which the
Registration Statement or any prospectus relating to the Registrable Securities
contains or would contain an untrue statement of a material fact regarding such
Holder or its intended method of distribution of such Registrable Securities or
omits to state any material fact regarding such Holder or its intended method of
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein, not misleading.
(e) Indemnification and Contribution.
(i)Parent agrees to indemnify and hold harmless each Holder from
and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which such Holder may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement, alleged untrue statement, omission or alleged
omission of a material fact in the Registration Statement, any prospectus
included in the Registration Statement, or any amendment or supplement to the
Registration Statement or any such prospectus, and Parent will, as incurred,
reimburse such Holder for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that Parent shall not be liable in any such case to
the extent that such loss, claim, damage or liability arises out of, or is based
upon (A) an untrue statement or alleged untrue statement made in such
Registration Statement in reliance upon and in conformity with written
information furnished to Parent by such Holder in an instrument executed by such
Holder and specifically stated to be for use in the preparation of the
Registration Statement, (B) the failure of such Holder to comply with any of the
covenants and agreements contained in Sections 5.15(f) or 5.15(h) hereof, or (C)
any untrue statement in any prospectus that is corrected in any subsequent
prospectus that was delivered to the Holder prior to the pertinent sale or sales
by the Holder.
(ii) Each Holder, severally and not jointly, agrees to indemnify
and hold harmless Parent from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which Parent may
become subject (under the Securities Act or otherwise) insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of, or are based upon (A) an untrue statement, alleged untrue
statement, omission or alleged omission of a material fact in the Registration
Statement, any prospectus included in the Registration Statement, or any
amendment or supplement to the Registration Statement or any such prospectus in
reliance upon and in conformity with written information furnished to Parent by
such Holder in an instrument executed by such Holder and specifically stated to
be for use in preparation of the Registration Statement, provided, however, that
no Holder shall be liable in any such case for any untrue statement included in
any Prospectus which statement has been corrected in a writing delivered to
Parent at least two business days before the sale from which such loss arose,
(B) the failure of such Holder to comply with any of the covenants and
agreements contained in Sections 5.15(f) or 5.15(h) hereof, or (C) any untrue
statement in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to the Holder prior to the pertinent sale or sales by the Holder;
and each Holder, severally and not jointly, will, as incurred, reimburse Parent
for any legal or other expenses
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reasonably incurred in investigating, defending or preparing to defend any such
action, proceeding or claim. In no event shall the amount payable by any Holder
to Parent pursuant to this Section 5.15(e)(ii) by reason of a sale of Parent
Common Stock by such Holder exceed the amount of the gross proceeds to such
Holder from the sale of Parent Common Stock from which such liability arose.
(iii) Promptly after receipt by any indemnified person under
subsections (i) or (ii) above of a notice of a claim or the beginning of any
action in respect of which indemnity is to be sought against an indemnifying
person pursuant to this Section 5.15(e), such indemnified person shall notify
the indemnifying person in writing of such claim or of the commencement of such
action (provided, however, that no failure to provide such notice shall relieve
any indemnifying person of any liability hereunder except to the extent that
such indemnifying person is prejudiced thereby), and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof; provided,
however, that, if the indemnifying person shall propose that the same counsel
represent it and the indemnified person, and if counsel for the indemnified
person shall reasonably have concluded that there is an actual conflict of
interest posed by the representation proposed by the indemnifying person, the
indemnified person shall be entitled to retain its own counsel reasonably
satisfactory to the indemnifying person at the expense of such indemnifying
person; provided, however that if more than one indemnified person makes a claim
against an indemnifying person based on substantially similar facts, the
indemnifying person shall not be responsible for the fees of more than one
counsel for all indemnified persons whose claims are based on substantially
similar facts.
(iv) If the indemnification provided for in this Section 5.15(e)
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (i) or (ii) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof), in such proportion as is
appropriate to reflect the relative fault of each such party, as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by Parent on the one hand or a
Holder on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Parent and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 5.15(e)(iv) were determined by any method
of allocation which does not take account of the equitable considerations
referred to above in this Section 5.15(e)(iv). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or
actions in respect thereof) referred to above in this Section 5.15(e)(iv) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action,
proceeding or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(v) The obligations of the Parent and the Holders under this
Section 5.15(e) shall be in addition to any liability which Parent and the
respective Holders may otherwise have and shall extend,
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upon the same terms and conditions, to each director and officer of Parent or
any Holder, and to each person, if any, who controls Parent or any Holder within
the meaning of the Securities Act or the Exchange Act.
(f) Restrictions on Transferability. The shares of Parent Common
Stock issued pursuant to the Merger (the "Restricted Shares") shall not be
transferable in the absence of (i) registration under the Securities Act or an
exemption therefrom, or (ii) registration or qualification under the provisions
of any applicable blue sky laws or an exemption therefrom.
(g) Restrictive Legend. Each certificate representing Restricted
Shares shall bear substantially the following legends (in addition to any
legends required under applicable securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM.
The legend contained in this Section 5.15(g) shall be removed
from a certificate in connection with any sale in compliance with and pursuant
to the Registration Statement, but shall not be removed in any other
circumstance without Parent's prior written consent (which consent shall not be
unreasonably withheld or delayed and shall be granted if such legend is no
longer appropriate).
(h) Transfer of Shares After Registration.
(i) Restriction. No Holder may make any sale of any Restricted
Shares except (A) in accordance with the Registration Statement, in which case
Holder must comply with the requirement of delivering a current prospectus, (B)
in accordance with Rule 144, or (C) pursuant to an exemption from the
registration requirements of the Securities Act, if accompanied by an opinion of
counsel that registration is not necessary, which opinion of counsel shall be
reasonably satisfactory to Parent.
(ii) Right of Parent to Suspend Use of Registration Statement.
At any time Parent may refuse to permit any Holder to resell any Registrable
Securities pursuant to the Registration Statement; provided, however, that in
order to exercise this right, Parent must deliver a certificate in writing to
the Stockholders' Representative to the effect that, in the good faith judgement
of the Board of Directors or Chief Executive Officer of Parent, that a sale
pursuant to the Registration Statement in its then-current form would be
seriously detrimental to Parent and its stockholders and therefore it is in the
best interests of Parent to prohibit any sale under the Registration Statement
at that time. The Stockholders' Representative shall immediately notify the
holders of Registrable Securities of the receipt and contents of such
certificate. In no event shall such prohibition period exceed thirty (30)
calendar days, and provided further, however, that in no event shall Parent be
permitted to exercise this right (i) more than two times in any single calendar
year, or (ii) within thirty (30) calendar days of the expiration of such a
prohibition period or the expiration of the period during which Parent has
delayed the filing of a Registration Statement under Section 5.15(a).
(i) Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the SEC which may at any time permit the
sale of the Registrable Securities to the public without registration, or
pursuant to a registration on Form S-3, Parent agrees to use its reasonable best
efforts to:
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(i)Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the Merger;
(ii) File with the SEC in a timely manner all reports and other
documents required of Parent under the Securities Act and the Exchange Act; and
(iii) So long as a Holder owns any Registrable Securities, to
furnish to that Holder forthwith upon request a written statement by Parent as
to its compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of Parent, and such other reports and documents of Parent as
such Holder may reasonably request in availing itself of any rule or regulation
of the SEC allowing such Holder to sell any such Registrable Securities without
registration.
(j) Transfer of Registration Rights. The rights and obligations of
any Holder under this Section 5.15 may be assigned to a transferee or assignee
in connection with any transfer or assignment of Registrable Securities by a
Holder; provided that: (i) such transfer may otherwise be effected in accordance
with applicable securities laws, (ii) Parent is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned under, (iii) each transferee shall agree
to be bound by all of the provisions of this Section 5.15; and (iv) such
assignment shall be effective only if immediately following such transfer the
further disposition of such Registrable Securities by the transferee or assignee
is restricted under the Securities Act.
5.17 401(k) Plan. Parent and the Company acknowledge that they will work
together with respect to the transition of Company employees from the Company
401(k) plan. If Parent requests in writing at least fifteen (15) days prior to
Closing, Company shall cause its 401(k) plan to terminate effective as of the
day immediately preceding the Closing Date. From and after the Closing Date,
Parent shall provide for the participation by employees of the Surviving
Corporation in a 401(k) plan that is substantially similar to the 401(k) plan in
which employees of Parent participate. Parent shall recognize service with
Company for the purpose of eligibility to participate and vesting under such
401(k) plan.
5.18 Promissory Note. In the event that all the conditions to closing
set forth in Sections 6.1, 6.2(a), (b) and (c), and 6.3 that are required to be
satisfied or waived have been satisfied or waived and Parent refuses to
consummate the Merger, the entire principal amount and interest owing under that
Promissory Note dated October 28, 1999 issued by the Company in favor of Parent
in the principal amount of $10,000,000 (the "Promissory Note") shall be forgiven
by Parent and the Company shall have no further obligation to repay the
principal or interest thereon.
5.19 Company 1999 Bonus Plan. Simultaneous with the Closing of the
Merger, Parent shall pay to Epstein Becker & Green, P.C. ("EBG"), on behalf of
the Company, the amount of $7,500,000, representing payment in full of the
Company's obligations under its 1999 Bonus Plan. Prior to the Effective Time,
the Company shall provide to EBG irrevocable instructions pursuant to which EBG
shall thereafter promptly distribute such funds in accordance with such written
instructions, as contemplated by the terms of such 1999 Bonus Plan.
5.20 Satisfaction of Company Liabilities. At Closing, Parent shall
satisfy the liabilities of the Company set forth on Schedule 5.20, together with
any other liabilities assumed by Parent in accordance with the Merger.
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the stockholders of the Company by the requisite
vote under applicable law and the Company's Certificate of Incorporation and .
(b) No Injunctions or Restraints; Illegality; HSR Act. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect. All
waiting periods under the HSR Act shall have expired or been terminated early.
(c) Nasdaq Listing. The shares of Parent Common Stock issuable to
shareholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the Nasdaq Stock Market upon official notice of
issuance; provided, however, that the failure of Parent to file all forms
necessary to obtain such listing approval from the Nasdaq National Market shall
be a material breach of this Agreement by Parent and shall permit the Company to
seek enforcement by specific performance of this Section 6.1(c).
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement shall have been
true and correct in all material respects as of the date of this Agreement. In
addition, the representations and warranties of Parent and Merger Sub contained
in this Agreement shall be true and correct in all material respects on and as
of the Effective Time except for (i) changes contemplated by this Agreement, and
(ii) except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such
particular date). The Company shall have received a certificate with respect to
the foregoing signed on behalf of Parent by a duly authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied (which performance or compliance shall be subject to
Parent's or Merger Sub's ability to cure as provided in Section 8.1(e) below) in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such effect signed by
a duly authorized officer of Parent.
(c) Material Adverse Change. There shall not have occurred any
Material Adverse Effect on Parent since September 30, 1999. For purposes of this
condition, neither a reduction in the trading price of Parent's Common Stock,
whether occurring at any time or from time to time, as reported by Nasdaq
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or any other automated quotation system or exchange, nor changes in general
economic conditions or changes affecting the industry generally in which Parent
operates shall, in and of itself, constitute a Material Adverse Effect.
(d) Payment of Cash and Parent Common Stock. Parent and Merger Sub
shall have delivered the Aggregate Cash Consideration and the Parent Common
Stock to the Exchange Agent and Escrow Agent, as appropriate, pursuant to
Section 1.8 of this Agreement.
(e) Legal Opinion. The Company shall have received a legal opinion
from Wilson Sonsini Goodrich & Rosati, legal counsel to Parent and Merger Sub,
in substantially the form attached hereto as Exhibit D.
(f) Third Party Consents. The Company shall have been furnished with
evidence satisfactory to it that Parent has obtained those consents required in
connection with the Merger except as would not have a Material Adverse Effect on
Parent.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement. In addition,
the representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time except for (i) changes contemplated by this Agreement, and (ii) except for
those representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date). Parent shall have received a certificate with respect to the foregoing
signed on behalf of the Company by a duly authorized officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 8.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and Parent and Merger Sub
shall have received a certificate to such effect signed by a duly authorized
officer of the Company.
(c) Third Party Consents. Parent shall have been furnished with
evidence satisfactory to it that the Company has obtained those Required
Consents set forth in Schedule 6.3(c).
(d) Legal Opinion. Parent shall have received a legal opinion from
EBG, legal counsel to the Company, in substantially the form attached hereto as
Exhibit E.
(e) Material Adverse Change. There shall not have occurred any
Material Adverse Effect on the Company since September 30, 1999. For purposes of
this condition, changes in general economic conditions or changes affecting the
industry generally in which the Company operates shall not, in and of itself,
constitute a Material Adverse Effect. Further, for purposes of this condition, a
failure by the Company to extend the U.S. West Agreement shall not be deemed a
Material Adverse Effect for purposes of this closing condition.
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(f) Offer Letter. Each person listed on Schedule 6.3(f) shall have
executed and delivered to Parent an acceptance of an Offer Letter substantially
in the form attached hereto as Exhibit F, which shall contain a prohibition
against (i) competition against Parent and the Surviving Corporation and (ii)
solicitation of employees of Parent and Surviving Corporation and all of such
agreements shall be in full force and effect.
(g) Escrow Agreement. Parent, the Company, Escrow Agent and the
Stockholders' Representative (as defined in the Escrow Agreement) shall have
entered into an Escrow Agreement substantially in the form attached hereto as
Exhibit G (the "Escrow Agreement").
(h) Dissenters' Rights. Holders of more than 5% of the outstanding
shares of Company Capital Stock shall not have exercised, nor shall they have
any continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(i) Termination of Agreement. If requested in writing by Parent at
least five business days prior to Closing, the Sales Agency Agreement dated July
14, 1998 between GN Comtext Limited, a company incorporated under the laws of
England, and the Company, pursuant to which GN Comtext Limited appointed the
Company to act as its sales representative for certain services within the
United States of America and Canada shall have terminated.
(j) Repayment of Parent Loan. The Company shall repay in full
simultaneous with the Closing the outstanding principal and any interest thereon
under the Promissory Note; provided that in no event shall the Closing be deemed
to have occurred unless and until the outstanding principal and interest under
the Promissory Note shall have been repaid in full.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement (each as modified by the Company Schedules) shall
survive the Merger and continue until 5:00 p.m., California time, on the six
month anniversary of the Closing Date, except that the representations and
warranties set forth in sections 2.8, 2.11 and 2.18 shall survive the Merger and
continue until 5:00 p.m., California time, on the twelve month anniversary of
the Closing Date.
7.2 Obligation of the Company to Indemnify, Reimburse, etc. Subject to
the provisions of Section 7.4 hereof, the Company, its successors and assigns,
jointly and severally, shall indemnify, reimburse, defend, protect and hold
harmless Parent and Merger Sub and each of their successors and assigns and each
of their respective directors, officers, employees, affiliates, agents, and
their respective successors and assigns (each a "Parent Indemnitee") from and
against any claims, losses, liabilities, damages, causes of action, costs and
expenses (including reasonable attorney's, accountant's, consultant's and
expert's fees and expenses) (collectively "Losses") resulting from, directly or
indirectly, or based upon, any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Company.
7.3 Obligation of Parent to Indemnify, Reimburse, etc. Subject to the
provisions of Section 7.4 hereof, Parent and Merger Sub and their respective
successors and assigns, jointly and severally, shall indemnify, defend, protect
and hold harmless the Company and its successors and assigns and each of its
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directors, officers, employees, affiliates, agents, and their respective
successors and assigns (each a "Company Indemnitee") from and against any Losses
resulting from, directly or indirectly, or based upon, any inaccuracy in or
breach of any representation, warranty, covenant or agreement of Parent or
Merger Sub.
7.4 Claims for Indemnification. Whenever any claim shall arise for
indemnification under this Section 7, Parent or the Company, as the case may be,
seeking indemnification (the "Indemnified Party"), shall promptly notify (the
"Claim Notice") the party for whom indemnification is sought hereunder (the
"Indemnifying Party") of the claim and, when known, the facts constituting the
basis for such claim. In the event such Claim Notice is sent by Parent, Parent
shall deliver a copy of such Claim Notice to the Escrow Agent and the
Stockholders' Representatives. In the event of any such claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, the notice shall specify, if known, the
amount or an estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a third party for
which it is entitled to indemnification hereunder without the prior written
consent, which shall not be unreasonably withheld or delayed, of the
Indemnifying Party; provided, however, that if suit shall have been instituted
against the Indemnified Party and the Indemnifying Party shall not have taken
control of such suit after notification thereof as provided herein, the
Indemnified Party shall have the right to settle or compromise such claim upon
giving notice to the Indemnifying Party as provided in Section 7.5. In the event
that the Company constitutes the Indemnifying Party, all notices and consents
shall be given to, or by, the Stockholders' Representatives, who shall have the
power and authority to bind the Company and all of the Company's stockholders.
7.5 Defense by the Indemnifying Party. In connection with any claim
which may give rise to indemnity hereunder resulting from or arising out of any
claim or legal proceeding by a person other than the Indemnified Party, the
Indemnifying Party, at its sole cost and expense, may, upon written notice to
the Indemnified Party, assume the defense of any such claim or legal proceeding
if the Indemnifying Party acknowledges to the Indemnified Party in writing the
obligation of the Indemnifying Party to indemnify the Indemnified Party with
respect to all elements of such claim. If the Indemnifying Party assumes the
defense of any such claim or legal proceeding, the Indemnifying Party shall, at
its sole cost and expense, take all steps necessary in the defense or settlement
thereof. The Indemnifying Party shall not consent to a settlement of, or the
entry of any judgment arising from, any such claim or legal proceeding, other
than the payment of money, unless such settlement includes a release of the
Indemnified Party from any and all claims arising from or related to such claim
or legal proceeding. The Indemnified Party shall be entitled to participate in
(but not control) the defense of any such action, with its own counsel and at
its own expense. If the Indemnifying Party does not assume the defense of any
such claim or litigation resulting therefrom within thirty (30) days after the
date such claim is made: (a) the Indemnified Party may defend against such claim
or litigation in such manner as it may deem appropriate, including, but not
limited to, settling such claim or litigation, after giving notice of the same
to the Indemnifying Party on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to participate in
(but not control) the defense of such action, with its counsel and at its own
expense. If the Indemnifying Party thereafter seeks to question the manner in
which the Indemnified Party defended such third party claim or the amount or
nature of any such settlement, the Indemnifying Party shall have the burden to
prove by a preponderance of the evidence that the Indemnified Party did not
defend or settle such third party claim in a reasonably prudent manner. In the
event that the Company's stockholders constitute the Indemnifying Party, all
references herein to the Indemnifying Party shall be deemed to mean the
Stockholders' Representatives, who shall have the power and authority to bind
the Company and all of the Company's stockholders. All costs and expenses to be
borne by the Indemnifying Party, if the Indemnifying Party is the Company, shall
be borne severally by each of the Company's stockholders.
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7.6 Limits on Indemnification, Reimbursement, etc. Absent fraud or
willful misconduct of any party (for which there shall be no limitation of
liability of any party), no Parent Indemnitee and no Company Indemnitee shall
have any right to seek indemnification, reimbursement or defense under this
Agreement or the Escrow Agreement until Losses which would otherwise be
indemnifiable hereunder, and have been incurred by such party and other
indemnitees associated with or related to such party, exceed $1,000,000, and
then such indemnification or reimbursement shall only be to the extent that such
Losses are in excess of $500,000. For the purposes of the foregoing, only such
Losses that individually exceed $25,000 shall be counted towards the $1,000,000
threshold.
7.7 Escrow Arrangements. Concurrent with the Effective Time, the Escrow
Amount and Special Escrow Amount, if appropriate, shall be placed in an escrow
fund (the "Escrow Fund"), to be governed by the terms of the Escrow Agreement.
That amount of shares of Parent Common Stock equal to the Escrow Amount placed
in the Escrow Fund shall be available to compensate Parent and its affiliates
for losses incurred by Parent and its affiliates in connection with breaches of
representations, warranties, or covenants contained herein or delivered pursuant
hereto. That amount of shares of Parent Common Stock equal to the Special Escrow
Amount placed in the Escrow Fund shall be paid to Parent in the event that,
prior to March 31, 2000, the Company shall fail to extend the term of the U.S.
West Agreement to a period ending not earlier than March 31, 2001, on
substantially the terms set forth on Schedule 1.8(b). The parties acknowledge
that after the Closing Date and absent fraud or willful misconduct, the maximum
amount that is payable under the indemnification obligation of the Company under
Section 7.2 is the Escrow Amount. The terms and conditions of the Escrow Fund
shall be set forth more fully in the Escrow Agreement.
7.8 General Limitations. Unless this Agreement is terminated prior to
Closing, and except for any knowing and intentional, willful or fraudulent
breach of the representations and warranties or covenants contained in this
Agreement, no party hereto shall make any claim against another party other than
as set forth in this Article VII.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by January 31, 2000 (provided that the right to terminate this
Agreement under this clause 8.1(b)(i) shall not be available to any party whose
willful failure to fulfill any obligation hereunder has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date);
(ii) there shall be a final nonappealable order of a federal or state court in
effect preventing consummation of the Merger; or (iii) there shall be any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any governmental entity that would make consummation
of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of the business of the
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Company or (ii) compel Parent or the Company to dispose of or hold separate, as
a result of the Merger, any portion of the business or assets of the Company or
Parent;
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
6.3(a) or 6.3(b), as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 8.1(d) unless such breach is not
cured within thirty (30) days of written notice of such breach (but no cure
period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and as a result of such breach the conditions
set forth in Section 6.2(a) or 6.2(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or Merger
Sub within thirty (30) days through the exercise of its reasonable best efforts,
then for so long as Parent or Merger Sub continues to exercise such reasonable
best efforts the Company may not terminate this Agreement under this Section
8.1(e) unless such breach is not cured within thirty (30) days of written notice
of such breach (but no cure period shall be required for a breach which by its
nature cannot be cured);
(f) by Parent upon a breach of Section 4.2 or the Company shall fail
to submit to its stockholders an Information Statement that includes the
unanimous recommendation of the Board of Directors of the Company in favor of
the Merger and this Agreement; and
(g) by the Company or the Parent if the required approval of the
stockholders of the Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
the Company stockholders duly convened therefore or at any adjournment thereof;
provided, however, that the right to terminate this Agreement under this Section
8.1(g) shall not be available to the Company where the failure to obtain the
Company's stockholder approval shall have been caused by the action or failure
to act of the Company and such action or failure to act constitutes a material
breach by the Company of this Agreement.
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
In the event that (i) this Agreement is terminated pursuant to Section
8.1 (other than Section 8.1(e)) of this Agreement, or (ii) the Company enters
into an agreement with any person, other than Parent, providing for the
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital stock or
assets, the Company shall pay on demand the principal and any interest thereon
due under the Promissory Note.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and,
except as set forth in Section 8.3, there shall be no liability or obligation on
the part of Parent, Merger Sub or the Company, or their respective officers,
directors or shareholders, provided that each party shall remain liable for any
breaches of this Agreement prior to its termination to the extent provided in
Section 8.3; and provided further that, the provisions of
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Sections 5.3, this Section 8.2, Section 8.3 and Article IX of this Agreement
shall remain in full force and effect and survive any termination of this
Agreement.
8.3 Fees and Expenses.
(a) General. Except as set forth in this Section 8.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated.
(b) Break-up Fees Payments. In the event that this Agreement is
terminated by Parent or the Company, as applicable, pursuant to Sections 8.1(f)
or (g) or the Company fails to consummate the Merger and the transactions
contemplated by this Agreement after all of the conditions to Closing described
in Section 6.1 and 6.2 have been duly satisfied or waived, the Company shall
promptly, but in no event later than two days after the date of such
termination, pay Parent a fee equal to $5,000,000 in immediately available funds
(the "Termination Fee"). The parties hereto acknowledge that the agreements
contained in this Section 8.3(b) are an integral part of the transactions
contemplated by this Agreement and that, without these agreements, neither
Parent nor the Company would enter into this Agreement; accordingly, if the
Company fails to pay in a timely manner the amounts due pursuant to this Section
8.3(b), and, in order to obtain such payment, Parent makes a claim that results
in a judgment against the Company for the amount set forth in this Section
8.3(b), the Company shall pay to Parent its reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit, together
with interest on the amount set forth in this Section 8.3(b) at the prime rate
of The Chase Manhattan Bank in effect on the date such payment was required to
be made. Payment of the fees described in this Section 8.3(b) shall not be in
lieu of damages incurred in the event of breach of this Agreement.
8.4 Amendment. Except as is otherwise required by applicable law after
the shareholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time, Parent
and Merger Sub, on the one hand, and the Company, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
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(a) if to Parent or Merger Sub, to:
Critical Path, Inc.
320 1st Street
San Francisco, CA 94105
Attention: David Thatcher
Telephone No.: (415) 808-8800
Facsimile No.: (415) 808-8777
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Alan K. Austin
Mark L. Reinstra
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to:
FaxNet Corporation
98 N. Washington Street
Boston, MA 02114
Attention: Keith Cooper
Telephone No.: (617) 557-4300
Facsimile No.: (617) 747-0999
with a copy to:
Epstein Becker & Green
75 State Street
Boston, MA 02109
Attention: Susan Pravda
Beth Felder
Telephone No.: (617) 342-4000
Facsimile No.: (617) 342-4001
(c) if to the Stockholders' Representative, to:
Keith Cooper
15 Gaslight Lane
Framingham, MA 01702
Telephone No.: (508) 872-1974
Facsimile No.: (617) 747-3448
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with a copy to:
Epstein Becker & Green
75 State Street
Boston, MA 02109
Attention: Susan Pravda
Beth Felder
Telephone No.: (617) 342-4000
Facsimile No.: (617) 342-4001
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein (except with respect to this
Agreement) shall be deemed in each case to mean any contract, commitment or
other agreement, whether oral or written, that is legally binding. As used in
this Agreement, the phrase "to [a party's] knowledge," and similar phrases shall
mean the knowledge of such party, or of the President, Chief Executive Officer,
Chief Financial Officer, Controller or any Vice President of such party after
careful consideration of the matters set forth in the representation that is so
qualified and a reasonably diligent review of all files, documents, agreements
and other materials in such person's possession or subject to his or her
control. The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the schedules and
Exhibits hereto, the documents and instruments and other agreements among the
parties hereto referenced herein, and the Confidentiality Agreement by and
between Parent and the Company dated August 13, 1999, (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided, except that Parent and Merger Sub may assign their respective rights
and delegate their respective obligations hereunder to their respective
affiliates.
9.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
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9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto hereby consent and submit themselves to the
jurisdiction and venue of the State of Delaware for the purposes of any suit,
action or proceeding relating to this Agreement or the transactions contemplated
herein. Each of the parties hereto agrees that process may be served upon them
in any manner authorized by the laws of the State of Delaware for such persons
and waives and covenants not to assert or plead any objection which they might
otherwise have to such process. Each of the parties hereto also agrees not to
bring any action or proceeding arising out of or relating to this Agreement in
any court not located in the State of Delaware and hereby waives any defense of
inconvenient forum to the maintenance of any action or proceeding brought
therein in connection with this Agreement and waives any bond, surety or other
security that might be required of any other party with respect thereto.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
9.10 Share Legends. All certificates representing any of the shares of
Parent Common Stock to be issued pursuant to this Agreement shall have endorsed
thereon any legend required by Federal or state securities laws.
(Remainder of page intentionally left blank)
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EXECUTION VERSION
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
FAXNET CORPORATION CRITICAL PATH, INC.
By /s/ James Driscoll By /s/ Brett Robertson
---------------------------------- ---------------------------------
James Driscoll Brett Robertson
Vice President Finance and Vice President Strategic
Chief Financial Officer Development and General Counsel
WELLFLEET ACQUISITION CORP.
By /s/ Brett Robertson
----------------------------------
Brett Robertson
President and Secretary
<PAGE> 1
EXHIBIT 2.8
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CRITICAL PATH, INC.
XETI ACQUISITION CORP.
AND
XETI, INC.
DATED AS OF OCTOBER 8, 1999
<PAGE> 2
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A Form of Voting Agreement
Exhibit B Form of Legal Opinion of Counsel to the Company
Exhibit C Form of Noncompetition Agreement
Exhibit D Form of Escrow Agreement
i
<PAGE> 3
INDEX OF SCHEDULES
SCHEDULE DESCRIPTION
- -------- -----------
1.6 Calculation of Exchange Ratio, Option Exchange Ratio and Cash Rate
2.2(a) Shareholder List
2.2(b) Option List
2.4 Governmental and Third Party Consents
2.5 Company Financials
2.6 Undisclosed Liabilities
2.7 No Changes
2.8 Tax Returns and Audits
2.10(a) Leased Real Property
2.10(b) Liens on Property
2.11(a) Intellectual Property
2.11(b) Intellectual Property Licenses
2.12(a) Agreements, Contracts and Commitments
2.12(b) Breaches
2.12(c) Required Consents
2.13 Interested Party Transactions
2.15 Litigation
2.19 Brokers/Finders Fees; Third-Party Expenses
2.20(b) Employee Benefit Plans and Employees
2.20(d) Employee Plan Compliance
2.20(g) Post Employment Obligations
2.20(h)(i) Effect of Transaction
2.20(h)(ii) Excess Parachute Payments
2.20(j) Labor
4.1 Conduct of the Business
5.15 Employee Bonus
6.3(c) Third Party Consents Required of Parent
6.3(f) Persons Signing Non-Compete Agreements
6.3(g) Key Employees
ii
<PAGE> 4
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of October 8, 1999, among Critical Path, Inc., a California
corporation ("Parent"), Xeti Acquisition Corp., a California corporation
("Merger Sub"), and Xeti, Inc., a California corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") shall be converted into
the right to receive shares of Common Stock of Parent ("Parent Common Stock")
and cash, and all outstanding options and other rights to acquire or receive
shares of Company Capital Stock shall be assumed by the Parent.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Voting Agreements in substantially
the form attached hereto as Exhibit A (the "Voting Agreement").
D. A portion of the shares of Exchangeable Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions.
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
F. The parties intend for the Merger to be accounted for financial
accounting purposes as a purchase.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
<PAGE> 5
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California General Corporations Law ("CGCL"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days, following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
unless another place or time is agreed to by Parent and the Company. The date
upon which the Closing actually occurs is herein referred to as the "Closing
Date." On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing a Agreement of Merger with the California Secretary of
State (the "Agreement of Merger"), in accordance with the relevant provisions of
applicable law. The date and time the Merger becomes effective in accordance
with the provisions of the CGCL is the "Effective Time". The parties currently
intend that the Closing Date will occur on or prior to November 15, 1999.
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the CGCL. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Articles of Incorporation of Merger Sub shall
be the Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Articles of Incorporation; provided that
Section 1 of the Articles of Incorporation of the Surviving Corporation shall be
amended to read "The name of the Corporation is XETI, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation. The officers of Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
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Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Maximum Shares to Be Issued; Effect on Capital Stock. No adjustment
shall be made in the number of shares of Parent Common Stock issued in the
Merger as a result of any cash proceeds received by the Company from the date
hereof to the Closing Date pursuant to the exercise of options to acquire
Company Capital Stock. Subject to the terms and conditions of this Agreement, as
of the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, the Company or the holder of any shares of the Company
Capital Stock, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common Stock
of the Company ("Company Common Stock") issued and outstanding immediately prior
to the Effective Time (other than any shares of Company Common Stock to be
canceled pursuant to Section 1.6(d) and any Dissenting Shares (as defined and to
the extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into the right to receive upon surrender of the
certificate representing such share of Company Common Stock in the manner
provided in Section 1.8:
(i) that number of shares of Parent Common Stock as is equal to
the Exchange Ratio (as defined in Schedule 1.6 attached hereto) plus the Common
Liquidation Exchange Ratio (as defined in Schedule 1.6 attached hereto) (subject
to readjustment in the event that a tax opinion is unavailable pursuant to
Section 6.1(c)); and
(ii) cash in the amount of the Cash Rate (as defined in Schedule
1.6 attached hereto) plus the Common Liquidation Cash Amount (subject to
reduction for interim financing as set forth in Section 5.16) (subject to
readjustment in the event that a tax opinion is unavailable pursuant to Section
6.1(c)).
(b) Conversion of Company Preferred Stock. Each share of Preferred
Stock of the Company ("Company Preferred Stock") issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Preferred Stock to be canceled pursuant to Section 1.6(d) and any Dissenting
Shares (as defined and to the extent provided in Section 1.7(a)) will be
canceled and extinguished and be converted automatically into the right to
receive upon surrender of the certificate representing such share of Company
Preferred Stock in the manner provided in Section 1.8:
(i) that number of shares of Parent Common Stock as is equal to
the Exchange Ratio (as defined in Schedule 1.6 attached hereto) plus the Series
A Liquidation Exchange Ratio, Series B Liquidation Exchange Ratio, or Series C
Liquidation Exchange Ratio (as defined in Schedule 1.6 attached hereto) as
appropriate for the share so surrendered (subject to readjustment in the event
that a tax opinion is unavailable pursuant to Section 6.1(c)); and
(ii) cash in the amount of the Cash Rate (as defined in Schedule
1.6 attached hereto) plus the Series A Liquidation Cash Amount, Series B
Liquidation Cash Amount, or
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Series C Liquidation Cash Amount (as defined in Schedule 1.6 attached hereto) as
appropriate for the share so surrendered (subject to reduction for interim
financing as set forth in Section 5.16) (subject to readjustment in the event
that a tax opinion is unavailable pursuant to Section 6.1(c)).
(c) Cancellation of Parent-Owned and Company-Owned Stock. Each share
of Company Capital Stock owned by Merger Sub, Parent, the Company or any direct
or indirect wholly owned subsidiary of Parent or of the Company immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(d) Stock Options. At the Effective Time, all options to purchase
Company Common Stock then outstanding under the Company's 1997 Stock Plan (the
"Option Plan"), or otherwise, shall be assumed by Parent in accordance with
provisions described below.
(i) At the Effective Time, each outstanding option to purchase
shares of Company Common Stock (each a "Company Option") under the Option Plan
or otherwise, whether vested or unvested, shall be, in connection with the
Merger, assumed by Parent. Each Company Option so assumed by Parent under this
Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Option Plan and/or as provided in the respective
option agreements governing such Company Option immediately prior to the
Effective Time, except that (A) such Company Option shall be exercisable for
that number of whole shares of Parent Common Stock equal to the product of the
number of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied by the
Option Exchange Ratio (as defined in Schedule 1.6 attached hereto), rounded down
to the nearest whole number of shares of Parent Common Stock and (B) the per
share exercise price for the shares of Parent Common Stock issuable upon
exercise of such assumed Company Option shall be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock at
which such Company Option was exercisable immediately prior to the Effective
Time by the Option Exchange Ratio, rounded up to the nearest whole cent (subject
to readjustment in the event that a tax opinion is unavailable pursuant to
Section 6.1(c)).
(ii) It is the intention of the parties that the Company Options
assumed by Parent qualify following the Effective Time as incentive stock
options as defined in Section 422 of the Code to the extent the Company Options
qualified as incentive stock options immediately prior to the Effective Time.
(iii) Promptly following the Effective Time, Parent will issue
to each holder of an outstanding Company Option a document evidencing the
foregoing assumption of such Company Option by Parent.
(e) Capital Stock of Merger Sub. Each share of Common Stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
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(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock or Company Capital
Stock occurring after the date hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof, each holder of shares of Company Capital
Stock who would otherwise be entitled to a fraction of a share of Parent Common
Stock (after aggregating all fractional shares of Parent Common Stock to be
received by such holder) shall be entitled to receive from Parent an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the Signing Date Price.
(h) Definitions.
(i) Escrow Amount. The "Escrow Amount" shall be the number of
shares of Parent Common Stock obtained by dividing (a) the product of (x) the
Total Purchase Price (as defined in Schedule 1.6 attached hereto) multiplied by
(y) 0.10, by (b) the Closing Share Price.
(ii) Outstanding Common Amount. The "Outstanding Common Amount"
shall mean the aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
(iii) Outstanding Series A Amount. The "Outstanding Series A
Amount" shall mean the aggregate number of shares of Company Series A Preferred
Stock outstanding immediately prior to the Effective Time.
(iv) Outstanding Series B Amount. The "Outstanding Series B
Amount" shall mean the aggregate number of shares of Company Series B Preferred
Stock outstanding immediately prior to the Effective Time.
(v) Outstanding Series C Amount. The "Outstanding Series C
Amount" shall mean the aggregate number of shares of Company Series C Preferred
Stock outstanding immediately prior to the Effective Time.
(vi) Outstanding Option Amount. The "Outstanding Option Amount"
shall mean the aggregate number of shares of Company Common Stock issuable upon
the exercise of all outstanding Vested Options (as defined below) immediately
prior to the Effective Time. For the purposes of this subsection, a "Vested
Option" is an option to acquire shares of Company Common Stock that is
exerciseable (a) at or before the Effective Time, or (b) under the terms of the
option agreement governing such option, becomes exercisable as a result of the
Merger.
(vii) Common Liquidation Amount. The "Common Liquidation Amount"
shall mean the per share amount that is due to the holders of the Company Common
Stock, in
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preference to the distribution of the residual assets of the Company in the
event of a merger under the Company's Articles of Incorporation as they exist
immediately prior to the Effective Time.
(viii) Series A Liquidation Amount. The "Series A Liquidation
Amount" shall mean the per share amount that is due to the holders of the Series
A Preferred Stock, in preference to the distribution of the residual assets of
the Company in the event of a merger under the Company's Articles of
Incorporation as they exist immediately prior to the Effective Time.
(ix) Series B Liquidation Amount. The "Series B Liquidation
Amount" shall mean the per share amount that is due to the holders of the Series
B Preferred Stock, in preference to the distribution of the residual assets of
the Company in the event of a merger under the Company's Articles of
Incorporation as they exist immediately prior to the Effective Time.
(x) Series C Liquidation Amount. The "Series C Liquidation
Amount" shall mean the per share amount that is due to the holders of the Series
C Preferred Stock, in preference to the distribution of the residual assets of
the Company in the event of a merger under the Company's Articles of
Incorporation as they exist immediately prior to the Effective Time.
(xi) Signing Date Price. The "Signing Date Price" shall mean the
average closing price of a share of common stock of the Parent, as reported on
the Nasdaq National Market, for the 10 consecutive trading days ending on the
second trading day immediately prior to September 21, 1999.
(xii) Closing Date Price. The "Closing Date Price" shall mean
the market low price of a share of common stock of the Parent, as reported on
the Nasdaq National Market, for the Closing Date.
(xiii) Total Consideration. The "Total Consideration" shall mean
$12,500,000.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with the
CGCL and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal or dissenters' rights ("Dissenting Shares"), shall not be
converted into or represent a right to receive Parent Common Stock pursuant to
Section 1.6, but the holder thereof shall only be entitled to such rights as are
granted by the CGCL.
(b) Notwithstanding the provisions of subsection (a), if any holder
of shares of Company Capital Stock who demands appraisal of such shares under
the CGCL shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Parent Common Stock and
the Cash Rate (and
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cash in lieu of fractional shares) as provided in Section 1.6, without interest
thereon, upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demands for appraisal of any shares of Company Capital Stock, withdrawals of
such demands, and any other instruments served pursuant to the CGCL and received
by the Company and (ii) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal under the CGCL. The Company
shall not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any demands for appraisal of capital stock of the
Company or offer to settle or settle any such demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. U. S. Bank Trust shall act as exchange agent
(the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock and Cash. Promptly after the
Effective Time, Parent shall make available to the Exchange Agent for exchange
in accordance with this Article I, the aggregate number of shares of Parent
Common Stock issuable and the Cash Rate payable pursuant to Section 1.6 in
exchange for outstanding shares of Company Capital Stock; provided that, on
behalf of the holders of Company Capital Stock, Parent shall deposit into an
escrow account a number of shares of Parent Common Stock equal to the Escrow
Amount out of the aggregate number of shares of Parent Common Stock otherwise
issuable pursuant to Section 1.6. The portion of the Escrow Amount contributed
on behalf of each holder of Company Capital Stock shall be in proportion to the
aggregate number of shares of Parent Common Stock which such holder would
otherwise be entitled to receive under Section 1.6 by virtue of ownership of
outstanding shares of Company Capital Stock.
(c) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Capital Stock whose
shares were converted into the right to receive shares of Parent Common Stock
and the Cash Rate pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Parent
Common Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of Parent Common Stock (less the number of shares of
Parent Common Stock, if any, to be deposited in the Escrow Fund (as defined in
Section 7.5 below) on such holder's behalf pursuant to Section 7.5 hereof), and
the Cash Rate (plus cash in lieu of fractional shares) in accordance with
Section 1.6, to which such holder is entitled pursuant to Section 1.6, and the
Certificate so surrendered shall
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forthwith be canceled. As soon as practicable after the Effective Time, and
subject to and in accordance with the provisions of Article VII hereof, Parent
shall cause to be distributed to the Escrow Agent a certificate or certificates
representing that number of shares of Parent Common Stock equal to the Escrow
Amount which shall be registered in the name of the Escrow Agent. Such shares
shall be beneficially owned by the holders on whose behalf such shares were
deposited in the Escrow Fund and shall be available to compensate Parent as
provided in Article VII. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Company Capital Stock
will be deemed from and after the Effective Time, for all corporate purposes,
other than the payment of dividends, to evidence the ownership of the number of
full shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted and the right to receive an amount in cash
calculated at the Cash Rate (plus cash in lieu of the issuance of any fractional
shares) in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Capital Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Capital Stock which were outstanding immediately prior to the
Effective Time.
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If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such shares of Parent Common Stock, the Cash Rate and
cash for fractional shares, if any, as may be required pursuant to Section 1.6;
provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
1.11 Tax and Accounting Consequences. It is intended by the parties
hereto that the Merger shall (i) constitute a reorganization within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) be accounted for financial reporting purposes as a purchase. The parties
hereby adopt this Agreement as a "plan of reorganization" within the meaning of
sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. No
party to this Agreement shall take any action inconsistent with such treatment.
1.12 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and directors
of the Company and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub,
subject to such exceptions as are specifically disclosed in the disclosure
letter (referencing the appropriate section number) supplied by the Company to
Parent (the "Company Schedules") and dated as of the date hereof, as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation each jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, prospects, assets (including intangible assets), financial condition
or results of operations of the Company (hereinafter referred to as a "Material
Adverse Effect"). The Company has delivered a true, correct and complete copy of
its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
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2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of
10,700,000 common shares, of which 1,130,524 shares are issued and outstanding
and 2,300,000 preferred shares, of which 296,365 Series A, 1,080,000 Series B
and 250,000 Series C preferred shares are issued and outstanding. The Company
has issued warrants to purchase up to 116,000 Series B preferred shares and
50,000 Series C preferred shares; assuming a fair market value of $4.49 for the
Series B preferred shares and a price of $5.24 for the Series C preferred
shares, and the application of the net exercise provisions of the warrants an
additional 83,739.17 Series B preferred shares and 30,932.82 Series C preferred
shares will be issued thereunder. The Company Capital Stock is held by the
persons, with the domicile addresses and in the amounts set forth on Schedule
2.2(a). All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) The Company has reserved 729,000 common shares for issuance to
employees and consultants pursuant to the Option Plan, of which 469,500 shares
are subject to outstanding, unexercised options and 259,500 shares remain
available for future grant. The Company has not granted any options other than
pursuant to the Option Plan. Schedule 2.2(b) sets forth for each outstanding
Company Option the name of the holder of such option, the domicile address of
such holder, the number of shares of Common Stock subject to such option, the
exercise price of such option and the vesting schedule for such option,
including the extent vested to date and whether the exercisability of such
option will be accelerated and become exercisable by the transactions
contemplated by this Agreement. Except for the Company Options described in
Schedule 2.2(b), there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which it is bound obligating the Company to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of the Company. Except for the Company Options
described in Schedule 2.2(b), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which the
Company is a party or by which it is bound obligating the Company to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. The holders
of Company Options have been or will be given, or shall have properly waived,
any required notice prior to the Merger and all such rights will be terminated
at or prior to the Effective Time. As a result of the Merger, Parent will be the
record and sole beneficial owner of all Company Capital Stock and rights to
acquire or receive Company Capital Stock.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the approval of the Merger and this
Agreement by the Company's shareholders, the Company has all requisite corporate
power and authority to enter into
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this Agreement and to consummate the transactions contemplated hereby. The vote
required of the Company's shareholders to duly approve the Merger and this
Agreement is a majority of the outstanding shares of the Company Common Stock
and a majority of the outstanding shares of the Company Preferred Stock. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of the
Merger by the Company's shareholders. The Company's Board of Directors has
unanimously approved the Merger and this Agreement. This Agreement has been duly
executed and delivered by the Company and assuming the due authorization,
execution and delivery by the other parties hereto, constitutes the valid and
binding obligation of the Company, enforceable in accordance with its terms,
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors and to rules of law governing specific performance,
injunctive relief or other equitable remedies. Except as set forth on Schedule
2.4, subject only to the approval of the Merger and this Agreement by the
Company's shareholders, the execution and delivery of this Agreement by the
Company does not, and, as of the Effective Time, the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (any such event, a "Conflict") (i)
any provision of the Articles of Incorporation or Bylaws of the Company or (ii)
any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party (so as not to trigger any Conflict), is required by or with respect
to the Company in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i) the
filing of the Agreement of Merger with the California Secretary of State, (ii)
such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, (iii) expiration or early termination of the applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and (iv) such other consents, waivers, authorizations,
filings, approvals and registrations which are set forth on Schedule 2.4.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
balance sheet as of December 31, 1998, and the related on statements of
operations and cash flows for the twelve-month period then ended and the
Company's unaudited balance sheet dated as of June 30, 1999, (the "Balance
Sheet") and the unaudited statements of operations and cash flows for the
three-month period ended June 30, 1999 (collectively, the "Company Financials").
The Company Financials have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent throughout the
periods indicated and consistent with each other. The Company Financials present
fairly the financial condition and operating results of the Company as of the
dates and during the periods indicated therein, subject, to normal year-end
adjustments, which will not be material in amount or significance.
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2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, the
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with generally accepted accounting
principles), which individually or in the aggregate, (i) has not been reflected
in the Balance Sheet, or (ii) has not arisen in the ordinary course of the
Company's business since June 30, 1999, consistent with past practices and in
the aggregate do not exceed $10,000.
2.7 No Changes. Except as set forth in Schedule 2.7, since June 30,
1999, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company of $25,000 in
any individual case or $25,000 in the aggregate;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person except as otherwise contemplated by this
Agreement;
(j) sale, lease, license or other disposition of any of the assets
or properties of the Company, except in the ordinary course of business as
conducted on that date and consistent with past practices;
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(k) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(m) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company;
(n) commencement or notice or, to the Company's knowledge, threat of
commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
(o) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.11 below) or of
infringement by the Company of any third party's Intellectual Property rights;
(p) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
(q) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company; or
(r) event or condition of any character that has or could be
reasonably expected to have a Material Adverse Effect on the Company.
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or, collectively, "Taxes", means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have prepared and
filed all material federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all material
Taxes concerning or attributable to the Company or its
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operations and such Returns are true and correct and have been completed in
accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will have paid or
accrued all material Taxes it is required to pay or accrue and (B) will have
withheld with respect to its employees all material federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld.
(iii) The Company has not been delinquent in the payment of any
material Tax nor is there any Tax deficiency outstanding, proposed or assessed
against the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of the Company
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v) The Company does not have any material liabilities for
unpaid federal, state, local or foreign Taxes which have not been accrued or
reserved against on the Balance Sheet, whether asserted or unasserted,
contingent or otherwise, and the Company has no knowledge of any basis for the
assertion of any such liability attributable to the Company, its assets or
operations.
(vi) The Company has provided to Parent copies of all material
Returns for all periods since the date of Company's incorporation.
(vii) There are (and as of immediately following the Closing
there will be) no liens, pledges, charges, claims, security interests or other
encumbrances of any sort ("Liens") on the assets of the Company relating to or
attributable to Taxes that would have a Material Adverse Effect.
(viii) The Company has no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company that would
have a Material Adverse Effect.
(ix) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(x) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or 162 of the Code.
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(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
(xiii) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.9 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
reasonably could be expected to have the effect of prohibiting or impairing any
business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. Without
limiting the foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all real property
currently, or at any time in the past, leased by the Company, the name of the
lessor and the date of the lease and each amendment thereto and, with respect to
any current lease, the aggregate annual rental and/or other fees payable under
any such lease. All such current leases are in full force and effect, are valid
and effective in accordance with their respective terms, and there is not, under
any of such leases, any existing default or event of default (or event which
with notice or lapse of time, or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Company Financials or in Schedule 2.10(b) and except
for liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
2.11 Intellectual Property.
(a) For the purposes of this Section 2.11, the following terms have
the following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United
States and foreign patents and utility models and applications therefor
and all reissues, divisions, renewals, extensions, provisionals,
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continuations and continuations-in-part thereof, and equivalent or
similar rights anywhere in the world in inventions and discoveries
("Patents); (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know
how, technology, technical data and customer lists, and all
documentation embodying or evidencing any of the foregoing; (iii) all
copyrights, copyrights registrations and applications therefor and all
other rights corresponding thereto throughout the world ("Copyrights");
(iv) all mask works, mask work registrations and applications therefor,
and any equivalent or similar rights in semiconductor masks, layouts,
architectures or topology ("Maskworks"); (v) all industrial designs and
any registrations and applications therefor throughout the world; (vi)
all trade names, logos, common law trademarks and service marks,
trademark and service mark registrations and applications therefor and
all goodwill associated therewith throughout the world ("Trademarks");
(vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all
source code, object code, firmware, development tools, files, records
and data, all media on which any of the foregoing is recorded; (ix) all
World Wide Web addresses, sites and domain names; and (x) any similar,
corresponding or equivalent rights to any of the foregoing anywhere in
the world.
"Business" means the business of the Company, including the manufacture,
use, licensing, distribution and sale of any products or technology or
the provision of any services by the Company, as currently conducted, as
conducted since the inception of the Company, or as reasonably is
contemplated to be conducted by the Company in the future.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by or licensed to the Company.
"Registered Intellectual Property" shall mean all United States,
international and foreign: (i) Patents, including applications therefor;
(ii) registered Trademarks, applications to register Trademarks,
including intent-to-use applications, or other registrations or
applications related to Trademarks; (iii) Copyrights registrations and
applications to register Copyrights; (iv) Mask Work registrations and
applications to register Mask Works; and (v) any other Company
Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued by, filed
with, or recorded by, any state, government or other public legal
authority at any time.
(b) Schedule 2.11(b) lists all Registered Intellectual Property in
whole or in part owned by, assigned to, or filed in the name of, the Company,
including all Registered Intellectual Property that will be transferred by
Company to Parent, on or prior to the Closing Date (the "Company Registered
Intellectual Property").
(c) Except as set forth on Schedule 2.11(c), each item of Company
Intellectual Property, including all Company Registered Intellectual Property
listed on Schedule 2.11(b), is free and clear of any encumbrance, including any
lien or security interest, other than an encumbrance arising from the licensing
of the Company's software in the ordinary course of business.
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(d) The Company: (i) is the exclusive owner of all Trademarks,
including trade names, trade dress and similar designations of origin used in
connection with the operation or conduct of the Business and (ii) owns
exclusively, and has good title to, all copyrighted works that are software
products of the Company or other works of authorship that the Company otherwise
purports to own.
(e) Except as set forth on Schedule 2.11(e), the Company has not
transferred ownership of, or granted any license of or right to use or
authorized the retention of any rights to use, any Intellectual Property that
is, or was, Company Intellectual Property, to any other person.
(f) The Company Intellectual Property constitutes all the
Intellectual Property used in and/or necessary to the conduct of the Business
including (i) the making, using, selling, marketing, or importing of any product
or device, (ii) the practice of any process, (iii) the offering or performance
of any service, or (iv) the copying, display, performance, distribution,
creation of derivative works of, or the exploitation of any device or work,
including any of the foregoing with respect to products, technology or services
currently under development by Company.
(g) The contracts, licenses and agreements listed on Schedule
2.11(g) include all material contracts, licenses and agreements pursuant to
which any Person, including any Affiliate of Company, has licensed any
Intellectual Property to the Company. The Company is neither in breach of, nor
has it failed to perform under any of the foregoing contracts, licenses and
agreements and, to the knowledge of the Company, no other party to such
contracts, licenses and agreements is in breach of or has failed to perform
thereunder.
(h) The contracts, licenses and agreements listed on Schedule
2.11(h) include all contracts and agreements pursuant to which any Person,
including any third party developer or consultant, has developed any device or
technology, authored any work, or otherwise created any thing in which any
Intellectual Property rights might arise, either separately or jointly with the
Company or any other Person, which the Company uses or possess or which the
Company believes it owns.
(i) The contracts, licenses and agreements listed on Schedule
2.11(i) include all material contracts, licenses and agreements pursuant to
which the Company has licensed or transferred to any third person or any
Affiliate of the Company any material Company Intellectual Property. The Company
is neither in breach of, nor has it failed to perform under any of the foregoing
contracts, licenses and agreements and, to the knowledge of the Company, no
other party to such contracts, licenses and agreements is in breach of or has
failed to perform thereunder.
(j) Neither the consummation of the transaction contemplated by this
Agreement nor the transfer to the Parent of any contracts, licenses, agreements
or Company Intellectual Property will cause or obligate Parent (i) to grant to
any third party any rights or licenses with respect to any Intellectual Property
of Parent; or (ii) pay any royalties or other amounts in excess of those being
paid by Company prior to the Closing.
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(k) Schedule 2.11(k) lists all agreements, licenses and contracts
pursuant to which Company has agreed to indemnify, hold harmless, or otherwise
agree to be liable for any losses cost or damages of, a third party with respect
to any Intellectual Property or product or service of Company.
(l) Except as set forth on Schedule 2.11(l), all material Company
Intellectual Property, including any item thereof, will be fully transferable,
alienable or licensable by, or between, Company or Parent without restriction
and without payment of any kind to any third party.
(m) Except as set forth on Schedule 2.11(m), the consummation of the
transactions contemplated by this Agreement will not result in the loss of, or
otherwise adversely affect, any ownership rights of Company in any Company
Intellectual Property or result in the breach or termination of any license,
contract or agreement to which Company is a party respecting any material
Company Intellectual Property.
(n) The operation of the Business, including (i) the making, using,
selling, marketing, or importing of any product or device, (ii) the practice of
any process, (iii) the offering or performance of any service, or (iv) the
copying, distribution, performance, display, creation of derivative works of, or
the exploitation of any device or work, including any of the foregoing with
respect to products, technology or services currently under development by
Company, does not, and will not when conducted in the same manner following the
Closing by Parent, infringe or misappropriate the Intellectual Property of any
person, violate the rights of any person, or constitute unfair competition or
trade practices under the laws of any jurisdiction, and the Company has not
received notice from any person claiming that such operation or any act,
product, technology or service of the Business infringes or misappropriates the
Intellectual Property of any person or to the Company's knowledge constitutes
unfair competition or trade practices under the laws of any jurisdiction (nor is
the Company aware of any basis therefor). Without limiting the foregoing, the
Company has not misappropriated the trade secrets of, or infringed the Copyright
or Mask work of any third party.
(o) There are no contracts, licenses or agreements between the
Company and any other person with respect to Company Intellectual Property under
which there is any dispute known to the Company regarding the scope of such
agreement, or performance under such contract, license or agreement including
with respect to any payments to be made or received by the Company thereunder.
(p) To the knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property.
(q) No Company Intellectual Property or product, technology or
service of the Business is subject to any proceeding or outstanding decree,
order, judgment, agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by the Company or may affect the validity, use or
enforceability of such Company Intellectual Property.
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(r) Schedule 2.11(r) lists all action, including the payment of any
fees, that must, or should be performed by, or on behalf of, the Company in the
ninety-day period following the Closing Date, with respect to any application
for, perfection of, preservation of, or continuation of any rights of Company
with respect to any Company Intellectual Property, including the filing of any
patent applications, response to Patent Office actions or payment of fees,
including renewal fees.
(s) The Company has not claimed small business status, or other
particular status in the application for any Registered Company Intellectual
Property which claim of status was not at the time made, or which has since
become inaccurate or false or that will no longer be true and accurate as a
result of the Closing.
(t) All software products of the Company were written and created
solely by either (i) employees of the Company acting within the scope of their
employment or (ii) by third parties who have validly assigned all of their
rights, including Intellectual Property rights in such products to the Company,
and no third party owns or has any license or other rights to such software
products or any Intellectual Property rights therein.
(u) The Company has no knowledge of any facts or circumstances that
would render any Company Intellectual Property invalid or unenforceable. Without
limiting the foregoing, Company knows of no information, materials, facts, or
circumstances, including any information or fact that would constitute prior
art, that would render any of the Company Registered Intellectual Property
invalid or unenforceable, or would adversely effect any pending application for
any Company Registered Intellectual Property and the Company has not
misrepresented, or failed to disclose, and is not aware of any misrepresentation
or failure to disclose, any fact or circumstances in any application for any
Company Register Intellectual Property that would constitute fraud or a material
misrepresentation with respect to such application or that would otherwise
effect the validity or enforceability of any Company Registered Intellectual
Property.
(v) The Company has taken all steps reasonable under the
circumstances to protect the confidentiality and trade secret status of any
material confidential information of the Company and knows of no basis on which
it could be claimed that the Company has failed to protect the confidentiality
of any material Confidential Information of the Company.
(w) All employees of the Company have entered into a valid and
binding agreement with the company sufficient to vest title in the Company of
all Intellectual Property created by such employee in the scope of his or her
employment with the Company.
2.12 Agreements, Contracts and Commitments. Except as set forth on
Schedule 2.12(a), the Company does not have, is not a party to nor is it bound
by:
(a) any collective bargaining agreements,
(b) any agreements or arrangements that contain any severance pay or
post-employment liabilities or obligations,
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(c) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements,
(d) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization,
(e) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement,
(f) any fidelity or surety bond or completion bond,
(g) any lease of personal property having a value individually in
excess of $25,000,
(h) any agreement of indemnification or guaranty,
(i) any agreement containing any covenant limiting the freedom of
the Company to engage in any line of business or to compete with any person,
(j) any agreement relating to capital expenditures and involving
future payments in excess of $25,000,
(k) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise outside the ordinary course of
the Company's business,
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (viii)
hereof,
(m) any purchase order or contract for the purchase of raw materials
involving $10,000 or more,
(n) any construction contracts,
(o) any distribution, joint marketing or development agreement,
(p) any other agreement that involves $25,000 or more or is not
cancelable without penalty within thirty (30) days.
Except for such alleged breaches, violations and defaults, and events
that would constitute a breach, violation or default with the lapse of time,
giving of notice, or both, as are all noted in Schedule 2.12(b), the Company has
not breached, violated or defaulted under, or received notice that it has
breached, violated or defaulted under, any of the terms or conditions of any
agreement,
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contract or commitment required to be set forth on Schedule 2.12(a) or Schedule
2.11 (any such agreement, contract or commitment, a "Contract"). Assuming due
execution by the other parties thereto, each Contract is in full force and
effect and, except as otherwise disclosed in Schedule 2.12(b), is not subject to
any default thereunder of which the Company has knowledge by any party obligated
to the Company pursuant thereto. Schedule 2.12(c) identifies each Contract that
requires a consent, waiver or approval to preserve all rights of, and benefits
to, the Surviving Corporation under such Contract as a result of entering into
this Agreement or effecting the Merger or the other transactions contemplated by
this Agreement (each a "Required Consent").
2.13 Interested Party Transactions. Except as set forth on Schedule
2.13, to the Company's knowledge, no officer, director or shareholder of the
Company (nor any ancestor, sibling, descendant or spouse of any of such persons,
or any trust, partnership or corporation in which any of such persons has or has
had an economic interest), has or has had, directly or indirectly, (i) an
economic interest in any entity which furnished or sold, or furnishes or sells,
services or products that the Company furnishes or sells, or proposes to furnish
or sell, (ii) an economic interest in any entity that purchases from, or sells
or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any contract or agreement set forth in Schedule 2.12(a) or Schedule
2.11; provided, that (x) ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed an
"economic interest in any entity" for purposes of this Section 2.13.
2.14 Compliance with Laws. Except as set forth on Schedule 2.14, the
Company has complied in all material respects with, is not in material violation
of, and has not received any notices of violation with respect to, any material,
foreign, federal, provincial, state or local statute, law or regulation.
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
action, suit or proceeding of any nature pending or to the Company's knowledge
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such. Except as set forth in
Schedule 2.15, to the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any governmental entity. Schedule 2.15 sets forth, with
respect to any pending or threatened action, suit, proceeding or investigation,
the forum, the parties thereto, the subject matter thereof and the amount of
damages claimed or other remedy requested. No governmental entity has at any
time challenged or questioned the legal right of the Company to manufacture,
offer or sell any of its products in the present manner or style thereof.
2.16 Insurance. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no
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knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.17 Minute Books. The minute books of the Company provided to counsel
for Parent are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
shareholders or actions by written consent since the time of incorporation of
the Company.
2.18 Environmental Matters.
(a) Definitions. "Environmental Laws" means any and all laws,
ordinances, rules, codes, orders, decrees and regulations relating in any way to
pollution, the environment or the protection of human health and worker safety.
"Hazardous Materials" means any chemical, pollutant, contaminant, waste, or
toxic substance regulated under any Environmental Law.
(b) Compliance With Laws. The Company has obtained, and is and has
been in compliance in all material respects with all applicable permits,
licenses, registrations, approvals and other authorizations that are required
for the operation of the business under all Environmental Laws.
(c) Hazardous Materials. The Company has not disposed of, released,
discharged or emitted any Hazardous Materials into the soil or groundwater at
any properties owned, leased or occupied at any time by the Company, or at any
other property, or exposed any employee or other individual to any Hazardous
Materials or any workplace or environmental condition in such a manner as would
result in any liability or clean-up obligation of any kind or nature to the
Company. No Hazardous Materials are present in, on, or under any properties
owned, leased or used at any time by the Company, and no reasonable likelihood
exists that any Hazardous Materials will come to be present in, on, or under any
properties owned, leased or used at any time by the Company, so as to give rise
to any liability or clean-up obligation under any Environmental Laws.
2.19 Brokers' and Finders' Fees; Third Party Expenses. Except as set
forth on Schedule 2.19, the Company has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby. Schedule 2.19 sets forth the principal terms
and conditions of any agreement, written or oral, with respect to such fees.
Schedule 2.19 sets forth the Company's current reasonable estimate of all Third
Party Expenses (as defined in Section 5.4) expected to be incurred by the
Company in connection with the negotiation and effectuation of the terms and
conditions of this Agreement and the transactions contemplated hereby.
2.20 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate"
set forth in Section 2.20(a)(i) below (such definition shall only apply to this
Section 2.20), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
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(i) "Affiliate" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded and whether or not
legally binding, including without limitation, each "employee benefit plan",
within the meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any "Employee" (as defined below), and pursuant to
which the Company or any Affiliate has or may have any material liability
contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
employee, officer, or director of the Company or any Affiliate;
(v)"Employee Agreement" shall refer to each management,
employment, severance, consulting, relocation, repatriation, expatriation, visa,
work permit or similar agreement or contract between the Company or any
Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA; and
(viii) "Pension Plan" shall refer to each Company Employee Plan
which is an "employee pension benefit plan", within the meaning of Section 3(2)
of ERISA.
(b) Schedule. Schedule 2.20(b) contains an accurate and complete
list of each Company Employee Plan and each Employee Agreement, together with a
schedule of all liabilities, whether or not accrued, under each such Company
Employee Plan or Employee Agreement. The Company does not have any plan or
commitment, whether legally binding or not, to establish any new Company
Employee Plan or Employee Agreement, to modify any Company Employee Plan or
Employee Agreement (except to the extent required by law or to conform any such
Company Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to Parent in writing, or as
required by this Agreement), or to enter into any Company Employee Plan or
Employee Agreement, nor does it have any intention or commitment to do any of
the foregoing.
(c) Documents. The Company has provided to Parent (i) correct and
complete copies of all documents embodying or relating to each Company Employee
Plan and each Employee
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<PAGE> 27
Agreement including all amendments thereto and written interpretations thereof;
(ii) the most recent annual actuarial valuations, if any, prepared for each
Company Employee Plan; (iii) the three most recent annual reports (Series 5500
and all schedules thereto), if any, required under ERISA or the Code in
connection with each Company Employee Plan or related trust; (iv) if the Company
Employee Plan is funded, the most recent annual and periodic accounting of
Company Employee Plan assets; (v) the most recent summary plan description
together with the most recent summary of material modifications, if any,
required under ERISA with respect to each Company Employee Plan; (vi) all IRS
determination letters and rulings relating to Company Employee Plans and copies
of all applications and correspondence to or from the IRS or the Department of
Labor ("DOL") with respect to any Company Employee Plan; (vii) all
communications material to any Employee or Employees relating to any Company
Employee Plan and any proposed Company Employee Plans, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in any material liability to the Company; and (viii) all
registration statements and prospectuses prepared in connection with each
Company Employee Plan.
(d) Employee Plan Compliance. Except as set forth on Schedule
2.20(d), (i) the Company, to the best of its knowledge, has performed in all
material respects all obligations required to be performed by it under each
Company Employee Plan and each Company Employee Plan has been established and
maintained in all material respects in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and regulations,
including but not limited to ERISA or the Code; (ii) no "prohibited
transaction", within the meaning of Section 4975 of the Code or Section 406 of
ERISA, has occurred with respect to any Company Employee Plan; (iii) there are
no actions, suits or claims pending, or, to the knowledge of the Company,
threatened or anticipated (other than routine claims for benefits) against any
Company Employee Plan or against the assets of any Company Employee Plan; and
(iv) each Company Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to the Company, Parent or any of its Affiliates (other than ordinary
administration expenses typically incurred in a termination event); (v) there
are no inquiries or proceedings pending or, to the knowledge of the Company or
any affiliates, threatened by the IRS or DOL with respect to any Company
Employee Plan; and (vi) neither the Company nor any Affiliate is subject to any
penalty or tax with respect to any Company Employee Plan, other than the Xeti,
Inc. 401(k) Plan under Section 402(i) of ERISA or Section 4975 through 4980 of
the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to
or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Schedule
2.20(g), no Company Employee Plan provides, or has any liability to provide,
life insurance, medical or other employee benefits to any Employee upon his or
her retirement or termination of employment for any
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reason, except as may be required by statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) that such Employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) Effect of Transaction.
(i) Except as set forth on Schedule 2.20(h)(i), the execution of
this Agreement and the consummation of the transactions contemplated hereby will
not (either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Company Employee Plan, Employee Agreement, trust
or loan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
Employee.
(ii) Except as set forth on Schedule 2.20(h)(ii), no payment or
benefit which will or may be made by the Company or Parent or any of their
respective affiliates with respect to any Employee will be characterized as an
"excess parachute payment", within the meaning of Section 280G(b)(1) of the
Code.
(i) Employment Matters. The Company (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for Employees (other than routine payments to be made in the
normal course of business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company is
pending or, to the knowledge of the Company, threatened. Except as set forth in
Schedule 2.20(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in liability to the Company. Neither the Company nor any of
its subsidiaries has engaged in any unfair labor practices within the meaning of
the National Labor Relations Act which would, individually or in the aggregate,
directly or indirectly result in a liability to the Company. Except as set forth
in Schedule 2.20(j), the Company is not presently, nor has it been in the past,
a party to, or bound by, any collective bargaining agreement or union contract
with respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
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2.21 Change of Control and Non-Compete Payments. Schedule 2.21 sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees, officers
and directors of the Company as a result of or in connection with the Merger.
2.22 Year 2000 Compliance. Assuming that the Company's software products
do not receive inaccurate, incompatible or incorrect time and date data from
other software products, the underlying operating systems, firmware or hardware,
all of the Company's software products fully comply with the Year 2000
Qualification Requirements. "Year 2000 Qualification Requirements" means that
the software products (i) have been designed to ensure date and time entry
recognition, calculations that accommodate same century and multi-century
formulas and date values, leap year recognition and calculations, and date data
interface values that reflect the century, (ii) accurately manage and manipulate
single century formulas and multi-century formulas, and will not cause an
abnormal ending scenario within the application or generate incorrect values or
invalid results involving such dates, (iii) accurately process any date
rollover, and (iv) accurately accept and respond to two-digit year date input.
2.23 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Schedules), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement, or furnished in or in connection with documents mailed or delivered
to the shareholders of the Company in connection with soliciting their consent
to this Agreement and the Merger, contains or will contain at the Effective
Time, any untrue statement of a material fact, or omits or will omit at the
Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Parent and
Merger Sub has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the ability of Parent and Merger Sub to
consummate the transactions contemplated hereby.
3.2 Authority. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
assuming the due
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execution and delivery by the other parties hereto constitutes the valid and
binding obligations of Parent and Merger Sub, enforceable in accordance with its
terms; subject to the laws of general application relating to bankruptcy,
insolvency, and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 150,000,000 shares of
Common Stock, of which 38,124,532 shares were issued and outstanding as of
September 1, 1999, and 5,000,000 shares of Preferred Stock, none of which is
issued or outstanding as of September 1, 1999. The authorized capital stock of
Merger Sub consists of 1,000 shares of Common Stock, 1,000 shares of which, as
of the date hereof, are issued and outstanding and are held by Parent. All such
shares have been duly authorized, and all such issued and outstanding shares
have been validly issued, are fully paid and nonassessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will, when issued in accordance with the terms of this Agreement, be duly
authorized, validly issued, fully paid and nonassessable.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC") for all periods subsequent to March 31, 1999, all in the
form so filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, except to the extent corrected by a subsequently filed
document with the SEC. The financial statements of Parent, including the notes
thereto, included in the SEC Documents (the "Parent Financial Statements")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with U.S. generally accepted
accounting principles consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial position of Parent
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal audit
adjustments).
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of (i) the termination of
this Agreement and (ii) the Effective Time, the Company agrees (except to the
extent that Parent shall otherwise consent in writing) to carry on its business
in the usual, regular and ordinary course in substantially the same
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manner as heretofore conducted, to pay its debts and Taxes when due, to pay or
perform other obligations when due, and, to the extent consistent with such
business, to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve their
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, all with the goal of preserving
unimpaired its goodwill and ongoing businesses at the Effective Time. The
Company shall promptly notify Parent of any event or occurrence or emergency not
in the ordinary course of its business, and any material event involving the
Company or its business. Except as expressly contemplated by this Agreement or
disclosed in Schedule 4.1, the Company shall not, without the prior written
consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to End-User Licenses in the
ordinary course of business);
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Except for the issuance of shares of Company Capital Stock upon
exercise or conversion of presently outstanding Company Options or Company
Preferred Stock, or presently outstanding warrants, issue, grant, deliver or
sell or authorize or propose the issuance, grant, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation
or Bylaws;
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(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof;
(j) Acquire or agree to acquire any assets in an amount in excess of
$10,000 in the case of a single transaction or in excess of $25,000 in the
aggregate in any 30-day period;
(k) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its employees; provided that the Company may cause the
vesting period of stock options granted to employees to be reduced from four to
two years;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Balance Sheet or expenses
consistent with the provisions of this Agreement incurred in connection with any
transaction contemplated and permitted hereby;
(q) Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) Enter into any strategic alliance, development or joint
marketing agreement; or
(s) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (r) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
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4.2 No Solicitation. Until the earlier of (i) the Effective Time and
(ii) the date of termination of this Agreement pursuant to the provisions of
Section 8.1 hereof, the Company will not (nor will the Company permit any of the
Company's officers, directors, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than Parent and its designees: (a) solicit, conduct discussions with or engage
in negotiations with any person, relating to the possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets,
(b) provide information with respect to it, to any person, other than Parent,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (c) enter into an agreement
with any person, other than Parent, providing for the acquisition of the Company
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any material portion of its or their capital stock or assets or
(d) make or authorize any statement, recommendation or solicitation in support
of any possible acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets by any person, other than by Parent. In
addition to the foregoing, if the Company receives prior to the Effective Time
or the termination of this Agreement any offer or proposal relating to any of
the above, the Company shall immediately notify Parent thereof, including
information as to the identity of the offeror or the party making any such offer
or proposal and the specific terms of such offer or proposal, as the case may
be, and such other information related thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Rights.
In the event that the Parent Common Stock is issued to Company
shareholders (the "Holders") pursuant to a transaction which relies on the
registration exemption provided by Section 4(2) of the Securities Act (a "4(2)
Transaction"), the Holders shall have registration rights with respect to such
shares of Parent Common Stock (the "Registrable Securities") subject to the
following terms and conditions:
(a) Registration on Form S-3. Parent shall use reasonable best
efforts to cause the Registrable Securities to be registered so as to permit the
resale thereof, and in connection therewith shall, within five (5) business days
after Parent becomes a registrant entitled to use a Form S-3 registration
statement or any successor form thereto to register the resale (which shall not
be through an underwritten public offering) of the Registrable Securities,
prepare and file a Form S-3 registration statement or any successor form thereto
providing for an offering to be made on a continuous basis under the Securities
Act (the "Registration Statement") with the SEC under the Securities Act of
1933, as amended (the "Securities Act") to effect such registration and
thereafter Parent shall use its reasonable best efforts to cause the
Registration Statement to be declared effective under the Securities Act as soon
as practicable after the filing thereof; provided, however,
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that if Parent shall furnish to the Shareholders' Representative (as defined in
the Escrow Agreement) a certificate signed by the Chief Executive Officer of
Parent stating that, in the good faith judgment of the Board of Directors or
Chief Executive Officer of Parent, it would be seriously detrimental to Parent
and its shareholders for the Registration Statement to be filed on or before the
date filing would otherwise be required, and it is therefore in the best
interests of Parent to defer the filing of the Registration Statement, then
Parent may delay the filing of the Registration Statement, once but not more
than once, for a period not in excess of forty-five (45) days.
(b) Piggy-Back Registration on Form S-1. If at any time prior to the
filing of the Registration Statement on Form S-3 described in Section 5.1(a) the
Parent shall determine to register any of its securities other than (a) a
registration relating solely to employee benefit plans, (b) a registration
relating solely to a SEC Rule 145 transaction or (c) a registration in which the
only Common Stock registered is Common Stock issuable upon conversion of
convertible debt securities that are also being registered, then the Parent will
comply with the provisions of this Section 5.1(b):
(i) Notice of Registration. The Parent will promptly give to
each Holder a written notice thereof;
(ii) Inclusion of Holder Shares. Include in such registration
(and any related qualification under state securities laws) and in any
underwriting involved therein all Registerable Securities specified in a written
request or requests made within 15 days after receipt of such written notice
from the Parent by any Holder; provided however, that if the managing
underwriter of the offering in connection with the registration advises the
Parent and/or the Holders that marketing factors require a limitation of the
number of shares to be underwritten, then the underwriter may exclude some or
all of the Registrable Securities proposed to be registered, but only so long as
the Registrable Securities, together with the securities that all other holders
of registration rights have elected to include in such registration, comprise at
least 15% of the offering.
(c) Expenses of Registration. Parent shall pay all Registration
Expenses (as hereafter defined) in connection with any registration,
qualification or compliance pursuant to this Section 5.1, and each Holder shall
pay all Selling Expenses (as hereafter defined) and other expenses that are not
Registration Expenses relating to the Registrable Securities resold by him or
her. For purposes of this Section 5.1(c), "Registration Expenses" shall mean all
expenses, except as otherwise stated below, incurred by Parent in complying with
Sections 5.1(a), 5.1(b) and 5.1(d), including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for Parent, blue sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration. For purposes of this Section 5.1(c), "Selling Expenses" shall mean
all selling discounts commissions and stock transfer or other Taxes applicable
to the Registrable Securities and all fees and disbursements of one counsel for
all Holders.
(d) Registration Procedures. In the case of any registration
effected by Parent pursuant to this Section 5.1, Parent will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. Parent will:
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(i) Use reasonable best efforts to keep such registration
effective until the earlier of (A) all Holders having completed the distribution
described in the registration statement relating thereto or (B) two years from
the Closing Date;
(ii) Promptly prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by the Registration Statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(iv) Subject to Section 5.1(i)(ii) hereof, notify each Holder of
Registrable Securities covered by the Registration Statement at any time when a
prospectus relating thereto is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing;
(v) Cause all such Registrable Securities registered pursuant to
the Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by Parent are then listed or quoted,
and in connection therewith, file with the Nasdaq National Market an application
for listing of additional shares with respect to the Registrable Securities;
(vi) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to the Registration Statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of the Registration Statement;
(vii) Use its reasonable best efforts to register or qualify the
Registerable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdiction within the United States and
Puerto Rico as shall be reasonably appropriate for the distribution of the
Registrable Securities covered by the Registration Statement; provided, however,
that Parent shall not be required in connection therewith or as a condition
thereto to qualify to do business in or file a general consent to service of
process in any jurisdiction wherein it would not but for the requirements of
this paragraph be obligated to do so; and
(viii) Otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably
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practicable, an earnings statement covering a period of at least twelve months,
but not more than eighteen months, beginning with the first month after the
effective date of the Registration Statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(e) Information by Holder. Each Holder of Registrable Securities
shall furnish to Parent such information regarding such Holder and the
distribution proposed by such Holder as Parent may reasonably request in
connection with any registration, qualification or compliance referred to in
this Section 5.1, but only to the extent that such information is required in
order for Parent to comply with its obligations under all applicable securities
and other laws and to ensure that the Registration Statement relating to such
Registrable Securities conforms to the applicable requirements of the Securities
Act and the rules and regulations thereunder. Each Holder covenants that it will
promptly notify Parent of any changes in the information set forth in the
Registration Statement or otherwise provided by such Holder to Parent regarding
such Holder or such Holder's plan of distribution as a result of which the
Registration Statement or any prospectus relating to the Registrable Securities
contains or would contain an untrue statement of a material fact regarding such
Holder or its intended method of distribution of such Registrable Securities or
omits to state any material fact regarding such Holder or its intended method of
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein, not misleading.
(f) Indemnification and Contribution.
(i) Parent agrees to indemnify and hold harmless each Holder
from and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which such Holder may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement, alleged untrue statement, omission or alleged
omission of a material fact in the Registration Statement, any prospectus
included in the Registration Statement, or any amendment or supplement to the
Registration Statement or any such prospectus, and Parent will, as incurred,
reimburse such Holder for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that Parent shall not be liable in any such case to
the extent that such loss, claim, damage or liability arises out of, or is based
upon (A) an untrue statement or alleged untrue statement made in such
Registration Statement in reliance upon and in conformity with written
information furnished to Parent by such Holder in an instrument executed by such
Holder and specifically stated to be for use in the preparation of the
Registration Statement, (B) the failure of such Holder to comply with any of the
covenants and agreements contained in Sections 5.1(g) or 5.1(i) hereof, or (C)
any untrue statement in any prospectus that is corrected in any subsequent
prospectus that was delivered to the Holder prior to the pertinent sale or sales
by the Holder.
(ii) Each Holder, severally and not jointly, agrees to indemnify
and hold harmless Parent from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which Parent may
become subject (under the Securities Act or otherwise) insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
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arise out of, or are based upon (A) an untrue statement, alleged untrue
statement, omission or alleged omission of a material fact in the Registration
Statement, any prospectus included in the Registration Statement, or any
amendment or supplement to the Registration Statement or any such prospectus in
reliance upon and in conformity with written information furnished to Parent by
such Holder in an instrument executed by such Holder and specifically stated to
be for use in preparation of the Registration Statement, provided, however, that
no Holder shall be liable in any such case for any untrue statement included in
any Prospectus which statement has been corrected in a writing delivered to
Parent at least two business days before the sale from which such loss arose,
(B) the failure of such Holder to comply with any of the covenants and
agreements contained in Sections 5.1(g) or 5.1(i) hereof, or (C) any untrue
statement in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to the Holder prior to the pertinent sale or sales by the Holder;
and each Holder, severally and not jointly, will, as incurred, reimburse Parent
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim. In no event shall
the amount payable by any Holder to Parent pursuant to this Section 5.1(f)(ii)
by reason of a sale of Parent Common Stock by such Holder exceed the amount of
the gross proceeds to such Holder from the sale of Parent Common Stock from
which such liability arose.
(iii) Promptly after receipt by any indemnified person under
subsections (i) or (ii) above of a notice of a claim or the beginning of any
action in respect of which indemnity is to be sought against an indemnifying
person pursuant to this Section 5.1(f), such indemnified person shall notify the
indemnifying person in writing of such claim or of the commencement of such
action (provided, however, that no failure to provide such notice shall relieve
any indemnifying person of any liability hereunder except to the extent that
such indemnifying person is prejudiced thereby), and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof; provided,
however, that, if the indemnifying person shall propose that the same counsel
represent it and the indemnified person, and if counsel for the indemnified
person shall reasonably have concluded that there is an actual conflict of
interest posed by the representation proposed by the indemnifying person, the
indemnified person shall be entitled to retain its own counsel reasonably
satisfactory to the indemnifying person at the expense of such indemnifying
person; provided, however that if more than one indemnified person makes a claim
against an indemnifying person based on substantially similar facts, the
indemnifying person shall not be responsible for the fees of more than one
counsel for all indemnified persons whose claims are based on substantially
similar facts.
(iv) If the indemnification provided for in this Section 5.1(f)
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (i) or (ii) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
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therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof), in such proportion as is
appropriate to reflect the relative fault of each such party, as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by Parent on the one hand or a
Holder on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Parent and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 5.1(f)(iv) were determined by any method
of allocation which does not take account of the equitable considerations
referred to above in this Section 5.1(f)(iv). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or
actions in respect thereof) referred to above in this Section 5.1(f)(iv) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action,
proceeding or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(v) The obligations of the Parent and the Holders under this
Section 5.1(f) shall be in addition to any liability which Parent and the
respective Holders may otherwise have and shall extend, upon the same terms and
conditions, to each director and officer of Parent or any Holder, and to each
person, if any, who controls Parent or any Holder within the meaning of the
Securities Act or the Exchange Act.
(g) Restrictions on Transferability. The shares of Parent Common
Stock issued or issuable pursuant to this Agreement in a 4(2) Transaction (the
"Restricted Shares") shall not be transferable in the absence of (i)
registration under the Securities Act or an exemption therefrom, (ii)
registration or qualification under the provisions of any applicable blue sky
laws or an exemption therefrom, or (iii) compliance with any term of this
Agreement. Parent shall be entitled to give stop transfer instructions to its
transfer agent with respect to the Restricted Shares in order to enforce the
foregoing restrictions.
(h) Restrictive Legend. Each certificate representing Restricted
Shares shall bear substantially the following legends (in addition to any
legends required under applicable securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
ADDITIONALLY, THE TRANSFER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED IN THE
AGREEMENT AND PLAN OF REORGANIZATION AMONG THE ISSUER,
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XETI ACQUISITION CORPORATION AND XETI , INC. DATED OCTOBER 8, 1999 (THE
"AGREEMENT"), AND NO TRANSFER OF SHARES SHALL BE VALID OR EFFECTIVE
ABSENT COMPLIANCE WITH SUCH RESTRICTIONS. ALL SUBSEQUENT HOLDERS OF THIS
CERTIFICATE WILL HAVE AGREED TO BE BOUND BY CERTAIN OF THE TERMS OF THE
AGREEMENT, INCLUDING SECTION 5.1 OF THE AGREEMENT. COPIES OF THE
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
REGISTERED HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.
The legend contained in this Section 5.1(h) shall be removed from a
certificate in connection with any sale in compliance with the terms of this
Agreement and pursuant to the Registration Statement, but shall not be removed
in any other circumstance without Parent's prior written consent (which consent
shall not be unreasonably withheld or delayed and shall be granted if such
legend is no longer appropriate).
(i) Transfer of Shares After Registration.
(i) Restriction. No Holder may make any sale of any Restricted
Shares except (A) in accordance with the Registration Statement, in which case
Holder must comply with the requirement of delivering a current prospectus, (B)
in accordance with Rule 144, or (C) pursuant to an exemption from the
registration requirements of the Securities Act, if accompanied by an opinion of
counsel that registration is not necessary, which opinion and counsel shall be
reasonably satisfactory to Parent. Such Restricted Shares are not transferable
on the books of Parent unless the certificate submitted to Parent's transfer
agent evidencing such Restricted Shares is accompanied by a separate
certificate, in form and substance reasonably satisfactory to Parent, executed
by an officer of, or other person duly authorized by, the Holder for purposes of
establishing compliance with this Agreement.
(ii) Notice to Parent of Proposed Sale and Right of Parent to
Suspend Use of Registration Statement. If any Holder shall propose to sell any
Registrable Securities pursuant to the Registration Statement, it shall notify
Parent of its intent to do so at least three (3) full business days prior to
such sale. Such notice shall be deemed to constitute a representation that any
information previously supplied by such Holder (including without limitation the
information referred to in Section 5.1(e) hereof) is accurate as of the date of
such notice. At any time within such three (3) business-day period, Parent may
refuse to permit the Holder to resell any Registrable Securities pursuant to the
Registration Statement; provided, however, that in order to exercise this right,
Parent must deliver a certificate in writing to the Holder to the effect that a
delay in such sale is necessary because a sale pursuant to such Registration
Statement in its then-current form would not be in the best interests of Parent
and its shareholders. In no event shall such delay exceed forty-five (45)
calendar days, and provided further, however, that in no event shall Parent be
permitted to exercise this right more than three times in any single calendar
year.
(j) Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the SEC which may at any time permit the
sale of the Registrable Securities to the
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public without registration, or pursuant to a registration on Form S-3, the
Company agrees to use its reasonable best efforts to:
(i)Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the Effective Time;
(ii) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(iii) So long as a Holder owns any Registrable Securities, to
furnish to that Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144, and of
the Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as such Holder may reasonably request in availing itself of any rule or
regulation of the SEC allowing such Holder to sell any such Registrable
Securities without registration.
(k) Transfer of Registration Rights. The rights and obligations of
any Holder under this Section 5.1 may be assigned to a transferee or assignee in
connection with any transfer or assignment of Registrable Securities by a
Holder; provided that: (i) such transfer may otherwise be effected in accordance
with applicable securities laws, (ii) the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned under, (iii) each transferee shall agree
to be bound by all of the provisions of this Section 5.1; and (iv) such
assignment shall be effective only if immediately following such transfer the
further disposition of such Registrable Securities by the transferee or assignee
is restricted under the Securities Act.
5.2 Purchaser Representative. The Company shall retain a "purchaser
representative," as such term is defined in Rule 501(h) under the Securities
Act, to represent each Company shareholder who is not an "accredited investor"
as defined in Rule 501(a) under the Securities Act. The Company shall use its
best efforts to solicit and obtain the consent of its shareholders sufficient to
approve the Merger and this Agreement and to enable the Closing to occur as
promptly as practicable. The Company shall further use its best efforts to have
each investor who is not an accredited investor sign an acknowledgement that the
purchaser representative is such investor's purchaser representative in the
transactions contemplated hereby. The materials submitted to the Company's
shareholders, including the Information Statement, shall be subject to prior
review and approval by Parent and shall include the unanimous recommendation of
the Board of Directors of the Company in favor of the Merger and this Agreement.
5.3 Access to Information. Subject to any applicable contractual
confidentiality obligations (which the Company shall use its best efforts to
cause to be waived) each party shall afford the others and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, agreements and records, and (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of it as the others may reasonably
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.2
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shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Merger.
5.4 Confidentiality. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of the Confidentiality Agreement between
Parent and the Company dated as of August 23, 1999.
5.5 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses.
5.6 Public Disclosure. Upon execution and delivery of this Agreement by
the parties hereto, Parent and the Company shall release a jointly prepared
announcement describing the Merger. Except as aforesaid, unless otherwise
required by law (including, without limitation, securities laws) or, as to
Parent, by the rules and regulations of the National Association of Securities
Dealers, Inc., prior to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party hereto unless approved by Parent and the Company prior to release,
provided that such approval shall not be unreasonably withheld.
5.7 Consents. The Company shall use its best efforts to obtain the
consents, waivers and approvals under any of the Contracts identified on
Schedule 2.12(c) as may be required in connection with the Merger.
5.8 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.9 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby, to obtain all necessary waivers, consents and approvals and to effect
all necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and capital
stock.
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5.10 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time except as
contemplated by this Agreement (including the Company Schedules) and (ii) any
failure of the Company or Parent, as the case may be, to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.9 (including any description of any breaches of the
representation or warranties in this Agreement contained in an officer
certificate delivered pursuant to Section 6.2(a) or 6.3(a) shall not limit or
otherwise affect any remedies available to the party receiving such notice.
5.11 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.12 Form S-8. Parent shall promptly file a registration statement on
Form S-8 for the shares of Parent Common Stock issuable with respect to assumed
Company Options after the Closing Date.
5.13 NMS Listing. Parent shall authorize for listing on the Nasdaq
National Market the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official notice
of issuance.
5.14 Cooperation With Financial Statements. The Company will use its
best efforts to cause the Company's management and its independent auditors to
facilitate on a timely basis (i) the preparation of historical and pro forma
financial statements as required by Parent to comply with applicable SEC
regulations, and (ii) the review of the Company's 1997 and 1998 audit work
papers, including the examination of selected interim financial statements and
data.
5.15 Employee Benefits.
(a)Parent shall take such reasonable actions as are necessary to
allow eligible employees of the Company to participate in the benefit programs
of Parent, or alternative benefits programs substantially comparable to those
applicable to employees of Parent on similar terms, as soon as practicable after
the Effective Time. Parent shall have made offers of employment to the Company's
current employees prior to the Closing Date on an at-will basis with at least
the same rate of pay and equivalent benefits.
(b) Parent shall reserve an aggregate of $1,000,000 in cash, which
shall be distributed one year after the Closing to those persons identified on
Schedule 5.15 in the amounts mutually agreed upon by Parent and the Company
prior to Closing and distributed in accordance with the terms of such Schedule.
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<PAGE> 43
5.16 Interim Financing. In the event that the Closing shall not have
occurred by November 30, 1999 and upon a reasonable demonstration of need for
interim financing, Parent, in its sole discretion, may provide a loan of up to
$500,000 on commercially reasonable terms. Any such loan shall be considered an
advance against the purchase price and deducted from the consideration payable
to Company Shareholders.
5.17 Indemnification of Directors and Officers. For a period of six
years from the Closing Date, Parent shall, and shall cause the Company to,
fulfill and honor in all respects all rights to indemnification existing in
favor of the directors and officers of the Company, as provided in and subject
to the terms of the Company's Articles of Incorporation and Bylaws (as in effect
as of the date of this Agreement) provided that (a) the indemnified party has
met any applicable standard of conduct to qualify for such indemnification and
(b) the basis of the claim against such indemnified party does not otherwise
constitute a breach of any of the representations or warranties made by, or
covenants to performed by, the Company under this Agreement. Section 5.17 shall
survive the consummation of the transactions contemplated hereby, is intended to
benefit and may be enforced by the directors and officers of the Company, and
shall be binding on all successors and assigns of Parent and the Company.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have
been approved and adopted by the shareholders of the Company by the requisite
vote under applicable law and the Company's Articles of Incorporation.
(b) No Injunctions or Restraints; Illegality; Competition Act,
Investment Act. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal or regulatory restraint or prohibition preventing the consummation of the
Merger shall be in effect. All waiting periods under the HSR Act shall have
expired or been terminated early.
(c) Tax Opinions. Parent and the Company shall each have received
written opinions from their respective tax counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code; provided, however, that if the counsel to either Parent or the Company
does not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders such
opinion to such party. The parties to this Agreement agree to make reasonable
representations as requested by such counsel for the purpose of rendering such
opinions. In the event that a tax opinion is unavailable because the aggregate
consideration consists of more than 20% cash (valuing the Parent Common Stock at
the Closing Date Price), the
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parties agree to renegotiate in good faith the various exchange ratios and cash
payments referred to in Section 1.6 based upon the following criteria: the
aggregate consideration paid for all shares of Company capital stock, vested
options to acquire Company capital stock, and warrants to acquire Company
capital stock should be $12,500,000 (valuing any Parent Common Stock paid at the
Signing Date Price); the aggregate consideration paid for all shares of Company
capital stock, but excluding payments made to options to acquire Company capital
stock or warrants to acquire Company capital stock should consist of no more
than 20% cash (valuing any Parent Common Stock paid at the Closing Date Price).
(d) Nasdaq Listing. The shares of Parent Common Stock issuable to
shareholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the Nasdaq Stock Market upon official notice of
issuance.
(e) Registration Exemption Available. The registration exemption
provided by Section 4(2) of the Securities Act shall be available and valid to
exempt the issuance of the Parent Common Stock to shareholders of the Company
pursuant to this Agreement.
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement shall have been
true and correct as of the date of this Agreement. In addition, the
representations and warranties of Parent and Merger Sub contained in this
Agreement shall be true and correct in all material respects on and as of the
Effective Time except for (i) changes contemplated by this Agreement, and (ii)
except for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such particular
date). The Company shall have received a certificate with respect to the
foregoing signed on behalf of Parent by a duly authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied (which performance or compliance shall be subject to
Parent's or Merger Sub's ability to cure as provided in Section 8.1(e) below) in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such effect signed by
a duly authorized officer of Parent.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
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(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall have been true and
correct as of the date of this Agreement. In addition, the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects on and as of the Effective Time except for (i) changes
contemplated by this Agreement, and (ii) except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date). Parent shall have received
a certificate with respect to the foregoing signed on behalf of the Company by a
duly authorized officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 8.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and Parent and Merger Sub
shall have received a certificate to such effect signed by a duly authorized
officer of the Company.
(c) Third Party Consents. Parent shall have been furnished with
evidence satisfactory to it that the Company has obtained the consents,
approvals and waivers set forth in Schedule 2.12(c).
(d) Legal Opinion. Parent shall have received a legal opinion from
General Counsel Associates LLP, legal counsel to the Company, in substantially
the form attached hereto as Exhibit B.
(e) Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets (including intangible assets)
financial condition or results of operations of the Company since June 30, 1999.
(f) Noncompetition Agreements. Each person listed on Schedule 6.3(f)
shall have executed and delivered to Parent a Noncompetition and Nonsolicitation
Agreement in substantially the form of Exhibit C and all of such agreements
shall be in full force and effect.
(g) Key Employees. Each person listed on Schedule 6.3(g) shall have
accepted an offer of employment with Parent.
(h) Escrow Agreement. Parent, the Company, Escrow Agent and the
Shareholders' Representative (as defined in the Escrow Agreement) shall have
entered into an Escrow Agreement substantially in the form attached hereto as
Exhibit D (the "Escrow Agreement").
(i) Dissenters' Rights. Holders of more than 10% of the outstanding
shares of Company Capital Stock shall not have exercised, nor shall they have
any continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
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(j) Resignation of Directors and Officers. All directors and
officers of the Company shall have resigned their respective offices as
directors and officers of the Company effective as of the Effective Time.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement (each as modified by the Company Schedules) shall
survive the Merger and continue until 5:00 p.m., California time, on the first
anniversary of the Closing Date.
7.2 Obligation of the Company to Indemnify, Reimburse, etc. Subject to
the provisions of Section 7.4 hereof, the Company, its successors and assigns,
jointly and severally, shall indemnify, reimburse, defend, protect and hold
harmless Parent and Merger Sub and each of their successors and assigns and each
of their respective directors, officers, employees, affiliates, agents, and
their respective successors and assigns (each a "Parent Indemnitee") from and
against any claims, losses, liabilities, damages, causes of action, costs and
expenses (including reasonable attorney's, accountant's, consultant's and
expert's fees and expenses) (collectively "Losses") resulting from, imposed
upon, incurred or suffered by any of them, directly or indirectly, based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Company.
7.3 Obligation of Parent to Indemnify, Reimburse, etc. Subject to the
provisions of Section 7.4 hereof, Parent and Merger Sub and their respective
successors and assigns, jointly and severally, shall indemnify, reimbursement,
defend, protect and hold harmless the Company and its successors and assigns and
each of its directors, officers, employees, affiliates, agents, and their
respective successors and assigns (each a "Company Indemnitee") from and against
any Losses resulting from, imposed upon, incurred or suffered by any of them,
directly or indirectly, based upon, arising out of or otherwise in respect of
any inaccuracy in or breach of any representation, warranty, covenant or
agreement of Parent.
7.4 Limits on Indemnification, Reimbursement, etc.. Absent fraud or
willful misconduct of any party (for which there shall be no limitation of
liability of any party), no Parent Indemnitee and no Company Indemnitee shall
have any right to seek indemnification, reimbursement or defense under this
Agreement or the Escrow Agreement until Losses which would otherwise be
indemnifiable hereunder, and have been incurred by such party and other
indemnitees associated with or related to such party exceed $100,000, after
which such party or parties to be indemnified hereunder shall be entitled to
receive indemnification for all losses in excess of $100,000. Furthermore, in
the event that the Closing occurs pursuant to Section 1.2 and absent fraud or
willful misconduct of a Company Indemnitee, the Parent's recourse against Losses
will be limited to the Escrow Fund.
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<PAGE> 47
7.5 Escrow Arrangements. Concurrent with the Effective Time, the Escrow
Amount shall be placed in an escrow fund (the "Escrow Fund"), to be governed by
the terms of the Escrow Agreement. The Escrow Fund shall be available to
compensate Parent and its affiliates for Losses for which Parent or its
affiliates are entitled to indemnification under Article VII. The terms and
conditions of the Escrow Fund shall be set forth more fully in the Escrow
Agreement.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by December 31, 1999 (provided that the right to terminate this
Agreement under this clause 8.1(b)(i) shall not be available to any party whose
willful failure to fulfill any obligation hereunder has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date);
(ii) there shall be a final nonappealable order of a federal or state court in
effect preventing consummation of the Merger; or (iii) there shall be any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any governmental entity that would make consummation
of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate, as
a result of the Merger, any portion of the business or assets of the Company or
Parent.
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
6.3(a) or 6.3(b), as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 8.1(d) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and as a result of such breach the conditions
set forth in Section 6.2(a) or 6.2(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or Merger
Sub within thirty (30) days
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through the exercise of its reasonable best efforts, then for so long as Parent
or Merger Sub continues to exercise such reasonable best efforts the Company may
not terminate this Agreement under this Section 8.1(e) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured).
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and,
except as set forth in Section 8.3, there shall be no liability or obligation on
the part of Parent, Merger Sub or the Company, or their respective officers,
directors or shareholders, provided that each party shall remain liable for any
breaches of this Agreement prior to its termination; and provided further that,
the provisions of Sections 5.3 and 5.4 and Article IX of this Agreement shall
remain in full force and effect and survive any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
the shareholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
and Merger Sub, on the one hand, and the Company, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
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(a) if to Parent or Merger Sub, to:
Critical Path
320 1st Street
San Francisco, California 94105
Attention: Brett Robertson
Telephone No.: (415) 808-8800
Facsimile No.: (415) 808-8898
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark L. Reinstra
Telephone No.: (650) 493-9300
Facsimile No.: (650) 461-5375
(b) if to the Company, to:
Xeti, Inc.
5150 El Camino
Los Altos, California 94022
Telephone No.: (650) 694-6800
Facsimile No.: (650) 694-6801
with a copy to:
General Counsel Associates LLP
1891 Landings Drive
Mountain View, California 94043
Attention: Adele Freedman
Telephone No.: (650) 428-3900
Facsimile No.: (650) 428-3901
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. As used in this Agreement, the phrase "to the best of
[a party's] knowledge," "to [a party's] knowledge," "[a party] is not aware,"
and similar phrases shall mean the knowledge of such party, or of the officers
and directors of such party, after careful consideration of the matters set
forth in the representation that is so qualified and a reasonably diligent
review of all files, documents, agreements and other materials in such person's
possession or subject to his or her control. The table of contents and headings
contained in this
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Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the schedules and
Exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided, except
that Parent and Merger Sub may assign their respective rights and delegate their
respective obligations hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with
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their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
9.10 Share Legends. All certificates representing any of the shares of
Parent Common Stock to be issued pursuant to this Agreement shall have endorsed
thereon any legend required by Federal or state securities laws.
(Remainder of page intentionally left blank)
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
XETI, INC. CRITICAL PATH, INC.
/s/ Jeff Y. C. Pan /s/ Brett Robertson
-------------------------------- --------------------------------
By: Jeff Y. C. Pan By: Brett Robertson
Chief Executive Officer General Counsel
XETI ACQUISITION CORP.
/s/ Brett Robertson
--------------------------------
By: Brett Robertson
President
***REORGANIZATION AGREEMENT***
<PAGE> 1
EXHIBIT 10.25
OFFICE LEASE
530 FOLSOM STREET
San Francisco, California
ECKER-FOLSOM PROPERTIES, LLC
LANDLORD
CRITICAL PATH, INC.
TENANT
<PAGE> 2
OFFICE LEASE
530 Folsom Street
San Francisco, California
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
Lease Date: December __, 1999
Landlord: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
Tenant: CRITICAL PATH, INC.
a California corporation
Premises: Approximately 26,485 square feet of rentable area within the
Building (as defined in Section 1.1) as shown on Exhibit A.
Term: Ten (10) years from the Commencement Date (the
"Initial Term"), subject to two (2) options to extend the Term each for a
period of five (5) years.
Possession Date: The date the Premises is delivered to Tenant in the condition
required under Section 3.1.
Commencement Date: The later of (i) April 1, 2000 or (ii) two (2) weeks following the
Possession Date.
Expiration Date: A date ten (10) years after the Commencement Date, subject to
extension pursuant to Section 3.2 of the Lease
</TABLE>
<TABLE>
<S> <C> <C>
Base Rent: PERIOD OF TERM AMOUNT
-------------- ------
Commencement Date to
December 31, 2000 $100,668.75/month
January 1, 2001 to
end of Initial Term $106,668.75/month
Extended Term: The fair market rent for the
Premises, as determined in accordance with
Section 3.2 of the Lease.
</TABLE>
<TABLE>
<S> <C>
Base Year: The calendar year 2000.
Permitted Use: General office, administrative, research and development,
computer
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
laboratory, and related functions.
Security Deposit: $213,337.50 which shall be deposited simultaneously with Tenant's
execution hereof.
Tenant's Address: Critical Path, Inc.
320 First Street
San Francisco, California 94105
Attention: Chief Financial Officer
Landlord's Address: Ecker-Folsom Properties, LLC
c/o The Bock Company
2996 Washington Street
San Francisco, California 94115
Brokers:
Landlord's Broker: The Bock Company
Tenant's Broker: Cushman Realty Corporation
</TABLE>
Exhibits and Addenda:
Exhibit A: Floor Plan(s) of Premises
Exhibit B: Legal Description of Land
Exhibit C: Work Letter
Exhibit D: Rules and Regulations of the Building
Exhibit E: Confirmation of Lease Term
The Basic Lease Information is incorporated into and made a part of the Lease.
Each reference in the Lease to any Basic Lease Information shall mean the
applicable information set forth above. In the event of any conflict between an
item in the Basic Lease Information and the Lease, the Lease shall control.
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<PAGE> 4
OFFICE LEASE
THIS LEASE is made and entered into by and between Landlord
and Tenant as of the Lease Date. Landlord and Tenant hereby agree as follows:
1. Definitions.
1.1. Terms Defined. The following terms have the meanings
set forth below. Certain other terms have the meanings set forth in the Basic
Lease Information or elsewhere in this Lease.
Alterations: Alterations, additions or other
improvements to the Premises made by Tenant or its employees or contractors (but
not including the alterations, additions or other improvements, if any, made by
or on behalf of Tenant during the initial improvement of the Premises pursuant
to and governed by the provisions of the Work Letter).
Base Operating Expenses and Base Real Estate Taxes:
The Operating Expenses and the Real Estate Taxes paid or incurred by Landlord in
the Base Year.
Building: The office building, and surrounding
property, consisting of a four-story building located on the Land, commonly
known as 530 Folsom Street, San Francisco, California, and any additions to such
Building.
Escalation Rent: The total dollar increase, if any,
in Operating Expenses and in Real Estate Taxes, each as paid or incurred by
Landlord in each calendar year, or part thereof, after the Base Year, over the
amount of Base Operating Expenses and Base Real Estate Taxes. .For purposes of
determining Operating Expenses for the Base Year, since the Building will be
less than ninety-five percent (95%) occupied during the Base Year, Landlord
shall make an appropriate adjustment of the variable components of Operating
Expenses for that year, as reasonably determined by Landlord using sound
accounting and management principles, to determine the amount of Operating
Expenses that would have been incurred during such year if the Building had been
ninety-five percent (95%) occupied during the entire year. This amount shall be
considered to have been the amount of Operating Expenses for the Base Year. For
purposes hereof, "variable components" include only those component expenses
that are affected by variations in occupancy levels. For purposes of determining
Real Estate Taxes for the Base Year, Landlord shall make an appropriate
adjustment to the Real Estate Taxes for such year as reasonably determined by
Landlord using sound accounting and management principles, to determine the
amount of Real Estate Taxes that would have been incurred during such year if
the tenant improvements in the Building had been fully constructed and the Land,
the Building, and all tenant improvements in the Building had been fully
assessed for Real Estate Tax purposes.
Impositions: Taxes, assessments, charges, excises and
levies, business taxes, licenses, permits, inspection and other authorization
fees, transit development fees, assessments or charges for housing funds,
service payments in lieu of taxes and any other fees or charges of any kind at
any time levied, assessed, charged or imposed by any federal, state or local
entity, upon, measured by or reasonably attributable to the cost or value of
Tenant's equipment, furniture, fixtures or other personal property located in
the Premises, or the cost or value of any alterations, additions or other
improvements to the Premises made by or on behalf of Tenant during the initial
improvement of the Premises pursuant to and governed by the
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Work Letter which exceed Building standard improvements (which for purposes of
this definition are defined to mean tenant improvements costing less than $50.00
per square foot of Rentable Area) and any subsequent Alterations. Impositions do
not include Real Estate Taxes, franchise, transfer, inheritance or capital stock
taxes, or income taxes measured by the net income of Landlord from all sources,
unless any such taxes are levied or assessed against Landlord as a substitute
for, in whole or in part, any Imposition.
Land: The parcel of land described on Exhibit B
attached to this Lease.
Operating Expenses: All costs of management,
operation, maintenance and repair of the Building, including, but not limited
to, the following: (i) a prorata portion of salaries, wages, benefits and other
payroll expenses of employees engaged in the operation, maintenance or repair of
the Building and the Land based on the percentage of such employees' time that
is devoted to the operation, maintenance or repair of the Building and the Land;
(ii) commercially reasonable property management fees and expenses; (iii)
electricity, natural gas, water, waste disposal, sewer, heating, lighting, air
conditioning and ventilating and other utilities; (iv) maintenance, security,
life safety and other services, such as alarm service, window cleaning and
elevator maintenance; (v) repair and replacement, resurfacing or repaving of
paved areas, sidewalks, curbs and gutters (except that any such work which
constitutes a capital improvement shall be included in Operating Expenses in the
manner provided in clause (xiii) below); (vi) landscaping, ground keeping,
management, operation, and maintenance and repair of all public, private and
park areas adjacent to the Building and Land; (vii) materials, supplies, tools
and rental equipment; (viii) license, permit and inspection fees and costs; (ix)
insurance premiums and costs (including a proportionate share if Landlord
insures under a "blanket" policy) for any and all insurance carried by Landlord
with respect to the Premises, and the deductible portion of any insured loss
under any such Landlord's insurance (not to exceed $20,000.00); (x) sales, use
and excise taxes; (xi) legal, accounting and other professional services for the
Building and the Land, including costs, fees and expenses of contesting the
validity or applicability of any law, ordinance, rule, regulation or order
relating to the Building and the Land; (xii) depreciation on personal property,
including exterior window draperies provided by Landlord and floor coverings in
the Common Areas and other public portions of the Building, and/or rental costs
of leased furniture, fixtures, and equipment; and (xiii) the cost of any capital
improvements to the Building or the Land made at any time that are intended in
Landlord's judgment as labor saving devices, or to reduce or eliminate other
Operating Expenses or to effect other economies in the operation, maintenance,
or management of the Building, or that are necessary or appropriate in
Landlord's judgment for the health and safety of occupants of the Building, or
that are required under any law, ordinance, rule, regulation or order which was
not applicable to the Building before the Commencement Date, all amortized over
the useful life of such items determined in accordance with generally accepted
accounting principles at an interest rate of ten percent (10%) per annum, or, if
applicable, the rate paid by Landlord on funds borrowed for the purpose of
constructing or installing such capital improvements and provided that, as to
cost savings expenditures, the annual amount of such amortized costs passed
through as an expense shall not exceed the cost savings realized in such year.
Operating Expenses shall not include: (A) Real Estate Taxes; (B) legal fees,
brokers' commissions or other costs incurred in the negotiation, termination, or
extension of leases or in proceedings involving a specific tenant; (C)
depreciation, except as set forth above; (D) interest, amortization or other
payments on loans to Landlord except as a component of amortization as set forth
above; (E) the cost of any repairs or alterations resulting from defects in the
design or construction of the remodeled Building and the initial improvement of
the Premises or that are required under any law, ordinance, rule, regulation or
order which was applicable to the Building before the Commencement Date; (F)
costs of repairs that are covered by warranties in connection with the
construction of the Building; (G) the cost of capital improvements, except as
set forth in clause (xiii) above; (H) any management fees, representing an
amount paid to a person, firm, corporation, or other entity affiliated to
Landlord to the extent in excess of the amount which would have been paid in the
absence of such relationship; (I) expenses directly resulting from the
negligence, willful misconduct or violation of laws by Landlord, its agents,
servants or employees; (J) any costs of repairs for damage or
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destruction occasioned by eminent domain or fires or other casualty (except the
deductible amount permitted under clause (iv) above); (K) all costs arising from
monitoring, cleaning up and otherwise remediating or due to the presence of,
Hazardous Substances (defined below) at the Premises except to the extent caused
by the release or emisssion of Hazardous Substances by Tenant, its contractors,
employees or agent; (L) the creation of any reserves (other than standard
operating reserves); (M) costs of correcting defects in or inadequacy of the
renovation of the Building; and (N) insurance costs for coverage not customarily
required by lenders, or paid by tenants, of similar projects in the vicinity of
the Premises, insurance deductibles in excess of $20,000 per occurrence and
premiums for earthquake insurance. Subject to the provisions of this definition,
the determination of Operating Expenses shall be made by Landlord in accordance
with generally accepted accounting principles and practices consistently
applied.
Real Estate Taxes: All taxes, assessments and charges
now or hereafter levied or assessed upon, or with respect to, the Building or
any portion thereof, or any personal property of Landlord used in the operation
thereof or located therein, or Landlord's interest in the Building or such
personal property, by any federal, state or local entity, including: (i) all
real property taxes and general and special assessments; (ii) charges, fees or
assessments for transit, housing, day care, open space, art, police, fire or
other governmental services or benefits to the Building; (iii) service payments
in lieu of taxes; (iv) any tax, fee or excise on the use or occupancy of any
part of the Building, or on rent for space in the Building; (v) any other tax,
fee or excise, however described, that may be levied or assessed as a substitute
for, in whole or in part, any other Real Estate Taxes; and (vi) reasonable fees
and expenses, including those of consultants or attorneys, incurred in
connection with proceedings to contest, determine or reduce Real Estate Taxes.
Real Estate Taxes do not include: (A) franchise, transfer, gift, estate,
inheritance or capital stock taxes, or income taxes measured by the net income
of Landlord, unless any such taxes are levied or assessed against Landlord as a
substitute for, in whole or in part, any Real Estate Tax; (B) Impositions and
all similar amounts payable by Tenant; and (C) penalties, fines, interest or
charges due for late payment of Real Estate Taxes by Landlord. If any Real
Estate Taxes are payable, or may at the option of the taxpayer be paid, in
installments, such Real Estate Taxes shall, together with any interest that
would otherwise be payable with such installment, be deemed to have been paid in
installments, amortized over the maximum time period allowed by applicable law.
Rent: Base Rent, Escalation Rent and all other
additional charges and amounts payable by Tenant in accordance with this Lease.
Term: The period from the Possession Date to the
Expiration Date.
2. Lease of Premises. Landlord leases to Tenant and Tenant leases from
Landlord the Premises.
3. Term; Condition and Acceptance of Premises.
3.1 Initial Term and Acceptance of Premises. Except as
hereinafter provided, and unless sooner terminated pursuant to the provisions of
this Lease, the Term of this Lease shall commence on the Possession Date and end
on the Expiration Date. Landlord shall deliver the Premises to Tenant on the
Possession Date in the condition required by the Work Letter. To the extent that
(i) Landlord has agreed in the Work Letter to make any alterations or
improvements to the Premises prior to the Possession Date, (ii) Tenant desires
to take occupancy of the Premises in advance of the Possession Date, and (iii)
Landlord determines in its sole discretion that Tenant's early occupancy shall
not delay the completion of the improvements to the Premises, then Landlord
shall deliver the Premises to Tenant in advance of the Possession Date on a date
mutually agreed upon by Landlord and Tenant. If Landlord, for any reason
whatsoever, is delayed in the delivery of the Premises to Tenant, this Lease
shall not be void or voidable, and Landlord shall not be in default or liable to
Tenant for any loss or damage resulting therefrom: provided,
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however, that if the Possession Date does not occur on or before September 1,
2000, then Tenant shall have the right to terminate this Lease by delivering
written notice to Landlord at any time before October 1, 2001, whereupon any
monies previously paid by Tenant to Landlord shall be reimbursed to Tenant.
Within five (5) days after the Possession Date, Landlord and Tenant shall
execute a Confirmation of Lease Term in the form as set forth in Exhibit E
attached to this Lease. Tenant's occupancy of all or any portion of the Premises
shall constitute Tenant's acceptance of the Premises in the condition called for
by this Lease. Tenant's occupancy of all or any portion of the Premises shall
constitute Tenant's acceptance of the Premises in the condition called for by
this Lease, subject to the punchlist items as described in the Work Letter.
Notwithstanding the foregoing, if the Possession Date occurs after June 1, 2000
as a result of events other than delays caused by the acts or omissions of
Tenant, or Tenant's contractors, employees or agents ("Tenant Delays"), then the
"Commencement Date" shall be a date calculated as follows: (i) two (2) weeks
after the Possession Date, plus (ii) the number of days by which the Possession
Date exceeds June 1, 2000, minus (iii) the number of days of delay that Landlord
is actually delayed in delivering the Premises to Tenant caused by Tenant
Delays.
3.2 Option to Extend.
3.2.1. Exercise of Option to Extend Term. If no
"Suspension Condition" (as hereinafter defined) exists at the time of Tenant's
exercise of the option to extend the Initial Term or at the commencement of the
Extended Term, as the case may be, Tenant shall have two (2) options (each an
"Extension Option") to extend the Initial Term for an additional period of five
(5) years each (each an "Extended Term"). To exercise Tenant's option with
respect to the Extended Term, Tenant shall give notice to Landlord not less than
two hundred ten (210) days prior to the expiration of the Initial Term, or the
first Extended Term ("Election Notice"). A "Suspension Condition" shall mean the
existence of any event or condition of default after expiration of any
applicable grace, notice or cure periods. Tenant shall have no right to exercise
the second Extension Option unless Tenant properly exercised the first Extension
Option.
3.2.2. Fair Market Rent. If Tenant properly and
timely exercises Tenant's option to extend pursuant to Section 3.2.1 above, such
extension shall be upon all of the same terms, covenants and conditions of this
Lease; provided, however, that the Base Rent applicable to the Premises for each
Extended Term shall be one hundred percent (100%) of the "Fair Market Rent" for
space comparable to the Premises as of the commencement of the applicable
Extended Term. "Fair Market Rent" shall mean the annual rental being charged for
first class space comparable to the Premises in buildings comparable to the
Building in the south of Market and financial districts of San Francisco, taking
into account location, parking, condition and improvements to the space and the
fact that Tenant is not entitled to rent concessions or a tenant improvement
allowance. All other terms and conditions of the Lease, which may be amended
from time to time by the parties in accordance with the provisions of the Lease,
shall remain in full force and effect and shall apply during each Extended Term,
as applicable, except that: (i) there shall be no further option to extend the
Term beyond a date ten (10) years after the expiration of the Initial Term, (ii)
there shall be no further rent concessions, and (iii) there shall be no tenant
improvement allowance or similar provisions.
3.2.3. Determination of Rent. Within thirty (30) days
after the date of the Election Notice, Landlord and Tenant shall negotiate in
good faith in an attempt to determine Fair Market Rent for the Extended Term. If
they are unable to agree within said thirty (30) day period, then the Fair
Market Rent shall be determined as provided in Section 3.2.4 below, unless on or
before such thirtieth (30th) day after the date of the Election Notice Tenant
provides Landlord with written notice of its election to revoke the Election
Notice and to not exercise its option to extend.
3.2.4. Appraisal. If it becomes necessary to
determine the Fair Market Rent for the Premises by appraisal, the real estate
appraiser(s) indicated in this Section 3.2.4, each of whom shall be
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members of the Appraisal Institute and each of whom have at least five (5) years
experience appraising office space located in the vicinity of the Premises,
shall be appointed and shall act in accordance with the following procedures:
(i) If the parties are unable to agree on the Fair
Market Rent within the allowed time, either party may demand an appraisal by
giving written notice to the other party, which demand to be effective must
state the name, address and qualifications of an appraiser selected by the party
demanding the appraisal ("Notifying Party"). Within ten (10) days following the
Notifying Party's appraisal demand, the other party ("Non-Notifying Party")
shall either approve the appraiser selected by the Notifying Party or select a
second properly qualified appraiser by giving written notice of the name,
address and qualification of said appraiser to the Notifying Party. If the
Non-Notifying Party fails to select an appraiser within the ten (10) day period,
the appraiser selected by the Notifying Party shall be deemed selected by both
parties and no other appraiser shall be selected. If two (2) appraisers are
selected, they shall select a third appropriately qualified appraiser. If the
two (2) appraisers fail to select a third qualified appraiser, the third
appraiser shall be appointed by the then presiding judge of the county where the
Premises are located upon application by either party.
(ii) If only one appraiser is selected, that
appraiser shall notify the parties in simple letter form of its determination of
the Fair Market Rent for the Premises within fifteen (15) days following his or
her selection, which appraisal shall be conclusively determinative and binding
on the parties as the appraised Fair Market Rent.
(iii) If multiple appraisers are selected, the
appraisers shall meet not later than ten (10) days following the selection of
the last appraiser. At such meeting, the appraisers shall attempt to determine
the Fair Market Rent for the Premises as of the commencement date of the
Extended Term in question by the agreement of at least two (2) of the
appraisers.
(iv) If two (2) or more of the appraisers agree on
the Fair Market Rent for the Premises at the initial meeting, such agreement
shall be determinative and binding upon the parties hereto and the agreeing
appraisers shall forthwith notify both Landlord and Tenant of the amount set by
such agreement. If multiple appraisers are selected and two (2) appraisers are
unable to agree on the Fair Market Rent for the Premises, each appraiser shall
submit to Landlord and Tenant his or her respective independent appraisal of the
Fair Market Rent for the Premises, in simple letter form, within twenty (20)
days following appointment of the final appraiser. The parties shall then
determine the Fair Market Rent for the Premises by averaging the appraisals;
provided that any high or low appraisal, differing from the middle appraisal by
more than ten percent (10%) of the middle appraisal, shall be disregarded in
calculating the average.
(v) If only one (1) appraiser is selected, then each
party shall pay one-half (1/2) of the fees and expenses of that appraiser. If
three (3) appraisers are selected, each party shall bear the fees and expenses
of the appraiser it selects and one-half (1/2) of the fees and expenses of the
third appraiser.
3.2.5. Restriction on Assignment. The Extension
Option shall be personal to Critical Path or any Related Entity (defined below),
shall not be assignable or transferable, shall terminate upon any assignment of
the Premises other than to a Related Entity and or any sublease that results in
Tenant or a Related Entity retaining a portion of the Premises that is less than
fifty percent (50%) of the Rentable Area of the original Premises
3.2.6. Amendment to Lease. Immediately after the Fair
Market Rent has been determined, the parties shall enter into an amendment to
this Lease setting forth the Base Rent for the Extended Term and shall also
state the new Expiration Date of the Term of the Lease.
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3.3 Right to Terminate. Tenant shall have the right to
terminate this Lease effective at the end of the seventh year following the
Commencement Date (the "Early Termination Date") provided that Tenant delivers
written notice to Landlord at least 180 days prior to the Early Termination Date
and that on or before the Early Termination Date Tenant pays to Landlord a
termination fee in an amount equal to the unamortized (amortized on a straight
line basis over the Initial Term) Tenant Allowance (as defined in the Work
Letter) and brokerage fee paid by Landlord to the Brokers at the time this Lease
is executed and at the time the Tenant takes possession of the Premises.
4. Rent.
4.1. Obligation to Pay Base Rent. Tenant shall pay Base Rent
to Landlord, in advance, in equal monthly installments, commencing on the
Commencement Date, and thereafter on or before the first day of each calendar
month during the Term. If the Commencement Date and/or Expiration Date is other
than the first day of a calendar month, the installment of Base Rent for the
first and/or last fractional month of the Term shall be prorated on a daily
basis. Not less than thirty (30) days prior to the Commencement Date, Tenant
shall pay to Landlord the first month's Base Rent.
4.2. Manner of Rent Payment. All Rent shall be paid by Tenant
without notice, demand, abatement, deduction or offset (except as expressly set
forth herein), in lawful money of the United States of America, payable to
Landlord, at Landlord's Address as set forth in the Basic Lease Information, or
to such other person or at such other place as Landlord may from time to time
designate by notice to Tenant.
4.3. Additional Rent. All Rent not characterized as Base Rent
or Escalation Rent shall constitute additional rent, and if payable to Landlord
shall, unless otherwise specified in this Lease, be due and payable thirty (30)
days after Tenant's receipt of Landlord's invoice therefor.
4.4. Late Payment of Rent; Interest. Tenant acknowledges that
late payment by Tenant of any Rent will cause Landlord to incur administrative
costs not contemplated by this Lease, the exact amount of which are extremely
difficult and impracticable to ascertain based on the facts and circumstances
pertaining as of the Lease Date. Accordingly, if any Rent is not paid by Tenant
when due, a late charge equal to five percent (5%) of such Rent; provided,
however, that the following additional provisions shall apply to such late
charge: (i) the first late payment in any calendar year shall not result in any
late charge payment unless such payment of Rent is not received within two (2)
business days after Landlord's delivery of written notice to Tenant, and (ii) if
there are more than two (2) late payments of Rent by Tenant in any calendar
year, then the late charge for each subsequent late payment in such calendar
year shall be eight percent (8%). Any Rent, other than late charges, due
Landlord under this Lease, if not paid when due, shall also bear interest from
the date due until paid, at the lesser of the rate of ten percent (10%) per
annum and the highest rate legally permitted. The parties acknowledge that such
late charge and interest represent a fair and reasonable estimate of the
administrative costs and loss of use of funds Landlord will incur by reason of a
late Rent payment by Tenant, but Landlord's acceptance of such late charge
and/or interest shall not constitute a waiver of Tenant's default with respect
to such Rent or prevent Landlord from exercising any other rights and remedies
provided under this Lease, at law or in equity.
5. Calculation and Payments of Escalation Rent. During each full or
partial calendar year of the Term subsequent to the Base Year, Tenant shall pay
to Landlord Escalation Rent in accordance with the following procedures:
5.1. Payment of Estimated Escalation Rent. During December of
the Base Year and
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December of each subsequent calendar year, or as soon thereafter as practicable,
Landlord shall give Tenant notice of its estimate of Escalation Rent due for the
next ensuing calendar year. On or before the first day of each month during such
next ensuing calendar year, Tenant shall pay to Landlord in advance, in addition
to Base Rent, one-twelfth (1/12th) of such estimated Escalation Rent. In the
event such notice is given after December 31st of any year during the Term, (i)
Tenant shall continue to pay Escalation Rent on the basis of the prior calendar
year's estimate until the month after such notice is given, (ii) subsequent
payments by Tenant shall be based of the estimate of Escalation Rent set forth
in Landlord's notice, and (iii) with the first monthly payment of Escalation
Rent based on the estimate set forth in Landlord's notice, Tenant shall also pay
the difference, if any, between the amount previously paid for such calendar
year and the amount which Tenant would have paid through the month in which such
notice is given, based on Landlord's noticed estimate or, in the alternative, if
such amount previously paid by Tenant for such calendar year through the month
in which such notice is given exceeds the amount which Tenant would have paid
through such month based on Landlord's noticed estimate, Landlord shall credit
such excess amount against the next monthly payments of Escalation Rent due from
Tenant. If at any time Landlord reasonably determines that the Escalation Rent
for the current calendar year will vary from Landlord's estimate by more than
five percent (5%), Landlord may, by notice to Tenant not more than once a
calendar year, revise its estimate for such calendar year, and subsequent
payments by Tenant for such calendar year shall be based upon such revised
estimate. Notwithstanding anything to the contrary contained herein, Tenant may
pay the portion of Escalation Rent attributable to Real Estate Taxes as set
forth in Landlord's notice of its estimate of Escalation Rent on or before a
date thirty (30) days prior to the date such Real Estate Taxes are due, unless
Landlord notifies Tenant that its lender is requiring Landlord to escrow Real
Estate Taxes pursuant to a deed of trust encumbering the Premises.
5.2. Escalation Rent Statement and Adjustment. Within one
hundred twenty (120) days after the close of each calendar year, or as soon
thereafter as practicable, Landlord shall deliver to Tenant a statement of the
actual Escalation Rent for such calendar year, accompanied by a statement
prepared by Landlord showing in reasonable detail the Operating Expenses and the
Real Estate Taxes comprising the actual Escalation Rent. If Landlord's statement
shows that Tenant owes an amount less than the payments previously made by
Tenant for such calendar year, Landlord shall credit the difference first
against any sums then owed by Tenant to Landlord and then against the next
payment or payments of Rent due Landlord within thirty (30) days, except that if
a credit amount is due Tenant after termination of this Lease, Landlord shall
pay to Tenant any excess remaining after Landlord credits such amount against
any sums owed by Tenant to Landlord. If Landlord's statement shows that Tenant
owes an amount more than the payments previously made by Tenant for such
calendar year, Tenant shall pay the difference to Landlord within thirty (30)
days after delivery of the statement.
5.3. Proration for Partial Year. If this Lease terminates
other than on the last day of a calendar year (other than due to Tenant's
default), the amount of Escalation Rent for such fractional calendar year shall
be prorated on a daily basis. Upon such termination, Landlord may, at its
option, calculate the adjustment in Escalation Rent prior to the time specified
in Section 5.2 above. Tenant's obligation to pay Escalation Rent and Landlord's
obligation to reimburse excess amounts as set forth in Section 5.2, above, shall
survive the expiration or termination of this Lease.
5.4. Tenant's Right to Contest Taxes If Real Estate Taxes are
not contested by Landlord, Tenant shall have the right to contest such Taxes, at
no cost or expense to Landlord, by the appropriate proceedings diligently
contested in good faith. Notwithstanding such proceedings, the contested Real
Estate Taxes shall be promptly paid and discharged, unless such proceedings (and
where necessary the posting of any appropriate bond or other security) shall
operate to prevent or stay the collection of the Real Estate Taxes and secure
any accruing penalties or interest and such proceedings shall provide a cure of
Landlord's default in the payment of Real Estate Taxes required under any deed
of trust upon the
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Premises. Landlord shall join Tenant in such proceedings, if necessary, provided
that Tenant pays all reasonable costs and expenses incurred by Landlord.
6. Impositions Payable by Tenant. Tenant shall pay all Impositions
prior to delinquency. If billed directly to Tenant, Tenant shall pay such
Impositions and concurrently deliver to Landlord evidence of such payments. If
any Impositions are billed to Landlord or included in bills to Landlord for Real
Estate Taxes or other charges, then Tenant shall pay to Landlord all such
amounts within twenty (20) days after delivery of Landlord's invoice therefor.
If applicable law prohibits Tenant from reimbursing Landlord for an Imposition,
but Landlord may lawfully increase the Base Rent to account for Landlord's
payment of such Imposition, the Base Rent payable to Landlord shall be increased
to net to Landlord the same return without reimbursement of such Imposition as
would have been received by Landlord with reimbursement of such Imposition.
Tenant's obligation to pay Impositions which have accrued and remain unpaid upon
the expiration or earlier termination of this Lease shall survive the expiration
or earlier termination of this Lease.
7. Use of Premises.
7.1. Permitted Use. The Premises may only be used solely for
the Permitted Use and for no other use or purpose.
7.2. No Violation of Legal and Insurance Requirements. Tenant
shall not do or knowingly permit to be done, or bring or keep or knowingly
permit to be brought or kept, in or about the Premises, or any other portion of
the Building, anything which (i) is prohibited by or will in any way conflict
with any law, ordinance, rule or regulation; (ii) would invalidate or be in
conflict with the provisions of any insurance policy carried by Landlord or
Tenant on any portion of the Building or Premises, or any property therein; or
(iii) would cause a cancellation of any such insurance, increase the existing
rate of or affect any such Landlord's insurance (unless Tenant pays an increase
in premium), or subject Landlord to any liability or responsibility for injury
to any person or property. If Tenant does or knowingly permits anything to be
done which increases the cost of any of Landlord's insurance, or which results
in the need, in Landlord's reasonable judgment, for additional insurance by
Landlord or Tenant with respect to any portion of the Building or Premises, then
after prior written notice to Tenant of such action Tenant shall reimburse
Landlord, upon demand, for any such additional costs or the costs of such
additional insurance, and/or procure such additional insurance at Tenant's sole
cost and expense. Exercise by Landlord of such right to require reimbursement of
additional costs (including the costs of procuring of additional insurance)
shall not limit or preclude Landlord from prohibiting Tenant's impermissible use
of the Premises or from invoking any other right or remedy available to Landlord
under this Lease.
7.3. Compliance with Legal, Insurance and Life Safety
Requirements. Except as provided in clauses (i) through (iii) below, Tenant, at
its cost and expense, shall promptly comply with all laws, ordinances, rules,
regulations, orders and other governmental requirements, the requirements of any
board of fire underwriters or other similar body, any directive or occupancy
certificate issued pursuant to any law by any public officer or officers, the
provisions of all recorded documents affecting any portion of the Building and
all life safety programs, procedures and rules implemented or promulgated by
Landlord in its reasonable judgement pertaining to Tenant's use of the Premises
in order to comply with applicable laws, ordinances, rules, regulations, orders
or governmental requirements or requirements of insurance underwriters ("Laws").
Tenant shall not, however, be required to comply with Laws requiring Tenant to
make structural changes or capital improvements to the Premises unless
necessitated, in whole or in part, by (i) Tenant's particular use or occupancy
of the Premises or (ii) Alterations (excluding any alterations, additions or
other improvements to the Premises made by or on behalf of Tenant during the
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initial improvement of the Premises pursuant to the Work Letter).
7.4. No Nuisance. Tenant shall not (i) do or permit anything
to be done in or about the Premises, or any other portion of the Building, which
would injure or annoy, or obstruct or interfere with the rights of, Landlord or
other occupants of the Building, or others lawfully in or about the Building;
(ii) use or allow the Premises to be used in any manner inappropriate for a
Class A office building, or for any improper or objectionable purposes; or (iii)
cause, maintain or permit any nuisance or waste in, on or about the Premises, or
any other portion of the Building.
7.5. Hazardous Substances. The term "Hazardous Substances"
as used in the Lease, is defined as follows:
Any element, compound, mixture, solution, particle or substance, which
presents danger or potential danger of damage or injury to health,
welfare or to the environment including, but not limited to: (i) those
substances which are inherently or potentially radioactive, explosive,
ignitable, corrosive, reactive, carcinogenic or toxic and (ii) those
substances which have been recognized as dangerous or potentially
dangerous to health, welfare or to the environment by any federal,
municipal, state, county or other governmental or quasi-governmental
authority and/or any department or agency thereof.
Tenant represents and warrants to Landlord and agrees that at
all times during the term of this Lease and any extensions or renewals thereof,
Tenant shall:
(i) promptly comply at Tenant's sole cost and expense, with
all laws, orders, rules, regulations, certificates of occupancy, or
other requirements, as the same now exist or may hereafter be enacted,
amended or promulgated, of any federal, municipal, state, county or
other governmental or quasi-governmental authorities and/or any
department or agency thereof relating to the manufacturing, processing,
distributing, using, producing, treating, storing (above or below
ground level), disposing or knowingly allowing to be present (the
"Environmental Activity") of Hazardous Substances in or about the
Premises (each, an "Environmental Law", and all of them, "Environmental
Laws") to the extent Tenant is responsible for the presence of such
Hazardous Substances.
(ii) indemnify and hold Landlord, its agents and employees,
harmless from any and all demands, claims, causes of action, penalties,
liabilities, judgments, damages (including consequential damages) and
expenses including, without limitation, court costs and reasonable
attorneys' fees incurred by Landlord as a result of (a) Tenant's
failure or delay in properly complying with any Environmental Law as
required by clause (i) above, or (b) any adverse effect which results
from the Environmental Activity by Tenant, Tenant's subtenants or any
of their respective agents, employees or contractors, whether Tenant or
Tenant's subtenants or any of their respective agents, employees,
contractors or invitees has caused such Environmental Activity, with or
without Tenant's consent, or either intentionally or unintentionally.
If any action or proceeding is brought against Landlord, its agents or
employees by reason of any such claim, Tenant, upon notice from
Landlord, will defend such claim at Tenant's expense with counsel
reasonably satisfactory to Landlord. This indemnity obligation by
Tenant of Landlord will survive the expiration or earlier termination
of this Lease.
(iii) promptly disclose to Landlord by delivering, in the
manner prescribed for delivery of notice in this Lease, a copy of any
forms, submissions, notices, reports, or other written documentation
(each, a "Communication") relating to any Environmental Activity,
whether any
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such Communication is delivered to Tenant or any of its subtenants or
is requested of Tenant or any of its subtenants by any federal,
municipal, state, county or other government or quasi-governmental
authority and/or any department or agency thereof.
(iv) in the event there is a release of any Hazardous
Substance as a result of or in connection with any Environmental
Activity by Tenant or any of Tenant's subtenants or any of their
respective agents, employees, contractors or invitees, which must be
remediated under any Environmental Law, Landlord shall perform the
necessary remediation; and Tenant shall reimburse Landlord for all
costs thereby incurred within fifteen (15) days after delivery of a
written demand therefor from Landlord (which shall be accompanied by
reasonable substantiation of such costs). In the alternative, Landlord
shall have the right to require Tenant, at its sole cost and expense,
to perform the necessary remediation in accordance with a detailed plan
of remediation which shall have been approved in advance in writing by
Landlord. Landlord shall give notice to Tenant within thirty (30) days
after Landlord receives notice or obtains knowledge of the required
remediation. The rights and obligations of Landlord and Tenant set
forth in this clause (iv) shall survive the expiration or earlier
termination of this Lease.
(v) notwithstanding any other provisions of this Lease, allow
Landlord, and any authorized representative of Landlord, access and the
right to enter and inspect the Premises for Environmental Activity, at
any time deemed reasonable by Landlord, upon prior notice to Tenant on
the terms set forth in Article 19.
Compliance by Tenant with any provision of this Section 7.5 shall not be deemed
a waiver of any other provision of this Lease. Without limiting the foregoing,
Landlord's consent to any Environmental Activity shall not relieve Tenant of its
indemnity obligations under the terms hereof.
Except as set forth in the Phase I Environmental Assessment
dated January 22, 1996 prepared by William Dubovsky Environmental and that
certain letter dated April 12, 1999 prepared by William Dubovsky Environmental,
to Landlord's knowledge, (a) no Hazardous Substance is present on the Building
or the soil, surface water or groundwater of the Land, (b) no underground
storage tanks are present on the Land, and (c) no action proceeding or claim is
pending or threatened regarding the Building concerning any Hazardous Substance
or pursuant to any Environmental Law. Landlord shall promptly remedy and shall
indemnify, defend, protect and hold harmless Tenant, its agents, contractors,
stockholders, directors, successors, representatives, and assigns from and
against, all losses, costs, claims, liabilities and damages (including
attorneys' and consultants' fees) of every type and nature, directly or
indirectly arising out of or in connection with any Hazardous Substance present
at any time on or about the Building, or the soil, air, improvements,
groundwater or surface water of the Land, or the violation of any Environmental
Laws, except to the extent that any of the foregoing results from the
Environmental Activity by Tenant or any of Tenant's subtenants or any of their
respective agents, employees, contractors or invitees, in violation of
Environmental Laws.
This Section 7.5 of the Lease constitutes the entire agreement
of Landlord and Tenant regarding Hazardous Substances.
7.6. Special Provisions Relating to The Americans With
Disabilities Act of 1990.
7.6.1. Allocation of Responsibility to Landlord. As
between Landlord and Tenant, Landlord shall be responsible that the Building as
of the Commencement Date complies with the requirements of Title III of the
Americans with Disabilities Act of 1990 (42 U.S.C. 12181, et seq., The
Provisions Governing Public Accommodations and Services Operated by Private
Entities), and all
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regulations promulgated thereunder, and all amendments, revisions or
modifications thereto now or hereafter adopted or in effect in connection
therewith (hereinafter collectively referred to as the "ADA"), and to take such
actions and make such alterations and improvements as are necessary for such
compliance. All costs incurred by Landlord in discharging its responsibilities
under this Section 7.6.1 shall be included in Operating Expenses to the extent
permitted by Section 1.1.
7.6.2. Allocation of Responsibility to Tenant. As
between Landlord and Tenant, Tenant, at its sole cost and expense, shall be
responsible that all Alterations to the Premises (excluding any alterations,
additions or other improvements to the Premises made by or on behalf of Tenant
during the initial improvement of the Premises pursuant to the Work Letter),
Tenant's particular use and occupancy of the Premises, and Tenant's performance
of its obligations under this Lease, comply with the requirements of the ADA,
and to take such actions and make such Alterations as are necessary for such
compliance; provided, however, that Tenant shall not make any such Alterations
except upon Landlord's prior written consent pursuant to the terms and
conditions of this Lease. Tenant shall protect, defend, indemnify and hold
Landlord harmless from and against any claim, demand, cause of action,
obligation, liability, loss, cost or expense (including reasonable attorneys'
fees) which may be asserted against or incurred by Landlord as a result of
Tenant's failure in any respect to comply with its obligations set forth in this
Section 7.6.2. Tenant's indemnity obligations set forth in the immediately
preceding sentence shall survive the expiration or earlier termination of this
Lease.
7.6.3. General. Notwithstanding anything in this
Lease to the contrary, no act or omission of Landlord, including any approval,
consent or acceptance by Landlord or Landlord's agents, employees or other
representatives, shall be deemed an agreement, acknowledgment, warranty, or
other representation by Landlord that Tenant has complied with the ADA or that
any action, alteration or improvement by Tenant complies or will comply with the
ADA or constitutes a waiver by Landlord of Tenant's obligations to comply with
the ADA under this Lease or otherwise. Any failure of Landlord to comply with
the obligations of the ADA shall not relieve Tenant from any obligations under
this Lease or constitute or be construed as a constructive or other eviction of
Tenant or disturbance of Tenant's use and possession of the Premises.
8. Building Services.
8.1. Maintenance of Building. Except as provided in Section 9,
Landlord shall maintain the Building in good order and condition, except for
ordinary wear and tear, damage by casualty or condemnation, or damage occasioned
by the act or omission of Tenant or Tenant's employees, agents, contractors,
licensees or invitees, which damage by Tenant or Tenant's employees, agents,
contractors, licensees or invitees shall be repaired by Landlord at Tenant's
expense. Landlord shall perform and construct, and Tenant shall have no
responsibility to perform or construct, any repair, maintenance or improvements
(a) to the roof or the structural portions of the Building, (b) which could be
treated as a "capital expenditure" under generally accepted accounting
principles, (c) to the heating, ventilating, air conditioning, electrical, fire
and life safety, water, sewer, and plumbing systems serving the Premises and the
Building, (d) to any exterior or other portion of the Land outside of the
demising walls of the Premises, (e) due to negligent acts or omissions of
Landlord or (f) for which Landlord has a right of reimbursement. Notwithstanding
the foregoing, Tenant shall pay for its share of the repairs described above to
the extent such costs are properly included in Operating Expenses. Landlord's
maintenance of, and provision of services to, the Building shall be performed in
a manner consistent with that of comparable office buildings in the San
Francisco, California area. Landlord shall not be in default under this Lease or
liable for any damages directly or indirectly resulting from or incidental to,
nor shall the rental reserved in this Lease be abated by reason of, Landlord's
failure to make any repair or to perform any maintenance required to be made or
performed by Landlord under this Section 8.1, except as otherwise provided in
Section 20.6 or unless such failure shall persist for
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<PAGE> 15
an unreasonable time after written notice of the need for such repair or
maintenance is given to Landlord by Tenant; provided, however, that Landlord
shall be liable only to Tenant for actual, out of pocket, costs or expenses
incurred by Tenant as a direct result of Landlord's failure to cause the floor
lobby or elevators of the Building to comply with laws which are immediately
applicable to, and enforceable against, the Building (subject to Landlord's
reasonable right of contest of such laws).
8.2. Building Standard Services. During the Term, the Premises
shall be furnished with water, gas, electricity and heating, ventilating and air
conditioning in the capacity set forth in the Work Letter. Any additional
utility services required by Tenant shall be procured by Tenant at its sole cost
and expense and shall comply with all regulations and limitations as may be
prescribed by any applicable policies, regulations or guidelines adopted by any
federal, state or local governmental or quasi-governmental entities or utility
suppliers. Landlord may establish in the Premises such measures as are required
by laws, ordinances, rules or regulations or as it deems necessary or
appropriate to conserve energy, including automatic switching of lights and/or
more efficient forms of lighting. Tenant shall have access to the Building and
all of the foregoing services 24 hours a day, 7 days a week.
8.3. Interruption or Unavailability of Services. Rent shall
not abate, no constructive or other eviction shall be construed to have
occurred, Tenant shall not be relieved from any of its obligations under this
Lease, and Landlord shall not be in default hereunder or liable for any damages
directly or indirectly resulting from, the failure of Landlord to furnish, or
delay in furnishing, any maintenance or services under this Article 8 as a
result of repairs, alterations, improvements or any circumstances beyond
Landlord's reasonable control. Landlord shall use reasonable diligence to remedy
any failure or interruption in the furnishing of such maintenance or services.
Notwithstanding anything set forth in this Lease to the contrary, if such
interruption or interference with access to the Premises, or unavailability of
services continues for more than thirty (30) consecutive days and such
interruption or unavailability prevents Tenant from using the Premises, then
commencing upon the expiration of such thirty (30) day period, Rent shall abate
until beneficial use of the Premises is restored.
8.4. Tenant's Payment of Utilities. Commencing on the
Commencement Date and continuing throughout the Term, Tenant shall pay directly
to the utility providing such service, as the same become due, all charges for
water, gas, electricity, steam, telephone, sewer, waste pick-up and any other
utilities, materials or services furnished to the Premises and/or used by Tenant
on or about the Premises during the Term, including, without limitation, (i)
meter, use, connection, hook-up and/or standby fees (including any connection or
hook-up fees which relate to making the existing electrical, steam, gas, and
water service available to the Premises as of or following the Commencement
Date), and (ii) penalties for discontinued or interrupted service relating to
discontinuance and interruptions following the Commencement Date (except
penalties resulting from Landlord's acts or omissions).
9. Maintenance of Premises. Except as set forth in the second sentence
of Section 8.1, Tenant shall, at all times during the Term, at Tenant's cost and
expense, keep the Premises in good condition and repair, except for ordinary
wear and tear and damage by casualty or condemnation. Tenant shall obtain at its
own cost janitorial supplies and services for the Premises (which services shall
at a minimum consist of vacuuming, emptying waste baskets and dusting at least
five days a week) so that the interior of the Premises shall be maintained in a
clean and sanitary order and condition as required by this Article 9. Except as
may be specifically set forth in this Lease (including the Work Letter),
Landlord has no obligation to alter, remodel, improve, repair, decorate or paint
the Premises, or any part thereof, or any obligation respecting the condition,
maintenance and repair of the Premises or any other portion of the Building.
Except as expressly set forth herein, Tenant hereby waives all rights, including
those provided in California Civil Code Section 1941 or any successor statute,
to make repairs which are Landlord's
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obligation under this Lease at the expense of Landlord or to receive any setoff
or abatement of Rent or in lieu thereof to vacate the Premises or terminate this
Lease.
10. Alterations to Premises.
10.1. Landlord Consent; Procedure. Tenant shall not make or
permit to be made any Alterations without Landlord's prior consent, which
consent may be granted or withheld in Landlord's reasonable discretion; no
consent shall be required for non-structural Alterations which do not require a
building permit and which, in the aggregate per project, cost less than
$25,000.00 to construct. Any Alterations to which Landlord has consented shall
be made in accordance with procedures as then established by Landlord and the
provisions of this Article 10.
10.2. General Requirements. All Alterations shall be made at
Tenant's cost and expense. Tenant shall be solely responsible for compliance
with applicable laws, ordinances, rules and regulations in connection with all
Alterations. Tenant shall be responsible for the cost of any additional
alterations required by applicable laws, ordinances, rules and regulations to be
made by Landlord to any portion of the Building as a result of Alterations.
Tenant shall promptly commence or cause the commencement of construction of all
Alterations and complete or cause completion of the same with due diligence as
soon as possible after commencement.
10.3. Removal of Alterations. If required by Landlord at the
time Landlord provides consent to an Alteration, Tenant shall, prior to the
expiration of the Term or termination of this Lease, remove such Alteration at
Tenant's cost and expense and restore the Premises to the condition existing
prior to the installation of such Alteration. If Tenant fails so to do, then
Landlord may remove such Alteration and perform such restoration and Tenant
shall reimburse Landlord for Landlord's cost and expense incurred to perform
such removal and restoration (which obligation of Tenant shall survive the
expiration or earlier termination of this Lease). Tenant shall repair at its
cost and expense all damage to the Premises or the Building caused by the
removal of such Alteration. Subject to the foregoing provisions regarding
removal, all Alterations (including any above Building standard improvements to
the Premises) shall be Landlord's property and from and after the expiration or
earlier termination of this Lease shall remain on the Premises without
compensation to Tenant. Tenant's trade fixtures, furniture, equipment and other
personal property installed in the Premises ("Tenant's Property") shall at all
times be and remain Tenant's property. Tenant may remove Tenant's Property from
the Premises at any time, provided that Tenant repairs all damage caused by such
removal. Landlord shall have no lien or other interest in any item of Tenant's
Property.
11. Liens. Tenant shall keep the Premises and the Building free from
any liens arising out of any work performed or obligations incurred by or for,
or materials furnished to, Tenant pursuant to this Lease or otherwise. Landlord
shall have the right to post and keep posted on the Premises any notices
required by law or which Landlord may deem to be proper for the protection of
Landlord, the Premises and the Building from such liens and to take any other
action at the expense of Tenant that Landlord deems necessary or appropriate to
prevent, remove or discharge such liens. Tenant shall protect, defend, indemnify
and hold Landlord harmless from and against any claim, demand, cause of action,
obligation, liability, loss, cost or expense (including reasonable attorneys'
fees) which may be asserted against or incurred by Landlord as a result of
Tenant's failure to comply with the foregoing obligation (which indemnity
obligation shall survive the expiration or earlier termination of this Lease).
12. Damage or Destruction.
12.1. Obligation to Repair. Except as otherwise provided in
this Article 12, if the
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Premises, or any other portion of the Building necessary for Tenant's use and
occupancy of the Premises, are damaged or destroyed by fire or other casualty,
Landlord shall, within thirty (30) days after such event, notify Tenant of the
estimated time, in Landlord's reasonable judgment, required to repair such
damage or destruction. Unless Landlord terminates this Lease as set forth in
Section 12.2, then (i) Landlord shall proceed with all due diligence to repair
the Premises, and/or the portion of the Building necessary for Tenant's use and
occupancy of the Premises, to substantially the condition existing immediately
before such damage or destruction, as permitted by and subject to then
applicable laws, ordinances, rules and regulations; (ii) this Lease shall remain
in full force and effect; and (iii) Rent shall abate for such part of the
Premises rendered unusable by Tenant in the conduct of its business during the
time such part is so unusable, in the proportion that the Rentable Area
contained in the unusable part of the Premises bears to the total Rentable Area
of the Premises.
12.2. Termination Rights. If Landlord determines that the
necessary repairs cannot be completed within two hundred seventy (270) days
after the date of damage or destruction, or if such damage or destruction arises
from causes not covered by Landlord's insurance policy required to be carried
hereunder, Landlord may elect, in its notice to Tenant pursuant to Section 12.1,
to (i) terminate this Lease or (ii) repair the Premises pursuant to the
applicable provisions of Section 12.1 above. If Landlord terminates this Lease,
then this Lease shall terminate as of the date of occurrence of the damage or
destruction. If Landlord determines that the necessary repairs cannot be
completed within two hundred seventy (270) days after the date of damage but
Landlord does not elect terminate the Lease pursuant to this Section 12.2,
Tenant shall have the right to terminate the Lease upon written notice to Tenant
to be delivered within ten (10) days of receipt by Tenant of Landlord's notice
of Landlord's determination that such damage or destruction cannot be completed
within two hundred seventy (270) days. Notwithstanding anything to the contrary
herein, Landlord shall not have the right to terminate the Lease if (i) that
portion of the damage or destruction arising from causes covered by Landlord's
insurance policy required to be carried hereunder may be completed within two
hundred seventy (270) days after the date of damage or destruction; (ii) the
cost of that portion of the damage or destruction arising from causes not
covered by Landlord's insurance policy required to be carried hereunder is less
than five percent (5%) of the replacement cost of the Building; or (iii) Tenant
deposits with Landlord prior to the commencement of any restoration work the
full cost of the uninsured portion of the costs required to repair the Building.
12.3. Cost of Repairs. Landlord shall pay the cost for repair
of the Building and all improvements in the Premises, other than any
Alterations. If Tenant elects to repair any damaged Alterations, Tenant shall
pay the costs therfor (but Landlord shall make available to Tenant for such
purpose any insurance proceeds received by Landlord for such purpose under
Landlord's insurance policy then in force). Tenant may also replace or repair,
at Tenant's cost and expense, Tenant's movable furniture, equipment, trade
fixtures and other personal property in the Premises which Tenant shall be
responsible for insuring during the Term of this Lease.
12.4. Damage at End of Term. Notwithstanding anything to the
contrary contained in this Article 12, if the Premises, or any other portion
thereof or of the Building, are materially damaged or destroyed by fire or other
casualty within the last seven (7) months of the Term, then Landlord shall have
the right, in its sole discretion, to terminate this Lease by notice to Tenant
given within ninety (90) days after the date of such event. Such termination
shall be effective on the date specified in Landlord's notice to Tenant, but in
no event later than the end of such 90-day period. For purposes hereof, the
Premises or other portion of the Building shall be deemed to be materially
damaged if such damage costs more than $2,000,000 to repair
12.5. Waiver of Statutes. The respective rights and
obligations of Landlord and Tenant
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in the event of any damage to or destruction of the Premises, or any other
portion of the Building, are governed exclusively by this Lease. Accordingly,
Tenant hereby waives the provisions of any law to the contrary, including
California Civil Code Sections 1932(2) and 1933(4) providing for the termination
of a lease upon destruction of the leased property.
13. Eminent Domain.
13.1. Effect of Taking. Except as otherwise provided in this
Article 13, if all or any part of the Premises is taken as a result of the
exercise of the power of eminent domain or condemned for any public or
quasi-public purpose, or if any transfer is made in avoidance of such exercise
of the power of eminent domain (collectively, "taken" or a "taking"), this Lease
shall terminate as to the part of the Premises so taken as of the effective date
of such taking. On a taking of a portion of the Premises, Tenant shall have the
right to terminate this Lease by notice to Landlord given within thirty (30)
days after the effective date of such taking, if the portion of the Premises
taken is of such extent and nature so as to materially impair Tenant's business
use of the balance of the Premises, as reasonably determined by Tenant. Such
termination shall be operative as of the effective date of the taking. Landlord
may terminate this Lease on a taking of any material portion of the Building if
Landlord reasonably determines that such taking is of such extent and nature as
to render the operation of the remaining Building economically infeasible or to
require a substantial alteration or reconstruction of such remaining portion.
Landlord shall elect such termination by notice to Tenant given within thirty
(30) days after the effective date of such taking, and such termination shall be
operative as of the effective date of such taking. Upon a taking of the Premises
which does not result in a termination of this Lease, the Base Rent shall
thereafter be reduced as of the effective date of such taking in the proportion
that the rentable area of the Premises so taken bears to the total rentable area
of the Premises.
13.2. Condemnation Proceeds. Except as hereinafter provided,
in the event of any taking, Landlord shall have the right to all compensation,
damages, income, rent or awards made with respect thereto (collectively an
"award"), including any award for the value of the leasehold estate created by
this Lease. No award to Landlord shall be apportioned and, subject to Tenant's
rights hereinafter specified, Tenant hereby assigns to Landlord any right of
Tenant in any award made for any taking. Notwithstanding the foregoing, Tenant
may seek to recover, at its cost and expense, as a separate claim, any damages
or awards payable on a taking of the Premises to compensate for the unamortized
cost paid by Tenant for the alterations, additions or improvements, if any, made
by or on behalf of Tenant during the initial improvement of the Premises
pursuant to the Work Letter and for any Alterations, or for Tenant's personal
property taken, or for interference with or interruption of Tenant's business
(including goodwill), or for Tenant's removal and relocation expenses.
13.3. Restoration of Premises. On a taking of the Premises
which does not result in a termination of this Lease, Landlord and Tenant shall
restore the Premises as nearly as possible to the condition they were in prior
to the taking in accordance with the applicable provisions and allocation of
responsibility for repair and restoration of the Premises on damage or
destruction pursuant to Article 12 above, and both parties shall use any awards
received by such party attributable to the Premises for such purpose.
13.4. Tenant Waiver. The rights and obligations of Landlord
and Tenant on any taking of the Premises or any other portion of the Building
are governed exclusively by this Lease. Accordingly, Tenant hereby waives the
provisions of any law to the contrary, including California Code of Civil
Procedure Sections 1265.120 and 1265.130, or any similar successor statute.
14. Insurance.
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14.1. Liability Insurance. Landlord, with respect to the
Building, and Tenant, at its cost and expense with respect to the Premises,
shall each maintain or cause to be maintained, from the Lease Date and
throughout the Term, a policy or policies of Commercial General Liability
insurance with limits of liability not less than Two Million Dollars
($2,000,000.00) per occurrence and in the aggregate. Each policy shall contain
coverage for blanket contractual liability, personal injury liability, and
premises operations, coverage deleting liquor liability exclusions and, as to
Tenant's insurance, fire legal liability. Landlord shall have the right to
approve the deductible under each policy of Tenant's liability insurance, such
approval not to be unreasonably withheld.
14.2. Form of Policies. All insurance required by this Article
14 shall be issued on an occurrence basis by solvent companies qualified to do
business in the State of California, with a Best's rating of at least A and a
financial size category of at least Class X, as set forth in the most recent
edition of Best's. Any insurance required under this Article 14 may be
maintained under a "blanket policy", insuring other parties and other locations,
so long as the amount and coverage required to be provided hereunder is not
thereby diminished. Tenant shall provide Landlord a copy of each policy of
insurance or a certificate thereof certifying that the policies contain the
provisions required hereunder. Tenant shall deliver such policies or
certificates to Landlord within (30) days after the Lease Date, but in no event
less than ten (10) business days prior to the Commencement Date or such earlier
date as Tenant or Tenant's contractors, agents, licensees, invitees or employees
first enter the Premises and, upon renewal, not less than thirty (30) days prior
to the expiration of such coverage. All evidence of insurance provided to
Landlord shall provide (i) that Landlord, Landlord's managing agent and any
other person requested by Landlord who has an insurable interest, is designated
as an additional insured without limitation as to coverage afforded under such
policy; (ii) for severability of interests or that the acts or omissions of one
of the insureds or additional insureds shall not reduce or affect coverage
available to any other insured or additional insured; (iii) that the insurer
agrees not to cancel or reduce the coverage under the policy without at least
thirty (30) days prior written notice to all additional insureds; (iv) that the
aggregate liability applies solely to the Premises and the remainder of the
Building; and (v) that Tenant's insurance is primary and noncontributing with
any insurance carried by Landlord.
14.3. Workers' Compensation Insurance. Tenant, at its sole
cost and expense, shall maintain Workers' Compensation insurance as required by
law and employer's liability insurance in an amount of not less than Five
Hundred Thousand Dollars ($500,000).
14.4. Additional Tenant Insurance. Tenant, at its sole cost
and expense, shall maintain such other insurance as Landlord may reasonably
require from time to time, but in no event may Landlord require any other
insurance which is (i) not then being required of comparable tenants leasing
comparable amounts of space in comparable buildings in the vicinity of the
Building or (ii) not then available at commercially reasonable rates.
14.5. Landlord's Casualty Insurance. Landlord shall, during
the Term of this Lease, procure and maintain in full force and effect, a policy
or policies of "all risk" insurance covering the Building and the permanent
tenant improvements in the Premises (including Alterations of which Landlord has
notice), with standard extended coverage, vandalism, malicious mischief and
sprinkler leakage endorsements. The amount and scope of coverage of Landlord's
insurance hereunder shall be determined by Landlord from time to time in its
reasonable discretion based on prudent risk management practices for buildings
comparable to the Building (but shall not be less than 90% of full replacement
value of the Building and Tenant's permanent tenant improvements in the Premises
(including Alterations of which Landlord has notice), and shall be subject to
such deductible amounts as Landlord may reasonably elect based on prudent risk
management practices for buildings comparable to the Building).
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15. Waiver of Subrogation Rights. Notwithstanding anything to the
contrary contained in this Lease, Landlord and Tenant, for themselves and their
respective insurers, agree to and do hereby release each other and their
respective employees, contractors, agents, assignees and subtenants, of and from
any and all claims, demands, actions and causes of action that each may have or
claim to have against the other for loss or damage to property, both real and
personal, notwithstanding that any such loss or damage may be due to or result
from the negligence of either of the parties hereto or their respective
employees, contractors, agents, assignees and subtenant, to the extent such
damage is due to a risk that is required to be insured hereunder. Each party
shall, to the extent such insurance endorsement is lawfully available at
commercially reasonable rates, obtain or cause to be obtained, for the benefit
of the other party, a waiver of any right of subrogation which the insurer of
such party may acquire against the other party by virtue of the payment of any
such loss covered by such insurance.
16. Tenant's Waiver of Liability and Indemnification.
16.1. Waiver and Release. Except to the extent due to the
gross negligence or willful misconduct of Landlord or its agents, employees or
contractors and Landlord's breach of its obligations hereunder, Landlord shall
not be liable to Tenant or Tenant's employees, agents, contractors, licenses or
invitees for, and Tenant waives and releases Landlord and Landlord's managing
agent from, all claims for loss or damage to any property or injury, illness or
death of any person in, upon or about the Premises and/or any other portion of
the Building (including claims caused in whole or in part by the act, omission,
or neglect of other tenants, contractors, licensees, invitees or other occupants
of the Building or their agents or employees). The waiver and release contained
in this Section 16.1 extends to the officers, directors, shareholders, partners,
employees, agents and representatives of Landlord.
16.2. Indemnification of Landlord. Tenant shall indemnify,
defend, protect and hold Landlord harmless of and from any and all loss, liens,
liability, claims, causes of action, damage, injury, cost or expense arising out
of or in connection with (i) the making of any alterations, additions or other
improvements made by or Tenant or by its employees, contractors or agents during
the initial improvement of the Premises pursuant to the Work Letter or any
Alterations, or (ii) injury to or death of persons or damage to property
occurring or resulting directly or indirectly from: (A) the use or occupancy of,
or the conduct of business in, the Premises by Tenant or its subtenants or any
of their respective officers, directors, employees, agents, contractors,
invitees or licensees; (B) any other occurrence or condition in or on the
Premises; and (C) the negligence or willful ,misconduct of Tenant , its
subtenants or any of their respective officers, directors, employees, agents,
contractors, invitees or licensees, in or about any portion of the Building.
Tenant's indemnity obligation includes reasonable attorneys' fees and costs,
investigation costs and all other reasonable costs and expenses incurred by
Landlord. If Landlord disapproves the legal counsel proposed by Tenant for the
defense of any claim indemnified against hereunder, Landlord shall have the
right to appoint its own legal counsel, the reasonable fees, costs and expenses
of which shall be included as part of Tenant's indemnity obligation hereunder.
The indemnification contained in this Section 16.2 shall extend to the officers,
directors, shareholders, partners, employees, agents and representatives of
Landlord.
16.3. Indemnification of Tenant. Notwithstanding anything to
the contrary herein, Landlord shall not be released or indemnified from and
shall indemnify, defend, protect and hold Tenant harmless of and from any and
all loss, liens, liability, claims, causes of action, damage, injury, cost or
expense arising out of or in connection with (i) any breach or default by
Landlord in the performance of any of its obligations under this Lease, (ii) the
negligence or willful misconduct of Landlord or its agents, employees or
contractors, or (iii) any loss or damage to property or injury to person
occurring in the public entrances, stairways, corridors, elevators and elevator
lobbies, and other public areas in the
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Building or the other public areas in the Building (except for such loss, damage
or injury for which Tenant is obligated to indemnify Landlord under Section
16.2).
17. Assignment and Subletting.
17.1. Compliance Required. Tenant shall not, directly or
indirectly, voluntary or by operation of law, sell, assign or otherwise transfer
this Lease, or any interest herein (collectively, "assign" or "assignment"), or
sublet the Premises, or any part thereof, or permit the occupancy of the
Premises by any person other than Tenant (collectively, "sublease" or
"subletting", the assignee or sublessee under an assignment or sublease being
referred to as a "transferee"), without Landlord's prior consent given or
withheld in accordance with the express standards and conditions of this Article
17 and compliance with the other provisions of this Article 17. Any assignment
or subletting made in violation of this Article 17 shall be void. Tenant
acknowledges and agrees that the limitations on Tenant's right to sublet or
assign which are set forth in this Article 17 are reasonable and, in particular,
that the express standards and conditions upon Tenant's right to assign or
sublet which are set forth in this Article 17 are reasonable as of the Lease
Date.
17.2. Request by Tenant; Landlord Response. If Tenant desires
to effect an assignment or sublease, Tenant shall submit to Landlord a request
for consent together with the identity of the parties to the transaction, the
nature of the transferee's proposed business use for the Premises, the proposed
documentation for and terms of the transaction, and all other information
reasonably requested by Landlord concerning the proposed transaction and the
parties involved therein, including certified financial information, credit
reports, the business background and references regarding the transferee, and an
opportunity to meet and interview the transferee. Within fifteen (15) days after
the later of such interview or the receipt of all such information required by
Landlord, or within fifteen (15) days after the date of Tenant's request to
Landlord if Landlord does not request additional information or an interview,
Landlord shall have the right, by notice to Tenant, to: (i) consent to the
assignment or sublease, subject to the terms of this Article 17; or (ii) decline
to consent to the assignment or sublease. Provided that the request for consent
and documentation is marked "LANDLORD'S RESPONSE IS REQUIRED WITHIN 15 DAYS OF
RECEIPT OF THIS NOTICE PURSUANT TO THE TERMS OF THE LEASE BETWEEN LANDLORD AND
THE UNDERSIGNED" and the envelope containing the request is marked "PRIORITY",
Landlord's failure to respond within the fifteen-day period described in the
foregoing sentence shall constitute Landlord's consent to the proposed sublease
or assignment.
17.3. Conditions for Landlord Approval. Landlord shall not
unreasonably withhold its consent to a proposed subletting or assignment by
Tenant. Without limiting the grounds on which it may be reasonable for Landlord
to withhold its consent to an assignment or sublease, Tenant agrees that
Landlord would be acting reasonably in withholding its consent in the following
instances: (i) if Tenant is in default under this Lease after applicable notice
and cure periods; (ii) if the transferee is a governmental or quasi-governmental
agency, foreign or domestic; (iii) if, in Landlord's sole but reasonably
judgment, the transferee's business, use and/or occupancy of the Premises would
(A) violate any of the terms of this Lease , or (B) require any Alterations
which would reduce the value of the existing leasehold improvements in the
Premises; (iv) if the financial condition of the transferee does not meet the
requirements that would be applied by Landlord for a tenant in the Building
under leases with comparable terms. If Landlord consents to an assignment or
sublease, the terms of such assignment or sublease transaction shall not be
modified without Landlord's prior written consent pursuant to this Article 17.
Landlord's consent to an assignment or subletting shall not be deemed consent to
any subsequent assignment or subletting.
17.4. Costs and Expenses. As a condition to the effectiveness
of any assignment or
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subletting under this Article 17, Tenant shall pay to Landlord all reasonable
costs and expenses, including reasonable attorneys' fees and disbursements,
incurred by Landlord in evaluating Tenant's requests for assignment or sublease,
whether or not Landlord consents to an assignment or sublease. Tenant shall pay
the processing fee with Tenant's request for Landlord's consent under Section
17.2.
17.5. Payment of Excess Rent and Other Consideration. Tenant
shall also pay to Landlord, promptly upon Tenant's receipt thereof, fifty
percent (50%) of any and all rent, sums or other consideration, howsoever
denominated, realized by Tenant in connection with any assignment or sublease
transaction in excess of the Base Rent and Escalation Rent payable hereunder
(prorated to reflect the Rent allocable to the portion of the Premises if a
sublease), after first deducting, (i) in the case of an assignment, the
unamortized reasonable cost of Alterations paid for by Tenant and reasonable
attorney's fee and real estate commissions paid by Tenant in connection with
such assignment and, (ii) in the case of a sublease, the reasonable cost of
Alterations made to the Premises at Tenant's cost to effect the sublease, and
the reasonable attorney's fees and the amount of any real estate commissions
paid by Tenant, both amortized over the term of the sublease.
17.6. Assumption of Obligations; Further Restrictions on
Subletting. Each assignee shall, concurrently with any assignment, assume all
obligations of Tenant under this Lease. Each sublease shall be made subject to
this Lease and all of the terms, covenants and conditions contained herein; and
the surrender of this Lease by Tenant, or a mutual cancellation thereof, or the
termination of this Lease in accordance with its terms, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
operate as an assignment to Landlord of any or all such subleases. No sublessee
of a sublessee shall have the right further to sublet more than one additional
time. Any assignment by a sublessee of its sublease shall be subject to
Landlord's prior consent in the same manner as a sublease by Tenant. No
sublease, once consented to by Landlord, shall be modified without Landlord's
prior consent. No assignment or sublease shall be binding on Landlord unless the
transferee delivers to Landlord a fully executed counterpart of the assignment
or sublease which contains the assumption by the assignee, or recognition by the
sublessee, of the provisions of this Section 17.6, in form and substance
satisfactory to Landlord, but the failure or refusal of a transferee to deliver
such instrument shall not release or discharge such transferee from the
provisions and obligations of this Section 17.6, but such failure shall
constitute a breach under this Lease by Tenant.
17.7. No Release. No assignment or sublease shall release
Tenant from its obligations under this Lease, whether arising before or after
the assignment or sublease. The acceptance of Rent by Landlord from any other
person shall not be deemed a waiver by Landlord of any provision of this Article
17. On a default by any assignee of Tenant in the performance of any of the
terms, covenants or conditions of this Lease, Landlord may proceed directly
against Tenant without the necessity of commencing or exhausting remedies
against such assignee. No consent by Landlord to any further assignments or
sublettings of this Lease, or any modification, amendment or termination of this
Lease, or extension, waiver or modification of payment or any other obligations
under this Lease, or any other action by Landlord with respect to any assignee
or sublessee, or the insolvency, or bankruptcy or default of any such assignee
or sublessee, shall affect the continuing liability of Tenant for its
obligations under this Lease and Tenant waives any defense arising out of or
based thereon, including any suretyship defense of exoneration. Landlord shall
have no obligation to notify Tenant or obtain Tenant's consent with respect to
any of the foregoing matters.
17.8. No Encumbrance. Notwithstanding anything to the contrary
contained in this Article 17, Tenant shall have no right to encumber, pledge,
hypothecate or otherwise transfer this Lease, or any of Tenant's interest or
rights hereunder, as security for any obligation or liability of Tenant without
Landlord's prior written consent.
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17.9 Assignment or Sublease to Related Entity. As long as
Critical Path or a Related Entity (as defined herein) is the Tenant in
possession of the Premises and no default then exists beyond applicable notice
and cure periods, Tenant shall have the right, subject to the terms and
conditions set forth in this Sections 17.9 but not Section 17.5, without the
consent of Landlord, but without in any way releasing Critical Path from any of
its obligations under this Lease, to (a) assign its interest in this Lease to a
corporation or other entity which shall control, be under the control of, or be
under common control with Critical Path (the term "control" as used herein shall
be deemed to mean ownership of more than fifty percent (50%) of the outstanding
voting stock of a corporation, or other majority equity and control interest if
Tenant is not a corporation) or successor entity related to Tenant by merger,
consolidation or reorganization or a purchaser of substantially all of Tenant's
assets (any such entity being a "Related Entity") or (b) sublease all or any
portion of the Premises to a Related Entity, so long as such sublease does not
result in the demising of any space in the Premises. Any assignment or sublease
to a Related Entity pursuant to this Section 17.9 shall be subject to the
following conditions: (i) the principal purpose of such assignment or sublease
is not the acquisition of Tenant"s interest in this Lease (except if such
assignment or sublease is made to a Related Entity and is made for a valid
intra-corporate business purpose and is not made to circumvent the provisions of
this Article 17), (ii) any such assignee shall have a net worth and annual
income and cash flow, determined in accordance with generally accepted
accounting principles, consistently applied, after giving effect to such
assignment, in amounts necessary to perform its duties, obligations and
liabilities hereunder, as reasonably determined by Landlord, (iii) such
assignment or sublease shall be subject to the terms of this Lease, including
the provisions of Sections 17.6 and 17.7, and (iv) such Related Entity shall
have executed all documents reasonably requested by Landlord to memorialize the
foregoing. Tenant shall, within ten (10) business days after execution thereof,
deliver to Landlord (A) a duplicate original instrument of assignment in form
and substance reasonably satisfactory to Landlord, duly executed by Tenant, (B)
if applicable, evidence reasonably satisfactory to Landlord establishing
compliance by the assignee with the net worth, income and cash flow requirements
of clause (b)(ii) above, (C) an instrument in form and substance reasonably
satisfactory to Landlord, duly executed by the assignee, in which such assignee
shall assume observance and performance of, and agree to be personally bound by,
all of the terms, covenants and conditions of this Lease on Tenant"s part to be
observed and performed or (D) a duplicate original sublease in form and
substance reasonably satisfactory to Landlord, duly executed by Tenant and
subtenant.
18. Rules and Regulations. Tenant shall observe and comply, and shall
cause its sublessees, employees, agents, contractors, licensees and invitees to
observe and comply, with the Rules and Regulations of the Building, a copy of
which are attached to this Lease as Exhibit D, and, after notice thereof, with
all modifications and additions thereto from time to time promulgated in writing
by Landlord. Landlord shall not be responsible to Tenant, or Tenant's
sublessees, employees, agents, contractors, licensees or invitees, for
noncompliance with any Rules and Regulations of the Building by any other
tenant, sublessee, employee, agent, contractor, licensee, invitee or other
occupant of the Building. Tenant shall not be required to comply with any new
rule or regulation unless the same applies non-discriminatorily to all occupants
of the Building, does not unreasonably interfere with Tenant's use of the
Premises or Tenant's parking rights and does not materially increase the
obligations or decrease the rights of Tenant under the Lease
19. Entry of Premises by Landlord.
19.1. Right to Enter. Upon 24 hours advance notice to Tenant
(except in emergencies or in order to provide regularly scheduled or other
routine Building standard services or additional services requested by Tenant,
or post notices of nonresponsibility or other notices permitted or required by
law when no such notice shall be required), Landlord and its authorized agents,
employees, and contractors
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enter the Premises at reasonable hours to: (i) inspect the same; (ii) determine
Tenant's compliance with its obligations hereunder; (iii) exhibit the same to
prospective purchasers, lenders or tenants; (iv) supply any services to be
provided by Landlord hereunder; (v) post notices of nonresponsibility or other
notices permitted or required by law; (vi) make repairs, improvements or
alterations, or perform maintenance in or to, the Premises or any other portion
of the Building, including Building systems; and (vii) perform such other
functions as Landlord deems reasonably necessary or desirable. Landlord may also
grant access to the Premises to government or utility representatives and bring
and use on or about the Premises such equipment as reasonably necessary to
accomplish the purposes of Landlord's entry. Landlord shall use reasonable good
faith efforts to effect all entries and perform all work hereunder in such
manner as to minimize interference with Tenant's use and occupancy of the
Premises. Landlord shall have and retain keys with which to unlock all of the
doors in or to the Premises (excluding Tenant's vaults, safes and similar secure
areas designated in writing by Tenant in advance), and Landlord shall have the
right to use any and all means which Landlord may deem proper in an emergency in
order to obtain entry to the Premises, including secure areas. Any entry shall
comply with Tenant's reasonable security measures.
19.2. Tenant Waiver of Claims. Except for damages to persons or
property caused by the gross negligence or willful misconduct of Landlord,
Tenant waives any claim for damages for any inconvenience to or interference
with Tenant's business, or any loss of occupancy or quiet enjoyment of the
Premises, or any other loss, occasioned by any entry effected or work performed
under this Article 19, and Tenant shall not be entitled to any abatement of Rent
by reason of the exercise of any such right of entry or performance of such
work. No entry to the Premises by Landlord or anyone acting under Landlord shall
constitute a forcible or unlawful entry into, or a detainer of, the Premises or
an eviction, actual or constructive, of Tenant from the Premises, or any portion
thereof.
20. Default and Remedies.
20.1. Events of Default. The occurrence of any of the following
events shall constitute a default by Tenant under this Lease:
a. Nonpayment of Rent. Failure to pay any Rent when due.
b. Unpermitted Assignment. An assignment or sublease
made in contravention of any of the provisions of Article 17 above.
c. Abandonment. Abandonment of the Premises for a
continuous period in excess of five (5) business days. For purposes hereof,
"abandonment" shall have the meaning provided under California law.
d. Other Obligations. Failure to perform or fulfill any
other obligation, covenant, condition or agreement under this Lease.
e. Bankruptcy and Insolvency. A general assignment by
Tenant for the benefit of creditors, any action or proceeding commenced by
Tenant under any insolvency or bankruptcy act or under any other statute or
regulation for protection from creditors, or any such action commenced against
Tenant and not discharged within thirty (30) days after the date of
commencement; the employment or appointment of a receiver or trustee to take
possession of all or substantially all of Tenant's assets or the Premises which
is not discharged within thirty (30) days; the attachment, execution or other
judicial seizure of all or substantially all of Tenant's assets or the Premises,
if such attachment or other seizure remains undismissed or undischarged for a
period of thirty (30) days after the levy thereof; the admission
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by Tenant in writing of its inability to pay its debts as they become due; or
the filing by Tenant of a petition seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, the filing by Tenant of an answer
admitting or failing timely to contest a material allegation of a petition filed
against Tenant in any such proceeding or, if within thirty (30) days after the
commencement of any such proceeding against Tenant, such proceeding is not
dismissed. For purposes of this Section 20.1(e), "Tenant" means Tenant and any
partner of Tenant, if Tenant is a partnership, or any person or entity
comprising Tenant, if Tenant is comprised of more than one person or entity, or
any guarantor of Tenant's obligations, or any of them, under this Lease.
f. 33 Clementina If, at any time that Landlord is also
the owner of the premises leased by Tenant under that certain Office Lease of
even date herewith for premises commonly known as 33 Clementina, San Francisco
(the "Clementina Lease"), Tenant is in default under the Clementina Lease,
beyond any applicable notice and cure period.
20.2. Notice to Tenant. Upon the occurrence of any default,
Landlord shall give Tenant notice thereof. If a time period is specified below
for cure of such default, then Tenant may cure such default within such time
period.
a. Nonpayment of Rent. For failure to pay Rent, within
five (5) days after Landlord's notice, unless Tenant has failed more than two
(2) times during any calendar year to timely pay any Rent, in which event no
cure period shall apply.
b. Other Obligations. For failure to perform any
obligation, covenant, condition or agreement under this Lease (other than
nonpayment of Rent or Tenant's abandonment of the Premises) within ten (10) days
after Landlord's notice or, if the failure is of a nature requiring more than 10
days to cure, then an additional forty five (45) days after the expiration of
such 10-day period, but only if Tenant commences cure within such 10-day period
and thereafter diligently pursues such cure to completion within such additional
45-day period. If Tenant has failed to perform any such obligation, covenant,
condition or agreement more than two (2) times during any calendar year and
notice of such event of default has been given by Landlord in each instance,
then no cure period shall apply.
c. Assignment/Sublease. For an assignment or subletting
in violation of Article 17, within ten (10) days after Landlord's notice.
d. No Cure Period. No cure period shall apply for any
other event of default specified in Section 20.1.
20.3. Remedies Upon Occurrence of Default. On the occurrence of
a default which Tenant fails to cure after notice and expiration of the time
period for cure, if any, specified in Section 20.2 above, Landlord shall have
the right either (i) to terminate this Lease and recover possession of the
Premises, or (ii) to continue this Lease in effect and enforce all Landlord's
rights and remedies under California Civil Code Section 1951.4 (by which
Landlord may recover Rent as it becomes due, subject to Tenant's right to assign
pursuant to Article 17). Landlord may store any property of Tenant located in
the Premises at Tenant's expense or otherwise dispose of such property in the
manner provided by law. If Landlord does not terminate this Lease, Tenant shall
in addition to continuing to pay all Rent when due, also pay Landlord's costs of
attempting to relet the Premises, any repairs and alterations necessary to
prepare the Premises for such reletting, and brokerage commissions and
attorneys' fees incurred in connection therewith, less the rents, if any,
actually received from such reletting. Notwithstanding Landlord's election to
continue this Lease in effect, Landlord may at any time thereafter
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terminate this Lease pursuant to this Section 20.3.
20.4. Damages Upon Termination. If and when Landlord terminates
this Lease pursuant to Section 20.3, Landlord may exercise all its rights and
remedies available under California Civil Code Section 1951.2, including the
right to recover from Tenant the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that the Tenant proves could have been
reasonably avoided. As used herein and in Civil Code Section 1951.2, "time of
award" means either the date upon which Tenant pays to Landlord the amount
recoverable by Landlord, or the date of entry of any determination, order or
judgment of any court or other legally constituted body determining the amount
recoverable, whichever occurs first.
20.5. Computation of Certain Rent for Purposes of Default. For
purposes of computing unpaid Rent pursuant to Section 20.4 above, Escalation
Rent for the balance of the Term shall be determined by averaging the amount
paid by Tenant as Escalation Rent for the calendar year prior to the year in
which the default occurred (or, if the prior year is the Base Year or such
default occurs during the Base Year, Escalation Rent shall be based on
Landlord's operating budget for the Building for the Base Year), increasing such
average amount for each calendar year (or portion thereof) remaining in the
balance of the Term at a per annum compounded rate equal to the mean average
rate of increase for the preceding five (5) calendar years in the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index (All Urban
Consumers, All Items, 1982-1984 = 100) for the Metropolitan Area of which San
Francisco, California, is a part, and adding together the resulting amounts. If
such Index is discontinued or revised, such computation shall be made by
reference to the index designated as the successor or substitute index by the
United States Department of Labor, Bureau of Labor Statistics, or its successor
agency, and if none is designated, by a comparable index as determined by
Landlord in its sole discretion, which would likely achieve a comparable result
to that achieved by the use of the Consumer Price Index. If the base year of the
Consumer Price Index is changed, then the conversion factor specified by the
Bureau, or successor agency, shall be utilized to determine the Consumer Price
Index.
20.6. Right to Cure Defaults. If Tenant fails to pay Rent (other
than Base Rent and Escalation Rent) required to be paid by it hereunder, or
fails to perform any other obligation under this Lease, and Tenant fails to cure
such default within the applicable cure period, if any, specified in Section
20.2 above, then Landlord may, without waiving any of Landlord's rights in
connection therewith or releasing Tenant from any of its obligations or such
default, make any such payment or perform such other obligation on behalf of
Tenant. All payments so made by Landlord, and all costs and expenses incurred by
Landlord to perform such obligations, shall be due and payable by Tenant as Rent
immediately upon receipt of Landlord's demand therefor. If Landlord fails to
make repairs to the Premises or perform any other obligations under this Lease
which Landlord is required to make pursuant to the terms of this Lease within
fifteen (15) days after written notice from Tenant (provided Landlord shall have
a longer time if reasonably necessary if Landlord commences cure within such
fifteen (15) day period and diligently prosecutes such cure to completion) and
such failure to repair materially and adversely affect Tenant's use of the
Premises, then Tenant shall give Landlord an additional three (3) business days
prior notice. If Landlord has not commenced repair within such three (3)
business day period, Tenant shall have the right to repair the Premises, and
Landlord shall reimburse Tenant for the reasonable cost thereof within thirty
(30) days after presentation of a reasonably detailed invoice demonstrating the
expenses incurred by Tenant. In the event Tenant makes such repairs, Tenant
shall be responsible for damages or injuries caused by Tenant or its employees,
contractors and subcontractors in making such repairs or any defect therein and
shall indemnify Landlord against any liability, cost or expense (including
attorneys' fees) arising out of such repair or any defect in the work performed.
If
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Landlord does not dispute Tenant's right to reimbursement and fails to reimburse
Tenant within such thirty (30) day period, Tenant may deduct the cost of such
cure from Rent.
20.7. Remedies Cumulative. The rights and remedies of Landlord
under this Lease are cumulative and in addition to, and not in lieu of, any
other rights and remedies available to Landlord at law or in equity. Landlord's
pursuit of any such right or remedy shall not constitute a waiver or election of
remedies with respect to any other right or remedy.
21. Subordination, Attornment and Nondisturbance.
21.1. Subordination and Attornment. This Lease and all of
Tenant's rights hereunder shall be subordinate to any ground lease or underlying
lease, and the lien of any mortgage, deed of trust, or any other security
instrument now or hereafter affecting or encumbering the Building, or any part
thereof or interest therein, and to any and all advances made on the security
thereof or Landlord's interest therein, and to all renewals, modifications,
consolidations, replacements and extensions thereof (an "encumbrance", the
holder of the beneficial interest thereunder being referred to as an
"encumbrancer"). An encumbrancer may, however, subordinate its encumbrance to
this Lease, and if an encumbrancer so elects by notice to Tenant, this Lease
shall be deemed prior to such encumbrance. If any encumbrance to which this
Lease is subordinate is foreclosed, or a deed in lieu of foreclosure is given to
the encumbrancer thereunder, Tenant shall attorn to the purchaser at the
foreclosure sale or to the grantee under the deed in lieu of foreclosure; and if
any encumbrance consisting of a ground lease or underlying lease to which this
Lease is subordinate is terminated, Tenant shall attorn to the lessor thereof.
Tenant shall execute, acknowledge and deliver in the form reasonably requested
by Landlord or any encumbrancer, any documents required to evidence or
effectuate the subordination hereunder, or to make this Lease prior to the lien
of any encumbrance, or to evidence such attornment.
21.2. Nondisturbance. If any encumbrance to which this Lease is
subordinate is foreclosed, or a deed in lieu of foreclosure is given to the
encumbrancer thereunder, or if any encumbrance consisting of a ground lease or
underlying lease to which this Lease is subordinate is terminated, this Lease
shall not terminate, and the rights and possession of Tenant under this Lease
shall not be disturbed if (i) no default by Tenant then exists under this Lease
(after expiration of applicable notice and cure periods); (ii) Tenant attorns to
the purchaser, grantee, or successor lessor as provided in Section 21.1 above
or, if requested, enters into a new lease for the balance of the Term upon the
same terms and provisions contained in this Lease; and (iii) Tenant enters into
a written agreement in a form reasonably acceptable to such encumbrancer with
respect to subordination, attornment and non-disturbance. Concurrent with the
execution of this Lease, Landlord shall use reasonable efforts to obtain a
non-disturbance agreement from the existing encumbrancer in a form reasonably
acceptable to Tenant. If Tenant and the existing encumbrancer are not able to
agree upon a mutually acceptable non-disturbance agreement within fifteen (15)
days after the Lease Date, Tenant shall have the right to terminate the Lease
within three business days after such fifteenth day.
22. Sale or Transfer by Landlord; Lease Non-Recourse.
22.1. Release of Landlord on Transfer. Landlord may at any time
transfer, in whole or in part, its right, title and interest under this Lease
and in the Building, or any portion thereof. If the original Landlord hereunder,
or any successor to such original Landlord, transfers (by sale, assignment or
otherwise) its right, title or interest in the Building and the transferee
assumes in writing all of landlord's obligations hereunder, all liabilities and
obligations of the original Landlord or such successor under this Lease accruing
after such transfer shall terminate, the original Landlord or such successor
shall automatically be released therefrom, and thereupon all such liabilities
and obligations shall be binding upon the new owner. Tenant shall attorn to each
such new owner.
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22.2. Lease Nonrecourse to Landlord. Landlord shall in no event
be personally liable under this Lease, and Tenant shall look solely to
Landlord's interest in the Building (including insurance and condemnation
proceeds, the Security Deposit and all proceeds thereof) of for recovery of any
damages for breach of this Lease by Landlord or on any judgment in connection
therewith. None of the persons or entities comprising or representing Landlord
(whether partners, shareholders, officers, directors, trustees, employees,
beneficiaries, agents or otherwise) shall ever be personally liable under this
Lease or liable for any such damages or judgment and Tenant shall have no right
to effect any levy of execution against any assets of such persons or entities
on account of any such liability or judgment. Any lien obtained by Tenant to
enforce any such judgment, and any levy of execution thereon, shall be subject
and subordinate to all encumbrances as specified in Article 21 above.
23. Estoppel Certificate.
23.1. Procedure and Content. From time to time, and within ten
(10) days after written notice by Landlord, Tenant shall execute, acknowledge,
and deliver to Landlord a certificate as specified by Landlord certifying: (i)
that this Lease is unmodified and in full force and effect (or, if there have
been modifications, that this Lease is in full force and effect, as modified,
and identifying each modification); (ii) the Commencement Date and Expiration
Date; (iii) that Tenant has accepted the Premises (or the reasons Tenant has not
accepted the Premises), and if Landlord has agreed to make any alterations or
improvements to the Premises, that Landlord has properly completed such
alterations or improvements (or the reasons why Landlord has not done so); (iv)
the amount of the Base Rent and current Escalation Rent, if any, and the date to
which such Rent has been paid; (v) that Tenant has not committed any event of
default, except as to any events of default specified in the certificate, and
whether there are any existing defenses against the enforcement of Tenant's
obligations under this Lease; (vi) that no default of Landlord is claimed by
Tenant, except as to any defaults specified in the certificate; and (vii) such
other matters as may be requested by Landlord.
23.2. Effect of Certificate. Any such certificate may be relied
upon by any prospective purchaser of any part or interest in the Building or
encumbrancer (as defined in Section 21.1) and, at Landlord's request, Tenant
shall deliver such certificate to Landlord and/or to any such entity and shall
agree to such notice and cure provisions and such other matters as such entity
may reasonably require. In addition, at Landlord's request, Tenant shall provide
to Landlord for delivery to any such entity such information, including
financial information, that may reasonably be requested by any such entity. Any
such certificate shall constitute a waiver by Tenant of any claims Tenant may
have in contravention to the information contained in such certificate and
Tenant shall be estopped from asserting any such claim. If Tenant fails or
refuses to give a certificate hereunder within the time period herein specified,
then the information contained in such certificate as submitted by Landlord
shall be deemed correct for all purposes, but Landlord shall have the right to
treat such failure or refusal as a default by Tenant.
23.2. Landlord's Estoppel If Tenant is required by an
unaffiliated third party to produce an estoppel certificate, Landlord shall,
within thirty (30) days after Tenant's request, execute and deliver to Tenant an
estoppel certificate in favor of Tenant and such other persons as Tenant shall
reasonably request, setting forth the following: (a) the Commencement Date and
the Expiration Date; (b) that this Lease is in full force and effect and has not
been assigned, modified, supplemented or amended (except by such writing as
shall be stated); (c) that all conditions under this Lease to be performed by
Tenant have, to Landlord's knowledge, been satisfied, or, in the alternative,
those claimed by Landlord to be unsatisfied; (d) that, to Landlord's knowledge,
no defenses or offsets exist against the enforcement of this Lease by Landlord,
or in the alternative, those claimed by Landlord; (e) that the amount of advance
Rent, if any (or none if such is the case), has been paid by Tenant; (f) the
date to which rent has been paid; and
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(g) such other information as Tenant may reasonably request.
24. No Light, Air, or View Easement. Nothing contained in this Lease
shall be deemed, either expressly or by implication, to create any easement for
light and air or access to any view. Any diminution or shutting off of light,
air or view to or from the Premises by any structure which now exists or which
may hereafter be erected, whether by Landlord or any other person, shall in no
way affect this Lease or Tenant's obligations hereunder, entitle Tenant to any
reduction of Rent, or impose any liability on Landlord.
25. Holding Over. No holding over by Tenant shall operate to extend the
Term. If Tenant remains in possession of the Premises after expiration or
termination of this Lease, unless otherwise agreed by Landlord in writing, then
(i) Tenant shall become a tenant at sufferance upon all the applicable terms and
conditions of this Lease, except that Base Rent shall be increased to equal 150%
of the Base Rent then in effect; (ii) Tenant shall indemnify, defend, protect
and hold harmless Landlord, and any tenant to whom Landlord has leased all or
part of the Premises, from any and all liability, loss, damages, costs or
expense (including loss of Rent to Landlord or additional rent payable by such
tenant and reasonable attorneys' fees) suffered or incurred by either Landlord
or such tenant resulting from Tenant's failure timely to vacate the Premises;
and (iii) such holding over by Tenant shall constitute a default by Tenant.
26. Security Deposit. If so specified in the Basic Lease Information,
Tenant shall deposit with Landlord the Security Deposit upon the execution of
this Lease by Tenant. The Security Deposit shall be held by Landlord as security
for the performance by Tenant of all its obligations under this Lease. If Tenant
fails to pay any Rent due hereunder, or otherwise commits a default (after
applicable notice and cure periods) with respect to any provision of this Lease,
Landlord may use, apply or retain all or any portion of the Security Deposit for
the payment of any such Rent or for the payment of any other amounts expended or
incurred by Landlord by reason of Tenant's default, or to compensate Landlord
for any loss or damage which Landlord may incur thereby (subject to the
provisions of California Civil Code Section 1950.7(c) and any similar or
successor statute providing that Landlord may claim from a security deposit only
those sums reasonably necessary to remedy defaults in the payment of Rent, to
repair damage caused by Tenant, or to clean the Premises). Exercise by Landlord
of its rights hereunder shall not constitute a waiver of, or relieve Tenant from
any liability for, any default. If Landlord so uses or applies all or any
portion of the Security Deposit, Tenant shall, within ten (10) days after demand
by Landlord, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its full amount. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without interest, to
Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's
interest under this Lease) within thirty (30) days after the later of (i) the
date of expiration or earlier termination of this Lease, or (ii) vacation of the
Premises by Tenant if the Premises has been left in the condition specified by
this Lease. Landlord's receipt and retention of the Security Deposit shall not
create any trust or fiduciary relationship between Landlord and Tenant and
Landlord need not keep the Security Deposit separate from its general accounts.
Subject to Section 22.1, upon termination of the original Landlord's (or any
successor owner's) interest in the Premises, the original Landlord (or such
successor) shall be released from further liability with respect to the Security
Deposit upon the original Landlord's (or such successor's) compliance with
California Civil Code Section 1950.7(d), or successor statute.
27. Waiver. Failure of Landlord to declare a default by Tenant upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but Landlord shall have the right to declare such
default at any time after its occurrence. To be effective, a waiver of any
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provision of this Lease, or any default, shall be in writing and signed by the
waiving party. Any waiver hereunder shall not be deemed a waiver of subsequent
performance of any such provision or subsequent defaults. The subsequent
acceptance of Rent hereunder, or endorsement of any check by Landlord, shall not
be deemed to constitute an accord and satisfaction or a waiver of any preceding
default by Tenant, except as to the particular Rent so accepted, regardless of
Landlord's knowledge of the preceding default at the time of acceptance of the
Rent. No course of conduct between Landlord and Tenant, and no acceptance of the
keys to or possession of the Premises by Landlord before the Expiration Date
shall constitute a waiver of any provision of this Lease or of any default, or
operate as a surrender of this Lease.
28. Notices and Consents; Tenant's Agent for Service. All notices,
approvals, consents, demands and other communications from one party to the
other given pursuant to this Lease shall be in writing and shall be made by
personal delivery, by use of a reputable overnight courier service or by deposit
in the United States mail, certified, registered or Express, postage prepaid and
return receipt requested. Notices shall be addressed if to Landlord, to
Landlord's Address, and if to Tenant, to Tenant's Address. Landlord and Tenant
may each change their respective Addresses from time to time by giving written
notice to the other of such change in accordance with the terms of this Article
28, at least ten (10) days before such change is to be effected. Any notice
given in accordance with this Article 28 shall be deemed to have been given (i)
on the date of personal delivery or (ii) on the earlier of the date of delivery
or attempted delivery (as shown by the return receipt or other delivery record)
if sent by courier service or mailed.
29. Authority. Tenant represents and warrants that (i) Tenant is a duly
formed, authorized and existing corporation, (ii) Tenant is qualified to do
business in California, (iii) Tenant has the full right and authority to enter
into this Lease and to perform all of Tenant's obligations hereunder, and (iv)
each person signing on behalf of Tenant is authorized to do so. Tenant shall
deliver to Landlord, upon Landlord's request, such certificates, resolutions, or
other written assurances authorizing Tenant's execution and delivery of this
Lease, and such financial information regarding Tenant and its constituent
members, as requested by Landlord from time to time or at any time in order for
Landlord to assess Tenant's then authority and/or ability to meet its
obligations under this Lease. Landlord represents and warrants that (i) Landlord
is a duly formed, authorized and existing limited liability company (ii)
Landlord is qualified to do business in California, (iii) Landlord has the full
right and authority to enter into this Lease and to perform all of Landlord's
obligations hereunder, and (iv) each person signing on behalf of Landlord is
authorized to do so. Landlord shall deliver to Tenant, upon Landlord's request,
such certificates, resolutions, or other written assurances authorizing
Landlord's execution and delivery of this Lease.
30. Automobile Parking. In consideration for the Base Rent paid
hereunder, Tenant shall have the right to occupy all of the parking stalls in
the Building during the Initial Term and any Extended Term at no additional
cost.
31. Tenant to Furnish Financial Statements. In order to induce Landlord
to enter into this Lease, Tenant agrees that it shall promptly deliver to
Landlord, from time to time, upon Landlord's written request, publicly available
financial statements (including a balance sheet and statement of income and
expenses on an annualized basis) reflecting Tenant's then current financial
condition. Such statements shall be delivered to Landlord within fifteen (15)
days after Tenant's receipt of Landlord's request. Tenant represents and
warrants that all financial statements, records, and information furnished by
Tenant to Landlord in connection with this Lease are and shall be true, correct
and complete in all respects.
32. Tenant's Signs. Subject to the following sentence, Tenant shall have
the right to exclusive building signage (including the exclusive right to
utilize any billboard signage from and after January 1,
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2001), but Tenant shall not place on the Premises or on the Building any
exterior signs nor any interior signs that are visible from the exterior of the
Premises or Building without Landlord's prior consent, which Landlord may
withhold in its reasonable discretion. Tenant's right to exclusive building
signage is subject to Landlord's right to maintain the billboard signage located
on the Building until December 31, 2000 Landlord hereby consents to the signage
for the Building substantially similar to that on Tenant's existing building
located at 320 First Street in San Francisco. Tenant shall pay all costs and
expenses relating to any such sign approved by Landlord, including without
limitation, the cost of the installation and maintenance of the sign. On the
date of expiration or earlier termination of this Lease, Tenant, at its sole
cost and expense, shall remove all signs and repair any damage caused by such
removal. If Tenant elects to no longer utilize the billboard signage, Base Rent
payable to Landlord shall be reduced by $6,000 per month for the Initial Term
and any Extended Terms. Tenant shall have the right to terminate the rental of
the billboard signage upon one hundred eighty (180) days' written notice to
Landlord. If Tenant elects to terminate the rental of the billboard signage,
Landlord may rent the billboard signage to a third party, subject to the
reasonable approval of the Tenant. In no case shall Landlord lease any signage
on the Building to a competitor of Tenant.
33. Miscellaneous.
33.1. No Joint Venture. This Lease does not create any
partnership or joint venture or similar relationship between Landlord and
Tenant.
33.2. Successors and Assigns. Subject to the provisions of
Article 17 regarding assignment, all of the provisions, terms, covenants and
conditions contained in this Lease shall bind, and inure to the benefit of, the
parties and their respective successors and assigns.
33.3. Construction and Interpretation. The words "Landlord" and
"Tenant" include the plural as well as the singular. If there is more than one
person comprising Tenant, the obligations under this Lease imposed on Tenant are
joint and several. References to a party or parties refers to Landlord or
Tenant, or both, as the context may require. The captions preceding the
Articles, Sections and subsections of this Lease are inserted solely for
convenience of reference and shall have no effect upon, and shall be disregarded
in connection with, the construction and interpretation of this Lease. Use in
this Lease of the words "including", "such as", or words of similar import when
following a general matter, shall not be construed to limit such matter to the
enumerated items or matters whether or not language of nonlimitation (such as
"without limitation") is used with reference thereto. All provisions of this
Lease have been negotiated at arm's length between the parties and after advice
by counsel and other representatives chosen by each party and the parties are
fully informed with respect thereto. Therefore, this Lease shall not be
construed for or against either party by reason of the authorship or alleged
authorship of any provision hereof, or by reason of the status of the parties as
Landlord or Tenant, and the provisions of this Lease and the Exhibits hereto
shall be construed as a whole according to their common meaning in order to
effectuate the intent of the parties under the terms of this Lease.
33.4. Severability. If any provision of this Lease, or the
application thereof to any person or circumstance, is determined to be illegal,
invalid or unenforceable, the remainder of this Lease, or its application to
persons or circumstances other than those as to which it is illegal, invalid or
unenforceable, shall not be affected thereby and shall remain in full force and
effect, unless enforcement of this Lease as so invalidated would be unreasonable
or grossly inequitable under the circumstances, or would frustrate the purposes
of this Lease.
33.5. Entire Agreement; Amendments. This Lease, together with
the Exhibits hereto and any Addenda identified on the Basic Lease Information,
contains all the representations and the entire
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<PAGE> 32
agreement between the parties with respect to the subject matter hereof and any
prior negotiations, correspondence, memoranda, agreements, representations or
warranties are replaced in total by this Lease, the Exhibits hereto and such
Addenda. Neither Landlord nor Landlord's agents have made any warranties or
representations with respect to the Premises or any other portion of the
Building, except as expressly set forth in this Lease. This Lease may be
modified or amended only by an agreement in writing signed by both parties.
33.6. Governing Law. This Lease shall be governed by and
construed pursuant to the laws of the State of California.
33.7. Litigation Expenses. If either party brings any action or
proceeding against the other (including any cross-complaint, counterclaim or
third party claim) to enforce or interpret this Lease or otherwise arising out
of this Lease, the prevailing party in such action or proceeding shall be
entitled to its costs and expenses of suit, including reasonable attorneys' fees
and accountants' fees.
33.8. Standards of Performance and Approvals. Unless otherwise
provided in this Lease, (i) each party shall act in a reasonable manner in
exercising or undertaking its rights, duties and obligations under this Lease
and (ii) whenever approval, consent or satisfaction (collectively, an
"approval") is required of a party pursuant to this Lease or an Exhibit hereto,
such approval shall not be unreasonably withheld or delayed. Unless provision is
made for a specific time period, approval (or disapproval) shall be given within
thirty (30) days after receipt of the request for approval. Nothing contained in
this Lease shall, however, limit the right of a party to act or exercise its
business judgment in a subjective manner with respect to any matter as to which
it has been (A) specifically granted such right, (B) granted the right to act in
its sole discretion or sole judgment, or (C) granted the right to make a
subjective judgment hereunder, whether "objectively" reasonable under the
circumstances and any such exercise shall not be deemed inconsistent with any
covenant of good faith and fair dealing implied by law to be part of this Lease.
The parties have set forth in this Lease their entire understanding with respect
to the terms, covenants, conditions and standards pursuant to which their
obligations are to be judged and their performance measured, including the
provisions of Article 17 with respect to assignments and sublettings.
33.9. Brokers. Landlord shall pay to Landlord's Broker and
Tenant's Broker, if any as specified in the Basic Lease Information of this
Lease, a commission in connection with such Brokers' negotiation of this Lease
pursuant to a separate agreement or agreements between Landlord and such
Brokers. Other than such Brokers, Landlord and Tenant each represent and warrant
to the other that no broker, agent, or finder has procured or was involved in
the negotiation of this Lease and no such broker, agent or finder is or may be
entitled to a commission or compensation in connection with this Lease. Landlord
and Tenant shall each indemnify, defend, protect and hold the other harmless
from and against any and all liability, loss, damages, claims, costs and
expenses (including reasonable attorneys' fees) resulting from claims that may
be asserted against the indemnified party in breach of the foregoing warranty
and representation.
33.10. Memorandum of Lease. Either party shall, upon request of
the other, execute, acknowledge and deliver a short form memorandum of this
Lease (and any amendment hereto) in form suitable for recording. Tenant shall
have the right to record the memorandum and, if Tenant elects to do so, Tenant
shall pay all recording fees and transfer taxes in connection therewith. Upon
termination or expiration of the Lease, Tenant shall promptly execute and record
a quit claim deed or other instrument required to remove such memorandum from
the records of the San Francisco County Recorder's office.
In no event shall this Lease be recorded by Tenant.
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33.11. Quiet Enjoyment. Upon paying the Rent and performing all
its obligations under this Lease, Tenant may peacefully and quietly enjoy the
Premises during the Term as against all persons or entities claiming by or
through Landlord, subject, however, to the provisions of this Lease and any
encumbrances as specified in Article 21.
33.12. Surrender of Premises. Upon the Expiration Date or
earlier termination of this Lease, Tenant shall quietly and peacefully surrender
the Premises to Landlord in the condition specified in Article 9 above. On or
before the Expiration Date or earlier termination of this Lease, Tenant shall
remove all of its personal property from the Premises and repair at its cost and
expense all damage to the Premises or Building caused by such removal. All
personal property of Tenant not removed hereunder shall be deemed, at Landlord's
option, to be abandoned by Tenant and Landlord may store such property in
Tenant's name at Tenant's expense and/or dispose of the same in any manner
permitted by law.
33.13. Building Directory. INTENTIONALLY DELETED.
33.14. Name of Building; Address. Tenant shall not use the name
of the Building for any purpose other than as the address of the business
conducted by Tenant in the Premises. Tenant shall, in connection with all
correspondence, mail or deliveries made to or from the Premises, use the
official Building address specified from time to time by Landlord.
33.15 Year 2000 Compliance. The Premises, Building and Land
shall meet all Year 2000 compliance requirements and the cost of such compliance
shall be at Landlord's sole expense.
33.16. Exhibits. The Exhibits specified in the Basic Lease
Information are by this reference made a part hereof.
33.17. Time of the Essence. Time is of the essence of this Lease
and of the performance of each of the provisions contained in this Lease.
33.18. Reasonable Expenditures Any expenditure by a party
permitted or required under the Lease, for which such party demands
reimbursement from the other party, shall be limited to the fair market value of
the goods and services involved, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by the
other party.
IN WITNESS WHEREOF, the parties have executed this Lease as of
the Lease Date.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-----------------------------------
Its:
-------------------------------
TENANT: CRITICAL PATH, INC.,
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a California corporation
By:
-----------------------------------
Its:
-------------------------------
By:
-----------------------------------
Its:
-------------------------------
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EXHIBIT A
FLOOR PLANS OF PREMISES
<PAGE> 36
EXHIBIT B
LEGAL DESCRIPTION OF LAND
<PAGE> 37
EXHIBIT C
TENANT IMPROVEMENT AGREEMENT
THIS TEN ANT IMPROVEMENT AGREEMENT ("Agreement") is made and entered
into by and between Landlord and Tenant as of the date of the Lease. This
Agreement shall be deemed a part of the Lease to which it is attached.
Capitalized terms which are used in this Agreement and defined in the Lease
shall have the meaning given in the Lease.
1. General.
1.1. The Parties' Respective Obligations. At Landlord's sole
cost and expense, in a good and workman like manner and in compliance with all
workplans and as-built plans approved by the City, Landlord shall construct the
Premises in "shell" condition which shall include only the work (the "Landlord's
Work") described on Schedule I attached to this Agreement and in those certain
plans prepared by Architecture Design Studio dated 10/5/99 (Delta 3 Set) Sheets
A0.1 through A10.2 and S-1 through S-21. At Tenant's sole cost and expense,
subject to the Construction Allowance described below, Landlord shall cause the
contractor (as defined below) to construct all initial leasehold improvements in
compliance with Final Plans (as defined below). The work which is to be
performed pursuant to Final Plans and this Agreement is referred to as the
"Tenant Improvements".
1.2. Tenant Improvement Costs. The cost of performing the Tenant
Improvements, including without limitation the costs described in Section 6
below (collectively, the "Tenant Improvement Costs") shall be paid by Tenant in
the manner set forth in Section 5.
1.3. Construction Allowance. In the manner provided in this
Section 5, Landlord shall provide an allowance for the Tenant Improvement Costs
in an amount equal to equal to Thirty and 00/100 Dollars ($30.00) multiplied by
the Rentable Area of the Premises (the "Construction Allowance"). If the cost of
Tenant Improvements is less than the Construction Allowance, Tenant shall be
entitled to a credit for any unused portion of the Construction Allowance in the
form of rent abatement of the rent first becoming due under the Lease.
2. Approval of Plans for Tenant Improvements.
2.1. Notification of Architect. Tenant hereby notifies Landlord
that it has engaged Richard Pollack & Associates having an address of 214 Grant
Street, San Francisco, California, who is licensed architect, as Tenant's
architect of record for the Tenant Improvements ("Architect"). Tenant's
Architect shall prepare plans for the Tenant Improvements and shall be retained
by Tenant for administrative services throughout the performance of Tenant
Improvements.
2.2. Submittal of Plans.
2.2.1. Preliminary Plans. On or before November 19,
1999, Tenant shall deliver to Landlord, for Landlord's review and approval,
"Preliminary Plans" which shall include the following: (i) floor plans; (ii)
preliminary architectural finish schedule; and (iii) sufficient detail showing
the location of electrical, mechanical and plumbing to permit pricing. Within
five (5) business days after Landlord's receipt of Preliminary Plans, Landlord
shall either approve or disapprove Preliminary Plans, which approval shall not
be unreasonably withheld. Failure by Landlord to respond within such five (5)
day period shall be
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<PAGE> 38
conclusively deemed approval. If Landlord disapproves Preliminary Plans, then
Landlord shall state in reasonable detail the changes which Landlord requires to
be made thereto. Landlord hereby approves the description of the Tenant
Improvements attached as Schedule III hereto and shall not withhold consent to
the Preliminary Plans or the Final Plans to the extent the same are consistent
with such description and provided that the Tenant Improvements as described
therein will not materially adversely affect the structure of the Building, the
Building systems or the exterior of the Building nor violate any Laws or
Environmental Laws.
2.2.2. Preliminary Budget. Landlord shall retain a
third-party general contractor for the construction of the Tenant Improvements.
Tenant shall have the right to approve the fee for the general contractor and
the general conditions of the construction contract between Landlord and
Contractor for the construction of the Tenant Improvements, which approval shall
not be unreasonably withheld or delayed. Ten (10) days after approval by
Landlord and Tenant of Preliminary Plans, Contractor shall prepare a preliminary
budget for the Tenant Improvements based upon the approved Preliminary Plans,
which Contractor shall submit to Tenant for its review and approval. Within five
(5) days after Tenant's receipt of the preliminary budget, Tenant shall either
approve or disapprove the preliminary budget. If Tenant reasonably rejects such
preliminary budget, Tenant shall, within five (5) days of Tenant's delivery of a
written rejection notice to Landlord, require Architect to revise the
Preliminary Plans to reduce the cost of the Tenant Improvements. Following
Tenant's instructions to the Architect, Landlord and Tenant shall again follow
the procedures set forth in Section 2.2.1 and this Section 2.2.2 with respect to
the approval of the Preliminary Plans and to the submission and approval of the
preliminary budget from Contractor.
2.2.3. Final Plans. Within fifteen (15) business days
after Landlord and Tenant's approval of the preliminary budget for the Tenant
Improvements, Tenant shall cause the Architect to deliver to Landlord, for
Landlord's review and approval, complete plans, specifications and working
drawings which incorporate and are consistent with Preliminary Plans and the
preliminary budget, as previously approved by Landlord, and which show in detail
the intended design, construction and finishing of all portions of Tenant
Improvements, in sufficient detail for construction ("Final Plans"). Within ten
(10) business days after Landlord's receipt of Final Plans, Landlord shall
either approve or disapprove Final Plans, which approval shall not be
unreasonably withheld. If Landlord disapproves Final Plans, then Landlord shall
state in reasonable detail the changes which Landlord requires to be made
thereto. If Landlord disapproves the Final Plans, then Landlord shall state in
reasonable detail the changes which Landlord requires to be made thereto. Tenant
shall submit to Landlord revised Final Plans within five (5) business days after
Tenant's receipt of Landlord's disapproval notice. Following Landlord's receipt
of the revised Final Plans from Tenant, Landlord shall have the right to review
and approve the revised Final Plans pursuant to this Section 2.2.3. Landlord
shall give Tenant written notice of its approval or disapproval of the revised
Final Plans within five (5) business days after the date of Landlord's receipt
thereof. If Landlord reasonably disapproves the revised Final Plans, then the
following shall occur: (i) Landlord and Tenant shall continue to follow the
procedures set forth in this Section 2.2.3 until Landlord and Tenant reasonably
approve such Final Plans in accordance with this Section 2.2.3, and (ii) the
period between the date which is ten (10) business after Landlord's reasonable
disapproval (or such earlier date if Landlord approves or disapproves the first
revised Final Plans in a period less than the 5-business days provided Landlord
above) and the eventual mutual approval of such Final Plans shall constitute a
Tenant Delay.
2.3. Landlord's Approval. Landlord's approval of any of Tenant's
plans, signs or materials samples shall not be valid unless such approval is in
writing and signed by Landlord, or otherwise deemed approved in accordance with
the provisions of Sections 2.2.1 and/or 2.2.3 of this Agreement. Landlord's
approval of any of Tenant's plans, including any preliminary draft or version
thereof, shall not be deemed to be a representation as to their completeness,
adequacy for Tenant's intended use of the Premises or
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<PAGE> 39
compliance with applicable law. Tenant shall pay to Landlord all reasonable
costs incurred by Landlord's architect in the review of Preliminary Plans and
Final Plans.
3. Construction Budget. Upon approval by Landlord and Tenant of the
Final Plans, Tenant shall propose preferred subcontractors to Landlord in
certain trades which Landlord shall reasonably approve and in all other trades
Landlord shall propose acceptable subcontractors to Tenant which Tenant shall
reasonably approve and from such lists Landlord shall instruct Contractor to
obtain competitive bids for the Tenant Improvements from at least three (3)
subcontractors for each of the major subtrades and to submit the same to
Landlord and Tenant for their review and approval. Landlord shall select the
lowest bid unless Tenant agrees otherwise. Upon selection of the subcontractors
and approval of the bids, Contractor shall prepare a cost estimate for the
Tenant Improvements described in such Final Plans, based upon the bids submitted
by the subcontractors selected. Contractor shall submit such cost estimate to
Landlord and Tenant for their review and approval. Within five (5) days after
their receipt of the cost estimate, Landlord and Tenant shall each either
approve or disapprove the cost estimate, which approval shall not be
unreasonably withheld. Tenant's failure to approve or disapprove the cost
estimate within such 5-day period shall constitute grounds for the assertion of
a Tenant Delay. Landlord or Tenant may each approve or reject such cost estimate
in their reasonable sole discretion. If either Landlord or Tenant rejects such
cost estimate, Landlord shall resolicit bids based on such Final Plans, in
accordance with the procedures specified above. Following any resolicitation of
bids by Landlord pursuant to this Section 3, Landlord and Tenant shall again
follow the procedures set forth in this Section 3 with respect to the submission
and reasonable approval of the cost estimate from Contractor; provided, however
that the period between Tenant's disapproval of the first revised cost estimate
and the eventual mutual approval of a cost estimate shall constitute a Tenant
Delay. Tenant shall have the right to revise the Final Plans to reduce the
Tenant Improvement Costs but the time required to do so and delays in the
construction schedule as a result thereof shall constitute a Tenant Delay.
4. Landlord to Construct. The construction contract shall specify and
Landlord shall use best efforts to cause Contractor to construct the Tenant
Improvements in a good and workmanlike manner, in accordance with the approved
Final Plans and in compliance with all applicable Laws. Architect shall be
responsible for promptly obtaining all necessary building permits and approvals
and other authorizations from governmental agencies required in connection with
the Tenant Improvements. The cost of all such permits and approvals, including
inspection and other building fees required to obtain the permits for the Tenant
Improvements, shall be included as part of the Tenant Improvement Costs. Tenant
shall have the benefit of any warranties provided by Contractor, the
subcontractors and suppliers in connection with the Tenant Improvements.
Landlord shall diligently prosecute construction of Landlord's Work and the
Tenant Improvements to completion. Landlord, Tenant, Contractor and Architect
shall hold weekly meetings to discuss the status of the construction. Landlord
shall provide Tenant with current construction schedules, including the
estimated date of completion.
5. Payment for Tenant Improvements. The Tenant Improvement Costs shall
be paid solely by Tenant as follows:
5.1 Method of Payment. Landlord shall bear the Tenant
Improvement Costs up to the amount of the Construction Allowance; and Tenant
shall be responsible for paying any excess in the Tenant Improvement Costs over
the amount of such Construction Allowance. For the purposes of this Agreement,
the term "Tenant's Share of Tenant Improvement Costs" shall mean the entire
amount of all Tenant Improvement Costs, less the Construction Allowance provided
by Landlord.
5.1.1. Payment. Within twenty (20) days after Landlord's
receipt of reasonably satisfactory invoices for costs of labor and materials
incurred in connection with the Tenant Improvements, together with such
supporting documentation and lien waivers as Landlord may
3
<PAGE> 40
reasonably require in order to review the costs covered by the billing, Landlord
shall pay the Tenant Improvement Costs represented by such invoices first coming
due for payment, up to an aggregate amount equal to the Construction Allowance.
As and when any amount of Tenant's Share of Tenant Improvement Costs become due
and payable, Tenant shall pay such Tenant Improvement Costs to Landlord within
fourteen (14) days after the date of Tenant's receipt of Landlord's written
request therefor, together with such supporting documentation and lien waivers
as Tenant may reasonably require in order to review the costs covered by the
billing. Any failure by Tenant to pay any amount of Tenant's Share of Tenant
Improvement Costs as and when required under this Agreement shall constitute a
default by Tenant under the Lease after notice and applicable cure period
provided under the Lease. Notwithstanding the foregoing, Tenant may elect to
have Landlord finance Tenant's Share of Tenant Improvement Costs in an amount up
to Five and 00/100 ($5.00) per square foot of Rentable Area by amortizing the
Tenant's Share of Tenant Improvement Costs over the Initial Term at an interest
rate of ten percent (10%) per annum. Tenant shall make such election within five
(5) days of the approval of the construction budget pursuant to Sections 2 and 3
and within ten (10) days following such election, Landlord and Tenant shall
enter into an amendment to the Lease providing for the increase in Base Rent.
5.1.2. Penalties. To the extent that any contractor or
subcontractor working on the Tenant Improvements imposes upon Landlord any
penalty or late charge due to Tenant's failure to pay to Landlord any amount due
under this Section 5.1 as and when such amount is due, Tenant shall be solely
responsible for paying such penalty or late charge; provided, however, that if
Tenant disputes the imposition of such penalty or late charge, Tenant shall not
be required to pay the penalty or late charge until the dispute has been settled
or otherwise resolved; provided further, that if any penalty or late charge is
imposed due to Tenant's exercise of its rights under this Section 5.1.3, Tenant
shall pay such penalty or late charge as provided in this Section 5.1.3.
5.2 Extra Work. Tenant shall be solely responsible for any and
all costs and expenses arising from any improvements to or installations in the
Building desired by Tenant and approved by Landlord that are outside the scope
of the Final Plans.
6. Tenant Improvement Costs. The Tenant Improvement Costs shall include
all reasonable costs incurred in connection with the Tenant Improvements, as
determined by Landlord in its reasonable discretion, including the following:
6.1 All costs of space plans and other architectural and
engineering plans and specifications for the Tenant Improvements, including
engineering costs associated with completion of the State of California energy
utilization calculations under Title 24 legislation required in connection with
the Tenant Improvements; provided however that only Two and 50/100 Dollars
($2.50) per square foot of Rentable Area for such costs may be allocated to the
construction allowance and any costs in excess thereof shall be allocated to
Tenant's Share of Tenant's Improvement Costs.
6.2 All costs of obtaining building permits and other necessary
authorizations from the City of San Francisco;
6.3 All costs of interior design and finish schedule plans and
specifications, including as-built drawings by Architect;
6.4 All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee payable to the Contractor for overhead and profit, and
the cost of all on-site supervisory and administrative staff, office,
4
<PAGE> 41
equipment and temporary services rendered by Contractor in connection with
construction of the Tenant Improvements;
6.5 All fees payable to Architect and Landlord's engineering
firm if they are required by Tenant to redesign any portion of the Tenant
Improvements following Tenant's approval of the Final Plans;
6.6 All costs of installing an emergency power supply systems in
the Building for Tenant's computer rooms, including emergency HVAC;
Tenant Improvement Costs shall not include (and Tenant shall have no
responsibility for and the Construction Allowance shall not be used for) the
following: (a) cost incurred to remove Hazardous Materials from the Premises or
the surrounding areas existing prior to the Commencement Date ; (b) attorneys'
fees incurred in connection with the negotiation of construction contracts and
attorneys' fees, experts' fees and other costs in connection with disputes with
third parties; (c) interest and other costs of financing construction costs; (d)
cost incurred as a consequence of delay (unless the delay is caused by Tenant),
construction defects or default by a contractor; (e) costs recoverable by
Landlord upon account of warranties and insurance; (f) restoration costs in
excess of insurance proceeds as a consequence of casualties; (g) penalties and
late charges attributable to Landlord's failure to pay construction costs; (h)
management or other general overhead costs incurred by Landlord except as
provided in the construction contract with the general contractor or pursuant to
Section 6.4; (i) costs to bring the Premises prior to delivery thereof into
compliance with all Laws in effect as of the Possession Date ; (j) wages for
overtime except required by Tenant's Delay or Tenant's change orders: and (k)
constructions costs in excess of ten percent (10%) over the final construction
cost estimate.
7. Change Requests. No revisions to the approved Final Plans shall be
made by either Landlord or Tenant unless approved in writing by both parties.
Landlord agrees to make all changes (i) required by any public agency to conform
with governmental regulations, or (ii) requested in writing by Tenant and
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Any costs related to such changes shall be added to the Tenant
Improvement Costs and shall be paid for in accordance with Section 5. The
billing for such additional costs shall be accompanied by evidence of the
amounts billed as is customarily used in the business. Costs related to changes
shall include, without limitation, any architectural, structural engineering, or
design fees, and the Contractor's price for effecting the change. Any change
order which may extend the date of substantial completion of the Tenant
Improvements may be disapproved by Landlord unless Tenant agrees that for all
purposes under this Lease, the Tenant Improvements shall be deemed to have been
substantially completed on that date on which such Tenant Improvements would
have been substantially completed without giving effect to the change order in
question. All change orders shall specify any change in the cost estimate as a
consequence of the change order.
8. Acceptance of Building. When Landlord's Work and Tenant Improvements
are complete Landlord shall deliver possession of the Premises to Tenant. As
used herein, "complete" shall mean the first business day following a weekend
after the date that all of the following have occurred: (i) Landlord shall
certify in writing that Contractor has substantially completed the Landlord's
Work and the Tenant Improvements, notwithstanding that minor details of
construction, mechanical adjustment or decorations which do not materially
interfere with Tenant's use of the Premises remain to be performed (such items
being normally referred to as "punch list" items); (ii) Landlord or Contractor
has obtained "signed-off" building permits and/or a temporary certificates of
occupancy permitting Tenant's occupancy of the Premises; (iii) all sanitary,
electrical, heating, ventilating and air conditioning systems of the Building
are operational; and (iv) access to the Building and parking areas are available
to the Tenant and Tenant's
5
<PAGE> 42
invitees 24 hours per day and 365 days per year. Within thirty (30) days after
completion of the Tenant Improvements, Tenant shall conduct a walk-through
inspection of the Building with Landlord and complete a punch-list of items
needing additional work. Other than the items specified in the punch list, if
any, by taking possession of the Building, Tenant shall be deemed to have
accepted the Building in good, clean and completed condition and repair, subject
to all applicable laws, codes and ordinances, except for latent defects in
Landlord's Work discovered within six (6) months after the Possession Date. Any
damage to the Building caused by Tenant's move-in shall be repaired or corrected
by Tenant, at its sole cost and expense, which repair or corrective work shall
not be paid for out of any Construction Allowance. Tenant acknowledges that
neither Landlord nor Landlord's agents shall be deemed to have made any
representations or warranties as to the suitability or fitness of the Building
for the conduct of Tenant's business or for any other purpose, nor shall
Landlord or Landlord's agents be deemed to have agreed to undertake any
alterations or construct any improvements to the Building except as expressly
provided in the Lease, this Agreement. If Tenant fails to submit a punch-list to
Landlord within such 30-day period, it shall be deemed that there are no items
needing additional work or repair. Contractor shall complete all reasonable
punch-list items within thirty (30) days after the walk-through inspection or as
soon as practicable thereafter. Upon completion of such punch-list items, Tenant
shall approve such completed items in writing to Landlord. If Tenant fails to
approve such items within fourteen (14) days of completion, such items shall be
deemed approved by Tenant. Nothing contained in this Section 9 shall limit,
restrict, or terminate any right of Landlord or Tenant to make any claim against
Contractor based upon the condition of the Building or any and all of
Contractor's warranties (express and implied) with respect to the Building.
Landlord shall use reasonable efforts to obtain a final certificate of occupancy
for the Premises within ninety (90) days after the issuance of the temporary
certificate of occupancy.
[SIGNATURES FOLLOW ON NEXT PAGE]
6
<PAGE> 43
IN WITNESS WHEREOF, Landlord and Tenant have each caused their
duly authorized representatives to execute this Agreement on their respective
behalf as of the day and year first above written.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-----------------------------------
Its:
----------------------------------
TENANT: CRITICAL PATH, INC.
a California corporation
By:
-----------------------------------
Its:
----------------------------------
By:
-----------------------------------
Its:
----------------------------------
7
<PAGE> 44
SCHEDULE 1 TO TENANT IMPROVEMENT AGREEMENT
LANDLORD'S WORK
CORE AND SHELL DESCRIPTION
(DESCRIPTION OF THE BUILDING, SYSTEMS AND FINISHES)
REVISED OCTOBER 26, 1999
B R I C K & T I M B E R
S T R U C T U R E
The purpose of this Exhibit is to define general and specific parameters of
architectural and engineering design practice to be employed by Landlord to the
benefit of Tenant.
BUILDING
1. Landlord shall cause the building to be designed, engineered and
remodeled.
2. The building is an existing brick and timber structure which will be
sand blasted (exterior) and sealed so as to eliminate moisture
penetration The cost difference between sandblasting and sealing the
exterior of the Building versus painting the same shall be paid from
the tenant allowance. Landlord will pressure wash the Interior brick
surfaces, unless Tenant chooses to sandblast these areas In which
case Tenant will pay the cost difference between pressure washing
and sandblasting.
3. Details of architecture shall be in substantial conformance with
details of design as demonstrated by Landlord's building plans dated
10-5-99 (Delta 3 Set) Sheets A0.1 through A10.2 and S-1 through
S-21.
4. All areas of the Premises (as defined within the Lease) and all
common areas shall be fully permitted by Landlord and shall be in
compliance with the most recent version of all local, state and
federal building codes and regulations including the Americans with
Disabilities Act, necessary for occupancy.
5. At time of delivery, Landlord shall provide all areas within the
Premises in broom clean condition and all systems serving the
Premises or within the Premises shall be in good working order.
6. Landlord shall be responsible for the improvement within the
building's main lobby including finished concrete floor, painted
smooth drywall finish, ceiling and lighting treatments, all subject
to the reasonable approval of Tenant.
7. All perimeter gypsum board details/treatment taped and mudded,
including all areas above and below perimeter glazing, at soffits,
<PAGE> 45
columns, etc.
STRUCTURE
1. The design of the building shall integrate all current codes,
regulations and utilize the highest level of engineering practice.
2. The floors of the Premises shall be finished in accordance with the
mutually approved plans and specifications for the building.
3. Landlord shall provide, at Tenant's option, finished gypcrete
floors. The floors shall be ready to accept Tenant's carpeting
and/or hard surface floor covering without further treatment.
4. Floor flatness within the Premises shall be within a tolerance of
5/16 of an inch in ten feet.
5. Tenant's space shall be designed to accommodate a combined live
weight load of no less than 70 lbs per square foot and dead load of
35lbs per square foot and shall be designed to minimize vibration
caused by people movement.
ROOF
1. The design of the roof structure shall incorporate accommodations
for all equipment to be located upon the roof.
2. At a minimum the roof type shall be partially standing seam metal
and shall have a minimum 10-year warranty.
BUILDING CORE
1. The building structure shall be constructed with sufficient
provisions for thermal insulation, acoustic control and vibration
isolation to limit noise and structural vibration transmission
generated from building equipment.
2. Noise levels found in all occupied office space within the Premises
created or dispersed by equipment and ductwork shall be measured in
all eight (8) octave bands.
3. The maximum acceptable noise levels relating specifically to noise
generated from the HVAC system, elevators and toilet rooms shall
conform to the following.
a. Adjacent to the building core and extending out a distance of
10 feet NC 35.
b. Lobbies, toilets, commercial area NC 40
c. Perimeter offices NC 35
d. Adjacent to roof penetrations and HVAC supply NC 35
TOILET ROOMS
1. Women's and men's toilet rooms, within the Premises, shall be in
compliance with all code requirements and law and recommendations
<PAGE> 46
for size and quantity including the Americans with Disabilities Act.
2. Each toilet room shall be consistent with details of design and
finish developed by Landlord's architect and mutually approved by
Tenant and Landlord including details and methods of installation.
3. The minimum level of design and finish shall not be less than the
following.
- Water (hot at 110 degrees and cold) shall be provided for all
rest rooms.
- Lavatory counters shall have high quality tops with bull nose
leading edges.
- Recessed lavatories with splashes.
- All vertical walls shall be finished with full height ceramic
tile.
- Floors shall be finished with ceramic tile.
- The ceilings shall be painted, water proof drywall.
- Metal toilet partitions shall be ceiling mounted with
concealed latch and coat hooks.
- Urinal partitions shall be wall mounted.
- Toilets and urinals shall be wall mounted in all rest rooms.
5. Notwithstanding the foregoing, Tenant shall have the right to review
and approve the finishes in the toilet rooms.
TENANT PLUMBING SYSTEM
1. One point of access to domestic cold and hot water, sanitary waste
and vent for Tenant's distribution shall be provided on each floor
to allow for Tenant's coffee bars and service kitchens.
HVAC SYSTEM
1. Landlord shall provide and operate a first class quality Heating,
Ventilating and Air Conditioning System with service available on a
year round basis in all occupied areas of each of the buildings.
2. The systems shall include controls that can monitor and manage each
zone and can be centrally located for climate management.
3. The systems shall have sufficient cooling and heating capacity to
maintain an average inside temperature of 72f +/- 2 FDB during
summer and 68 FDB during winter based on 99% ASHRAE standards for
minimum / maximum exterior temperature and humidity.
4. Internal heat loads for each building shall be calculated and
generated by occupancy levels of one person per 140 useable sq. ft.,
lighting load of 1.5 watts/sq. ft., and miscellaneous power loads
equivalent to a heat output of 8.5 watts per useable square foot.
5. Outdoor air ventilation shall be consistent with ASHRAE Standard
62-1989. The building shall employ a variable volume fan system.
6. Landlord shall make available condenser water for Tenant's
supplemental cooling requirements.
7. The supplemental cooling capability shall be 20 tons per floor and
shall
<PAGE> 47
be designed into the building cooling system.
8. The exact type of system(s), water cooled VAV or air cooled roof
mounted package units, and related requirements shall be mutually
agreed upon.
9. Landlord has provided a description of acceptable HVAC systems which
is dated _____ and is authored by _____, PE (Exhibit _____).
10. The HVAC system(s) includes the completed primary pneumatic trunks
within the Premises of each floor, ventilation make-up air systems,
toilet exhaust systems and direct digital controls for primary
systems and an energy management system, including HVAC and lighting
control.
11. The energy management system shall be capable of allowing Tenant to
request floor by floor after hours HVAC
12. Landlord's HVAC system shall be designed to accommodate the general
exhaust requirements related to performing general business
services.
ELECTRICAL AND POWER SYSTEM
1. Landlord shall provide the main power service from multiple sub
stations, if available, from utility provider to the entry point of
each building and to Tenant distribution panels which shall be at
277/480 volts, three-phase, four wire from multiple feeds located in
a vault(s) within each of the buildings.
2. 277/480 volt power is to be delivered by Landlord to lighting panels
and 120/208 volt transformers (K-rated) and panels for Tenant power
distribution.
3. Each tenant floor shall be provided with 277/480 volt lighting
panels and 120/208 volt power panels sufficient to provide the
following connected capacities:
- Distributable power for lighting at a minimum of 1.5 watts
per rentable square foot of the Premises or as permitted by
the local energy code.
- Distributable 120/208 volt power at 8.5 watts of connected
power per rentable square foot of the Premises and an
additional 3 watts per rentable square foot of capacity for
use by Tenant.
4. Landlord shall provide emergency power to operate lighting and fire
and life safety systems as required by code.
FIRE AND LIFE SAFETY SYSTEMS
1. Base building fire and life safety systems shall meet all local
codes and regulations and all requirements of California State Title
24, the Americans with Disabilities Act and shall be capable of
being extended beyond the core or the Premises with adequate
capacity to accommodate Tenant's improvements.
2. Fire alarm pull stations and fire extinguishers only as required by
code
<PAGE> 48
shall be at each stairwell entry along with fire alarm pulls,
strobes, exit signs, as required by code at each elevator lobby.
3. The shell and core building improvements shall include a fire
sprinkler system, main loop, and lateral runs. Tenant to pay for
relocated or added heads.
ACCESS SYSTEMS
1. The building shall have a fully operable security system, with card
readers at all points of entry.
2. Landlord shall provide adequate card access devices to Tenant's
employees.
3. All building security equipment shall be separate from Tenant's
security system(s).
COMMUNICATION SYSTEM(S)
1. A main telephone terminal room within the building garage, shall be
provided by Landlord with multiple feeder ducts and service from the
telephone company(s).
2. Conduits shall be provided by Landlord from this terminal room to
the main telephone risers and conduits that services Tenant's
premises.
3. Fire resistant plywood telephone backboards shall be provided for
each building in the telephone room.
4. Fire sealed floor openings shall be provided in the telephone room
on each floor for additional risers, conduits and cables.
5. Vertical and horizontal shaft and raceway space shall be provided
and identified, for the exclusive use of Tenant within the core.
6. Landlord shall provide conduit raceway for building-to-building
connections for data and telecommunications and security
transmission and to the point of utility demarcation to accommodate
requirements for Tenant's private telephone, electrical, data,
security and CTV systems.
ELEVATORS
1. Elevator cab shall be equipped with security code push button access
and will have 2,500 lb. capacity at 125 feet per minute.
2. All elevator cabs shall be in compliance with all codes and
regulations including the Americans with Disabilities Act.
3. This elevator shall provide access to all floors of Tenant's
Premises, the building, the garage, and other equipment levels of
the Building (excluding the roof).
<PAGE> 49
EXHIBIT D
RULES AND REGULATIONS
No rules and regulations exist at this time. Landlord reserves the right
to promulgate rules and regulations at a future date in accordance with the
terms of the Lease.
<PAGE> 50
EXHIBIT E
CONFIRMATION OF LEASE TERM
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC
TENANT: CRITICAL PATH, INC.
LEASE DATE: December _______, 1999
PREMISES: 530 Folsom, San Francisco, California
Pursuant to Section 3 of the above referenced Lease, the Commencement Date as
defined in Section 3 shall be _________________________.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-----------------------------------
Its:
-------------------------------
TENANT: CRITICAL PATH, INC.
a California corporation
By:
-----------------------------------
Its:
-------------------------------
By:
-----------------------------------
Its:
-------------------------------
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions 1
1.1. Terms Defined 1
2. Lease of Premises 3
3. Term; Condition and Acceptance of Premises 3
4. Rent 6
4.1. Obligation to Pay Base Rent 6
4.2. Manner of Rent Payment 6
4.3. Additional Rent 6
4.4. Late Payment of Rent; Interest 6
5. Calculation and Payments of Escalation Rent 6
5.1. Payment of Estimated Escalation Rent 6
5.2. Escalation Rent Statement and Adjustment 7
5.3. Proration for Partial Year 7
5.4. Tenant's Right to Contest Taxes 7
6. Impositions Payable by Tenant 8
7. Use of Premises 8
7.1. Permitted Use 8
7.2. No Violation of Legal and Insurance Requirements 8
7.3. Compliance with Legal, Insurance and Life Safety Requirements 8
7.4. No Nuisance 9
7.5. Hazardous Substances 9
7.6. Special Provisions Relating to The Americans With Disabilities Act of 1990 10
7.6.1. Allocation of Responsibility to Landlord 10
7.6.2. Allocation of Responsibility to Tenant 11
7.6.3. General 11
8. Building Services 11
8.1. Maintenance of Building 11
8.2. Building Standard Services 12
8.3. Interruption or Unavailability of Services 12
8.4. Tenant's Payment of Utilities 12
9. Maintenance of Premises 12
10. Alterations to Premises 13
10.1. Landlord Consent; Procedure 13
10.2. General Requirements 13
10.3. Removal of Alterations 13
11. Liens 13
12. Damage or Destruction 13
12.1. Obligation to Repair 13
12.2. Termination Rights 14
12.3. Cost of Repairs 14
12.4. Damage at End of Term 14
12.5. Waiver of Statutes 14
13. Eminent Domain 15
13.1. Effect of Taking 15
13.2. Condemnation Proceeds 15
13.3. Restoration of Premises 15
13.5. Tenant Waiver 15
14. Insurance 15
</TABLE>
<PAGE> 52
<TABLE>
<S> <C>
14.1. Liability Insurance 16
14.2. Form of Policies 16
14.3. Workers' Compensation Insurance 16
14.4. Additional Tenant Insurance 16
15. Waiver of Subrogation Rights 17
16. Tenant's Waiver of Liability and Indemnification 17
16.1. Waiver and Release 17
16.2. Indemnification of Landlord 17
16.3. Indemnification of Tenant 17
17. Assignment and Subletting 18
17.1. Compliance Required 18
17.2. Request by Tenant; Landlord Response 18
17.3. Conditions for Landlord Approval 18
17.4. Costs and Expenses 18
17.5. Payment of Excess Rent and Other Consideration 19
17.6. Assumption of Obligations; Further Restrictions on Subletting 19
17.7. No Release 19
17.8. No Encumbrance 19
18. Rules and Regulations 20
19. Entry of Premises by Landlord 20
19.1. Right to Enter 20
19.2. Tenant Waiver of Claims 21
20. Default and Remedies 21
20.1. Events of Default 21
20.2. Notice to Tenant 22
20.3. Remedies Upon Occurrence of Default 22
20.4. Damages Upon Termination 23
20.5. Computation of Certain Rent for Purposes of Default 23
20.6. Right to Cure Defaults 23
20.7. Remedies Cumulative 24
21. Subordination, Attornment and Nondisturbance 24
21.1. Subordination and Attornment 24
21.2. Nondisturbance 24
22. Sale or Transfer by Landlord; Lease Non-Recourse 24
22.1. Release of Landlord on Transfer 24
22.2. Lease Nonrecourse to Landlord 25
23. Estoppel Certificate 25
23.1. Procedure and Content 25
23.2. Effect of Certificate 25
23.2. Landlord's Estoppel 25
24. No Light, Air, or View Easement 26
25. Holding Over 26
26. Security Deposit 26
27. Waiver 26
28. Notices and Consents; Tenant's Agent for Service 27
29. Authority 27
30. Automobile Parking 27
31. Tenant to Furnish Financial Statements 27
32. Tenant's Signs 27
33. Miscellaneous 28
28
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
33.1. No Joint Venture 28
33.2. Successors and Assigns 28
33.3. Construction and Interpretation 28
33.4. Severability 28
33.5. Entire Agreement; Amendments 28
33.6. Governing Law 29
33.7. Litigation Expenses 29
33.8. Standards of Performance and Approvals 29
33.9. Brokers 29
33.10. Memorandum of Lease 29
33.11. Quiet Enjoyment 30
33.12. Surrender of Premises 30
33.13. Building Directory 30
33.14. Name of Building; Address 30
33.16. Exhibits 30
33.17. Time of the Essence 30
33.18. Reasonable Expenditures 30
</TABLE>
<PAGE> 1
EXHIBIT 10.26
OFFICE LEASE
33 CLEMENTINA STREET
San Francisco, California
ECKER-FOLSOM PROPERTIES, LLC
LANDLORD
CRITICAL PATH, INC.
TENANT
<PAGE> 2
OFFICE LEASE
33 Clementina Street
San Francisco, California
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
Lease Date: December __, 1999
Landlord: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
Tenant: CRITICAL PATH, INC.,
a California corporation
Premises: Approximately 13,345 square feet of rentable area
within the Building (as defined in Section 1.1) as shown on
Exhibit A.
Term: Ten (10) years from the Commencement Date
(the "Initial Term"), subject to two (2) options to extend the
Term each for a period of five (5) years.
Possession Date: The date the Premises is delivered to Tenant in the
condition required under Section 3.1.
Commencement Date: The later of (i) August 1, 2000 or (ii) two (2) weeks
following the Possession Date.
Expiration Date: A date ten (10) years after the Commencement Date,
subject to extension pursuant to Section 3.2 of the Lease
</TABLE>
<TABLE>
<CAPTION>
Base Rent: PERIOD OF TERM AMOUNT
<S> <C> <C>
Commencement Date to
end of Initial Term $50,718.75/month
Extended Term: The fair market rent for
the Premises, as determined in
accordance with Section 3.2 of the
Lease.
</TABLE>
<TABLE>
<S> <C>
Base Year: The calendar year 2000.
Permitted Use: General office, administrative, research and
development, computer laboratory, and related functions.
Security Deposit: $101,437.50 which shall be deposited simultaneously with
Tenant's execution hereof.
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Tenant's Address: Critical Path, Inc.
320 First Street
San Francisco, California 94105
Attention: Chief Financial Officer
Landlord's Address: Ecker-Folsom Properties, LLC
c/o The Bock Company
2996 Washington Street
San Francisco, California 94115
Brokers:
Landlord's Broker: The Bock Company
Tenant's Broker: Cushman Realty Corporation
</TABLE>
Exhibits and Addenda:
Exhibit A: Floor Plan(s) of Premises
Exhibit B: Legal Description of Land
Exhibit C: Work Letter
Exhibit D: Rules and Regulations of the Building
Exhibit E: Confirmation of Lease Term
The Basic Lease Information is incorporated into and made a part of the Lease.
Each reference in the Lease to any Basic Lease Information shall mean the
applicable information set forth above. In the event of any conflict between an
item in the Basic Lease Information and the Lease, the Lease shall control.
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OFFICE LEASE
THIS LEASE is made and entered into by and between Landlord and
Tenant as of the Lease Date. Landlord and Tenant hereby agree as follows:
1. Definitions.
1.1. Terms Defined. The following terms have the meanings set
forth below. Certain other terms have the meanings set forth in the Basic Lease
Information or elsewhere in this Lease.
Alterations: Alterations, additions or other improvements
to the Premises made by Tenant or its employees or contractors (but not
including the alterations, additions or other improvements, if any, made by or
on behalf of Tenant during the initial improvement of the Premises pursuant to
and governed by the provisions of the Work Letter).
Base Operating Expenses and Base Real Estate Taxes: The
Operating Expenses and the Real Estate Taxes paid or incurred by Landlord in the
Base Year.
Building: The office building, and surrounding property,
consisting of a four-story building located on the Land, commonly known as 33
Clementina Street, San Francisco, California, and any additions to such
Building.
Escalation Rent: The total dollar increase, if any, in
Operating Expenses and in Real Estate Taxes, each as paid or incurred by
Landlord in each calendar year, or part thereof, after the Base Year, over the
amount of Base Operating Expenses and Base Real Estate Taxes. For purposes of
determining Operating Expenses for the Base Year, since the Building will be
less than ninety-five percent (95%) occupied during the Base Year, Landlord
shall make an appropriate adjustment of the variable components of Operating
Expenses for that year, as reasonably determined by Landlord using sound
accounting and management principles, to determine the amount of Operating
Expenses that would have been incurred during such year if the Building had been
ninety-five percent (95%) occupied during the entire year. This amount shall be
considered to have been the amount of Operating Expenses for the Base Year. For
purposes hereof, "variable components" include only those component expenses
that are affected by variations in occupancy levels. For purposes of determining
Real Estate Taxes for the Base Year, Landlord shall make an appropriate
adjustment to the Real Estate Taxes for such year as reasonably determined by
Landlord using sound accounting and management principles, to determine the
amount of Real Estate Taxes that would have been incurred during such year if
the tenant improvements in the Building had been fully constructed and the Land,
the Building, and all tenant improvements in the Building had been fully
assessed for Real Estate Tax purposes.
Impositions: Taxes, assessments, charges, excises and
levies, business taxes, licenses, permits, inspection and other authorization
fees, transit development fees, assessments or charges for housing funds,
service payments in lieu of taxes and any other fees or charges of any kind at
any time levied, assessed, charged or imposed by any federal, state or local
entity, upon, measured by or reasonably attributable to the cost or value of
Tenant's equipment, furniture, fixtures or other personal property located in
the Premises, or the cost or value of any alterations, additions or other
improvements to the Premises made by or on behalf of Tenant during the initial
improvement of the Premises pursuant to and governed by the Work Letter which
exceed Building standard improvements (which for purposes of this definition are
defined
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to mean tenant improvements costing less than $50.00 per square foot of Rentable
Area) and any subsequent Alterations. Impositions do not include Real Estate
Taxes, franchise, transfer, inheritance or capital stock taxes, or income taxes
measured by the net income of Landlord from all sources, unless any such taxes
are levied or assessed against Landlord as a substitute for, in whole or in
part, any Imposition.
Land: The parcel of land described on Exhibit B attached
to this Lease.
Operating Expenses: All costs of management, operation,
maintenance and repair of the Building, including, but not limited to, the
following: (i) a prorata portion of salaries, wages, benefits and other payroll
expenses of employees engaged in the operation, maintenance or repair of the
Building and the Land based on the percentage of such employees' time that is
devoted to the operation, maintenance or repair of the Building and the Land;
(ii) commercially reasonable property management fees and expenses; (iii)
electricity, natural gas, water, waste disposal, sewer, heating, lighting, air
conditioning and ventilating and other utilities; (iv) maintenance, security,
life safety and other services, such as alarm service, window cleaning and
elevator maintenance; (v) repair and replacement, resurfacing or repaving of
paved areas, sidewalks, curbs and gutters (except that any such work which
constitutes a capital improvement shall be included in Operating Expenses in the
manner provided in clause (xiii) below); (vi) landscaping, ground keeping,
management, operation, and maintenance and repair of all public, private and
park areas adjacent to the Building and Land; (vii) materials, supplies, tools
and rental equipment; (viii) license, permit and inspection fees and costs; (ix)
insurance premiums and costs (including a proportionate share if Landlord
insures under a "blanket" policy) for any and all insurance carried by Landlord
with respect to the Premises, and the deductible portion of any insured loss
under any such Landlord's insurance ( not to exceed $20,000.00); (x) sales, use
and excise taxes; (xi) legal, accounting and other professional services for the
Building and the Land, including costs, fees and expenses of contesting the
validity or applicability of any law, ordinance, rule, regulation or order
relating to the Building and the Land; (xii) depreciation on personal property,
including exterior window draperies provided by Landlord and floor coverings in
the Common Areas and other public portions of the Building, and/or rental costs
of leased furniture, fixtures, and equipment; and (xiii) the cost of any capital
improvements to the Building or the Land made at any time that are intended in
Landlord's judgment as labor saving devices, or to reduce or eliminate other
Operating Expenses or to effect other economies in the operation, maintenance,
or management of the Building, or that are necessary or appropriate in
Landlord's judgment for the health and safety of occupants of the Building, or
that are required under any law, ordinance, rule, regulation or order which was
not applicable to the Building before the Commencement Date, all amortized over
the useful life of such items determined in accordance with generally accepted
accounting principles at an interest rate of ten percent (10%) per annum, or, if
applicable, the rate paid by Landlord on funds borrowed for the purpose of
constructing or installing such capital improvements and provided that, as to
cost savings expenditures, the annual amount of such amortized costs passed
through as an expense shall not exceed the cost savings realized in such year.
Operating Expenses shall not include: (A) Real Estate Taxes; (B) legal fees,
brokers' commissions or other costs incurred in the negotiation, termination, or
extension of leases or in proceedings involving a specific tenant; (C)
depreciation, except as set forth above; (D) interest, amortization or other
payments on loans to Landlord except as a component of amortization as set forth
above; (E) the cost of any repairs or alterations resulting from defects in the
design or construction of the remodeled Building and the initial improvement of
the Premises or that are required under any law, ordinance, rule, regulation or
order which was applicable to the Building before the Commencement Date; (F)
costs of repairs that are covered by warranties in connection with the
construction of the Building; (G) the cost of capital improvements, except as
set forth in clause (xiii) above; (H) any management fees, representing an
amount paid to a person, firm, corporation, or other entity affiliated to
Landlord to the extent in excess of the amount which would have been paid in the
absence of such relationship; (I) expenses directly resulting from the
negligence, willful misconduct or violation of laws by Landlord, its agents,
servants or employees; (J) any costs of repairs for damage or destruction
occasioned by eminent domain or fires or other casualty (except the deductible
amount permitted
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under clause (iv) above); (K) all costs arising from monitoring, cleaning up and
otherwise remediating, or due to the presence of, Hazardous Substances (defined
below) at the Premises except to the extent caused by the release or emisssion
of Hazardous Substances by Tenant, its contractors, employees or agent; (L) the
creation of any reserves (other than standard operating reserves); (M) costs of
correcting defects in or inadequacy of the renovation of the Building; and (N)
insurance costs for coverage not customarily required by lenders, or paid by
tenants, of similar projects in the vicinity of the Premises, insurance
deductibles in excess of $20,000 per occurrence and premiums for earthquake
insurance. Subject to the provisions of this definition, the determination of
Operating Expenses shall be made by Landlord in accordance with generally
accepted accounting principles and practices consistently applied.
Real Estate Taxes: All taxes, assessments and charges now
or hereafter levied or assessed upon, or with respect to, the Building or any
portion thereof, or any personal property of Landlord used in the operation
thereof or located therein, or Landlord's interest in the Building or such
personal property, by any federal, state or local entity, including: (i) all
real property taxes and general and special assessments; (ii) charges, fees or
assessments for transit, housing, day care, open space, art, police, fire or
other governmental services or benefits to the Building; (iii) service payments
in lieu of taxes; (iv) any tax, fee or excise on the use or occupancy of any
part of the Building, or on rent for space in the Building; (v) any other tax,
fee or excise, however described, that may be levied or assessed as a substitute
for, in whole or in part, any other Real Estate Taxes; and (vi) reasonable fees
and expenses, including those of consultants or attorneys, incurred in
connection with proceedings to contest, determine or reduce Real Estate Taxes.
Real Estate Taxes do not include: (A) franchise, transfer, gift, estate,
inheritance or capital stock taxes, or income taxes measured by the net income
of Landlord, unless any such taxes are levied or assessed against Landlord as a
substitute for, in whole or in part, any Real Estate Tax; (B) Impositions and
all similar amounts payable by Tenant; and (C) penalties, fines, interest or
charges due for late payment of Real Estate Taxes by Landlord. If any Real
Estate Taxes are payable, or may at the option of the taxpayer be paid, in
installments, such Real Estate Taxes shall, together with any interest that
would otherwise be payable with such installment, be deemed to have been paid in
installments, amortized over the maximum time period allowed by applicable law.
Rent: Base Rent, Escalation Rent and all other additional
charges and amounts payable by Tenant in accordance with this Lease.
Term: The period from the Possession Date to the
Expiration Date.
2. Lease of Premises. Landlord leases to Tenant and Tenant leases from
Landlord the Premises.
3. Term; Condition and Acceptance of Premises.
3.1 Initial Term and Acceptance of Premises. Except as
hereinafter provided, and unless sooner terminated pursuant to the provisions of
this Lease, the Term of this Lease shall commence on the Possession Date and end
on the Expiration Date. Landlord shall deliver the Premises to Tenant on the
Possession Date in the condition required by the Work Letter. To the extent that
(i) Landlord has agreed in the Work Letter to make any alterations or
improvements to the Premises prior to the Possession Date, (ii) Tenant desires
to take occupancy of the Premises in advance of the Possession Date, and (iii)
Landlord determines in its sole discretion that Tenant's early occupancy shall
not delay the completion of the improvements to the Premises, then Landlord
shall deliver the Premises to Tenant in advance of the Possession Date on a date
mutually agreed upon by Landlord and Tenant. If Landlord, for any reason
whatsoever, is delayed in the delivery of the Premises to Tenant, this Lease
shall not be void or voidable, and Landlord shall not be in default or liable to
Tenant for any loss or damage resulting therefrom: provided, however, that if
the Possession Date does not occur on or before January 1, 2001, then Tenant
shall have the
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right to terminate this Lease by delivering written notice to Landlord at any
time before February 1, 2002, whereupon any monies previously paid by Tenant to
Landlord shall be reimbursed to Tenant. Within five (5) days after the
Possession Date, Landlord and Tenant shall execute a Confirmation of Lease Term
in the form as set forth in Exhibit E attached to this Lease. Tenant's occupancy
of all or any portion of the Premises shall constitute Tenant's acceptance of
the Premises in the condition called for by this Lease. Tenant's occupancy of
all or any portion of the Premises shall constitute Tenant's acceptance of the
Premises in the condition called for by this Lease, subject to the punchlist
items as described in the Work Letter. Notwithstanding the foregoing, if the
Possession Date occurs after September 1, 2000 as a result of events other than
delays caused by the acts or omissions of Tenant, or Tenant's contractors,
employees or agents ("Tenant Delays"), then the "Commencement Date" shall be a
date calculated as follows: (i) two (2) weeks after the Possession Date, plus
(ii) the number of days by which the Possession Date exceeds September 1, 2000,
minus (iii) the number of days of delay that Landlord is actually delayed in
delivering the Premises to Tenant caused by Tenant Delays.
3.2 Option to Extend.
3.2.1. Exercise of Option to Extend Term. If no
"Suspension Condition" (as hereinafter defined) exists at the time of Tenant's
exercise of the option to extend the Initial Term or at the commencement of the
Extended Term, as the case may be, Tenant shall have two (2) options (each an
"Extension Option") to extend the Initial Term for an additional period of five
(5) years each (each an "Extended Term"). To exercise Tenant's option with
respect to the Extended Term, Tenant shall give notice to Landlord not less than
two hundred ten (210) days prior to the expiration of the Initial Term, or the
first Extended Term ("Election Notice"). A "Suspension Condition" shall mean the
existence of any event or condition of default after expiration of any
applicable grace, notice or cure periods. Tenant shall have no right to exercise
the second Extension Option unless Tenant properly exercised the first Extension
Option.
3.2.2. Fair Market Rent. If Tenant properly and timely
exercises Tenant's option to extend pursuant to Section 3.2.1 above, such
extension shall be upon all of the same terms, covenants and conditions of this
Lease; provided, however, that the Base Rent applicable to the Premises for each
Extended Term shall be one hundred percent (100%) of the "Fair Market Rent" for
space comparable to the Premises as of the commencement of the applicable
Extended Term. "Fair Market Rent" shall mean the annual rental being charged for
first class space comparable to the Premises in buildings comparable to the
Building in the south of Market and financial districts of San Francisco, taking
into account location, parking, condition and improvements to the space and the
fact that Tenant is not entitled to rent concessions or a tenant improvement
allowance. All other terms and conditions of the Lease, which may be amended
from time to time by the parties in accordance with the provisions of the Lease,
shall remain in full force and effect and shall apply during each Extended Term,
as applicable, except that: (i) there shall be no further option to extend the
Term beyond a date ten (10) years after the expiration of the Initial Term, (ii)
there shall be no further rent concessions, and (iii) there shall be no tenant
improvement allowance or similar provisions.
3.2.3. Determination of Rent. Within thirty (30) days
after the date of the Election Notice, Landlord and Tenant shall negotiate in
good faith in an attempt to determine Fair Market Rent for the Extended Term. If
they are unable to agree within said thirty (30) day period, then the Fair
Market Rent shall be determined as provided in Section 3.2.4 below, unless on or
before such thirtieth (30th) day after the date of the Election Notice Tenant
provides Landlord with written notice of its election to revoke the Election
Notice and to not exercise its option to extend.
3.2.4. Appraisal. If it becomes necessary to determine the
Fair Market Rent for the Premises by appraisal, the real estate appraiser(s)
indicated in this Section 3.2.4, each of whom shall be
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members of the Appraisal Institute and each of whom have at least five (5) years
experience appraising office space located in the vicinity of the Premises,
shall be appointed and shall act in accordance with the following procedures:
(i) If the parties are unable to agree on the Fair Market
Rent within the allowed time, either party may demand an appraisal by giving
written notice to the other party, which demand to be effective must state the
name, address and qualifications of an appraiser selected by the party demanding
the appraisal ("Notifying Party"). Within ten (10) days following the Notifying
Party's appraisal demand, the other party ("Non-Notifying Party") shall either
approve the appraiser selected by the Notifying Party or select a second
properly qualified appraiser by giving written notice of the name, address and
qualification of said appraiser to the Notifying Party. If the Non-Notifying
Party fails to select an appraiser within the ten (10) day period, the appraiser
selected by the Notifying Party shall be deemed selected by both parties and no
other appraiser shall be selected. If two (2) appraisers are selected, they
shall select a third appropriately qualified appraiser. If the two (2)
appraisers fail to select a third qualified appraiser, the third appraiser shall
be appointed by the then presiding judge of the county where the Premises are
located upon application by either party.
(ii) If only one appraiser is selected, that appraiser
shall notify the parties in simple letter form of its determination of the Fair
Market Rent for the Premises within fifteen (15) days following his or her
selection, which appraisal shall be conclusively determinative and binding on
the parties as the appraised Fair Market Rent.
(iii) If multiple appraisers are selected, the appraisers
shall meet not later than ten (10) days following the selection of the last
appraiser. At such meeting, the appraisers shall attempt to determine the Fair
Market Rent for the Premises as of the commencement date of the Extended Term in
question by the agreement of at least two (2) of the appraisers.
(iv) If two (2) or more of the appraisers agree on the
Fair Market Rent for the Premises at the initial meeting, such agreement shall
be determinative and binding upon the parties hereto and the agreeing appraisers
shall forthwith notify both Landlord and Tenant of the amount set by such
agreement. If multiple appraisers are selected and two (2) appraisers are unable
to agree on the Fair Market Rent for the Premises, each appraiser shall submit
to Landlord and Tenant his or her respective independent appraisal of the Fair
Market Rent for the Premises, in simple letter form, within twenty (20) days
following appointment of the final appraiser. The parties shall then determine
the Fair Market Rent for the Premises by averaging the appraisals; provided that
any high or low appraisal, differing from the middle appraisal by more than ten
percent (10%) of the middle appraisal, shall be disregarded in calculating the
average.
(v) If only one (1) appraiser is selected, then each party
shall pay one-half (1/2) of the fees and expenses of that appraiser. If three
(3) appraisers are selected, each party shall bear the fees and expenses of the
appraiser it selects and one-half (1/2) of the fees and expenses of the third
appraiser.
3.2.5. Restriction on Assignment. The Extension Option
shall be personal to Critical Path or any Related Entity (defined below), shall
not be assignable or transferable, shall terminate upon any assignment of the
Premises other than to a Related Entity and or any sublease that results in
Tenant or a Related Entity retaining a portion of the Premises that is less than
fifty percent (50%) of the Rentable Area of the original Premises
3.2.6. Amendment to Lease. Immediately after the Fair
Market Rent has been determined, the parties shall enter into an amendment to
this Lease setting forth the Base Rent for the Extended Term and shall also
state the new Expiration Date of the Term of the Lease.
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3.3 Right to Terminate. Tenant shall have the right to terminate
this Lease effective at the end of the seventh year following the Commencement
Date (the "Early Termination Date") provided that Tenant delivers written notice
to Landlord at least 180 days prior to the Early Termination Date and that on or
before the Early Termination Date Tenant pays to Landlord a termination fee in
an amount equal to the unamortized (amortized on a straight line basis over the
Initial Term) Tenant Allowance (as defined in the Work Letter) and brokerage fee
paid by Landlord to the Brokers at the time this Lease is executed and at the
time the Tenant takes possession of the Premises.
4. Rent.
4.1. Obligation to Pay Base Rent. Tenant shall pay Base Rent to
Landlord, in advance, in equal monthly installments, commencing on the
Commencement Date, and thereafter on or before the first day of each calendar
month during the Term. If the Commencement Date and/or Expiration Date is other
than the first day of a calendar month, the installment of Base Rent for the
first and/or last fractional month of the Term shall be prorated on a daily
basis. Not less than thirty (30) days prior to the Commencement Date, Tenant
shall pay to Landlord the first month's Base Rent.
4.2. Manner of Rent Payment. All Rent shall be paid by Tenant
without notice, demand, abatement, deduction or offset (except as expressly set
forth herein), in lawful money of the United States of America, payable to
Landlord, at Landlord's Address as set forth in the Basic Lease Information, or
to such other person or at such other place as Landlord may from time to time
designate by notice to Tenant.
4.3. Additional Rent. All Rent not characterized as Base Rent or
Escalation Rent shall constitute additional rent, and if payable to Landlord
shall, unless otherwise specified in this Lease, be due and payable thirty (30)
days after Tenant's receipt of Landlord's invoice therefor.
4.4. Late Payment of Rent; Interest. Tenant acknowledges that
late payment by Tenant of any Rent will cause Landlord to incur administrative
costs not contemplated by this Lease, the exact amount of which are extremely
difficult and impracticable to ascertain based on the facts and circumstances
pertaining as of the Lease Date. Accordingly, if any Rent is not paid by Tenant
when due, a late charge equal to five percent (5%) of such Rent; provided,
however, that the following additional provisions shall apply to such late
charge: (i) the first late payment in any calendar year shall not result in any
late charge payment unless such payment of Rent is not received within two (2)
business days after Landlord's delivery of written notice to Tenant, and (ii) if
there are more than two (2) late payments of Rent by Tenant in any calendar
year, then the late charge for each subsequent late payment in such calendar
year shall be eight percent (8%). Any Rent, other than late charges, due
Landlord under this Lease, if not paid when due, shall also bear interest from
the date due until paid, at the lesser of the rate of ten percent (10%) per
annum and the highest rate legally permitted. The parties acknowledge that such
late charge and interest represent a fair and reasonable estimate of the
administrative costs and loss of use of funds Landlord will incur by reason of a
late Rent payment by Tenant, but Landlord's acceptance of such late charge
and/or interest shall not constitute a waiver of Tenant's default with respect
to such Rent or prevent Landlord from exercising any other rights and remedies
provided under this Lease, at law or in equity.
5. Calculation and Payments of Escalation Rent. During each full or
partial calendar year of the Term subsequent to the Base Year, Tenant shall pay
to Landlord Escalation Rent in accordance with the following procedures:
5.1. Payment of Estimated Escalation Rent. During December of the
Base Year and
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December of each subsequent calendar year, or as soon thereafter as practicable,
Landlord shall give Tenant notice of its estimate of Escalation Rent due for the
next ensuing calendar year. On or before the first day of each month during such
next ensuing calendar year, Tenant shall pay to Landlord in advance, in addition
to Base Rent, one-twelfth (1/12th) of such estimated Escalation Rent. In the
event such notice is given after December 31st of any year during the Term, (i)
Tenant shall continue to pay Escalation Rent on the basis of the prior calendar
year's estimate until the month after such notice is given, (ii) subsequent
payments by Tenant shall be based of the estimate of Escalation Rent set forth
in Landlord's notice, and (iii) with the first monthly payment of Escalation
Rent based on the estimate set forth in Landlord's notice, Tenant shall also pay
the difference, if any, between the amount previously paid for such calendar
year and the amount which Tenant would have paid through the month in which such
notice is given, based on Landlord's noticed estimate or, in the alternative, if
such amount previously paid by Tenant for such calendar year through the month
in which such notice is given exceeds the amount which Tenant would have paid
through such month based on Landlord's noticed estimate, Landlord shall credit
such excess amount against the next monthly payments of Escalation Rent due from
Tenant. If at any time Landlord reasonably determines that the Escalation Rent
for the current calendar year will vary from Landlord's estimate by more than
five percent (5%), Landlord may, by notice to Tenant not more than once a
calendar year, revise its estimate for such calendar year, and subsequent
payments by Tenant for such calendar year shall be based upon such revised
estimate. Notwithstanding anything to the contrary contained herein, Tenant may
pay the portion of Escalation Rent attributable to Real Estate Taxes as set
forth in Landlord's notice of its estimate of Escalation Rent on or before a
date thirty (30) days prior to the date such Real Estate Taxes are due, unless
Landlord notifies Tenant that its lender is requiring Landlord to escrow Real
Estate Taxes pursuant to a deed of trust encumbering the Premises.
5.2. Escalation Rent Statement and Adjustment. Within one hundred
twenty (120) days after the close of each calendar year, or as soon thereafter
as practicable, Landlord shall deliver to Tenant a statement of the actual
Escalation Rent for such calendar year, accompanied by a statement prepared by
Landlord showing in reasonable detail the Operating Expenses and the Real Estate
Taxes comprising the actual Escalation Rent. If Landlord's statement shows that
Tenant owes an amount less than the payments previously made by Tenant for such
calendar year, Landlord shall credit the difference first against any sums then
owed by Tenant to Landlord and then against the next payment or payments of Rent
due Landlord within thirty (30) days, except that if a credit amount is due
Tenant after termination of this Lease, Landlord shall pay to Tenant any excess
remaining after Landlord credits such amount against any sums owed by Tenant to
Landlord. If Landlord's statement shows that Tenant owes an amount more than the
payments previously made by Tenant for such calendar year, Tenant shall pay the
difference to Landlord within thirty (30) days after delivery of the statement.
5.3. Proration for Partial Year. If this Lease terminates other
than on the last day of a calendar year (other than due to Tenant's default),
the amount of Escalation Rent for such fractional calendar year shall be
prorated on a daily basis. Upon such termination, Landlord may, at its option,
calculate the adjustment in Escalation Rent prior to the time specified in
Section 5.2 above. Tenant's obligation to pay Escalation Rent and Landlord's
obligation to reimburse excess amounts as set forth in Section 5.2, above, shall
survive the expiration or termination of this Lease.
5.4. Tenant's Right to Contest Taxes If Real Estate Taxes are not
contested by Landlord, Tenant shall have the right to contest such Taxes, at no
cost or expense to Landlord, by the appropriate proceedings diligently contested
in good faith. Notwithstanding such proceedings, the contested Real Estate Taxes
shall be promptly paid and discharged, unless such proceedings (and where
necessary the posting of any appropriate bond or other security) shall operate
to prevent or stay the collection of the Real Estate Taxes and secure any
accruing penalties or interest and such proceedings shall provide a cure of
Landlord's default in the payment of Real Estate Taxes required under any deed
of trust upon the
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Premises. Landlord shall join Tenant in such proceedings, if necessary, provided
that Tenant pays all reasonable costs and expenses incurred by Landlord.
6. Impositions Payable by Tenant. Tenant shall pay all Impositions prior
to delinquency. If billed directly to Tenant, Tenant shall pay such Impositions
and concurrently deliver to Landlord evidence of such payments. If any
Impositions are billed to Landlord or included in bills to Landlord for Real
Estate Taxes or other charges, then Tenant shall pay to Landlord all such
amounts within twenty (20) days after delivery of Landlord's invoice therefor.
If applicable law prohibits Tenant from reimbursing Landlord for an Imposition,
but Landlord may lawfully increase the Base Rent to account for Landlord's
payment of such Imposition, the Base Rent payable to Landlord shall be increased
to net to Landlord the same return without reimbursement of such Imposition as
would have been received by Landlord with reimbursement of such Imposition.
Tenant's obligation to pay Impositions which have accrued and remain unpaid upon
the expiration or earlier termination of this Lease shall survive the expiration
or earlier termination of this Lease.
7. Use of Premises.
7.1. Permitted Use. The Premises may only be used solely for the
Permitted Use and for no other use or purpose.
7.2. No Violation of Legal and Insurance Requirements. Tenant
shall not do or knowingly permit to be done, or bring or keep or knowingly
permit to be brought or kept, in or about the Premises, or any other portion of
the Building, anything which (i) is prohibited by or will in any way conflict
with any law, ordinance, rule or regulation; (ii) would invalidate or be in
conflict with the provisions of any insurance policy carried by Landlord or
Tenant on any portion of the Building or Premises, or any property therein; or
(iii) would cause a cancellation of any such insurance, increase the existing
rate of or affect any such Landlord's insurance (unless Tenant pays an increase
in premium), or subject Landlord to any liability or responsibility for injury
to any person or property. If Tenant does or knowingly permits anything to be
done which increases the cost of any of Landlord's insurance, or which results
in the need, in Landlord's reasonable judgment, for additional insurance by
Landlord or Tenant with respect to any portion of the Building or Premises, then
after prior written notice to Tenant of such action Tenant shall reimburse
Landlord, upon demand, for any such additional costs or the costs of such
additional insurance, and/or procure such additional insurance at Tenant's sole
cost and expense. Exercise by Landlord of such right to require reimbursement of
additional costs (including the costs of procuring of additional insurance)
shall not limit or preclude Landlord from prohibiting Tenant's impermissible use
of the Premises or from invoking any other right or remedy available to Landlord
under this Lease.
7.3. Compliance with Legal, Insurance and Life Safety
Requirements. Except as provided in clauses (i) through (iii) below, Tenant, at
its cost and expense, shall promptly comply with all laws, ordinances, rules,
regulations, orders and other governmental requirements, the requirements of any
board of fire underwriters or other similar body, any directive or occupancy
certificate issued pursuant to any law by any public officer or officers, the
provisions of all recorded documents affecting any portion of the Building and
all life safety programs, procedures and rules implemented or promulgated by
Landlord in its reasonable judgement pertaining to Tenant's use of the Premises
in order to comply with applicable laws, ordinances, rules, regulations, orders
or governmental requirements or requirements of insurance underwriters ("Laws").
Tenant shall not, however, be required to comply with Laws requiring Tenant to
make structural changes or capital improvements to the Premises unless
necessitated, in whole or in part, by (i) Tenant's particular use or occupancy
of the Premises, or (ii) Alterations (excluding any alterations, additions or
other improvements to the Premises made by or on behalf of Tenant during the
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initial improvement of the Premises pursuant to the Work Letter).
7.4. No Nuisance. Tenant shall not (i) do or permit anything to
be done in or about the Premises, or any other portion of the Building, which
would injure or annoy, or obstruct or interfere with the rights of, Landlord or
other occupants of the Building, or others lawfully in or about the Building;
(ii) use or allow the Premises to be used in any manner inappropriate for a
Class A office building, or for any improper or objectionable purposes; or (iii)
cause, maintain or permit any nuisance or waste in, on or about the Premises, or
any other portion of the Building.
7.5. Hazardous Substances. The term "Hazardous Substances" as
used in the Lease, is defined as follows:
Any element, compound, mixture, solution, particle or substance, which
presents danger or potential danger of damage or injury to health,
welfare or to the environment including, but not limited to: (i) those
substances which are inherently or potentially radioactive, explosive,
ignitable, corrosive, reactive, carcinogenic or toxic and (ii) those
substances which have been recognized as dangerous or potentially
dangerous to health, welfare or to the environment by any federal,
municipal, state, county or other governmental or quasi-governmental
authority and/or any department or agency thereof.
Tenant represents and warrants to Landlord and agrees that at all
times during the term of this Lease and any extensions or renewals thereof,
Tenant shall:
(i) promptly comply at Tenant's sole cost and expense, with all
laws, orders, rules, regulations, certificates of occupancy, or other
requirements, as the same now exist or may hereafter be enacted, amended
or promulgated, of any federal, municipal, state, county or other
governmental or quasi-governmental authorities and/or any department or
agency thereof relating to the manufacturing, processing, distributing,
using, producing, treating, storing (above or below ground level),
disposing or knowingly allowing to be present(the "Environmental
Activity") of Hazardous Substances in or about the Premises (each, an
"Environmental Law", and all of them, "Environmental Laws") to the
extent Tenant is responsible for the presence of such Hazardous
Substances.
(ii) indemnify and hold Landlord, its agents and employees,
harmless from any and all demands, claims, causes of action, penalties,
liabilities, judgments, damages (including consequential damages) and
expenses including, without limitation, court costs and reasonable
attorneys' fees incurred by Landlord as a result of (a) Tenant's failure
or delay in properly complying with any Environmental Law as required by
clause (i) above, or (b) any adverse effect which results from the
Environmental Activity by Tenant, Tenant's subtenants or any of their
respective agents, employees or contractors, whether Tenant or Tenant's
subtenants or any of their respective agents, employees, contractors or
invitees has caused such Environmental Activity, with or without
Tenant's consent, , or either intentionally or unintentionally. If any
action or proceeding is brought against Landlord, its agents or
employees by reason of any such claim, Tenant, upon notice from
Landlord, will defend such claim at Tenant's expense with counsel
reasonably satisfactory to Landlord. This indemnity obligation by Tenant
of Landlord will survive the expiration or earlier termination of this
Lease.
(iii) promptly disclose to Landlord by delivering, in the manner
prescribed for delivery of notice in this Lease, a copy of any forms,
submissions, notices, reports, or other written documentation (each, a
"Communication") relating to any Environmental Activity, whether any
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such Communication is delivered to Tenant or any of its subtenants or is
requested of Tenant or any of its subtenants by any federal, municipal,
state, county or other government or quasi-governmental authority and/or
any department or agency thereof.
(iv) in the event there is a release of any Hazardous Substance
as a result of or in connection with any Environmental Activity by
Tenant or any of Tenant's subtenants or any of their respective agents,
employees, contractors or invitees, which must be remediated under any
Environmental Law, Landlord shall perform the necessary remediation; and
Tenant shall reimburse Landlord for all costs thereby incurred within
fifteen (15) days after delivery of a written demand therefor from
Landlord (which shall be accompanied by reasonable substantiation of
such costs). In the alternative, Landlord shall have the right to
require Tenant, at its sole cost and expense, to perform the necessary
remediation in accordance with a detailed plan of remediation which
shall have been approved in advance in writing by Landlord. Landlord
shall give notice to Tenant within thirty (30) days after Landlord
receives notice or obtains knowledge of the required remediation. The
rights and obligations of Landlord and Tenant set forth in this clause
(iv) shall survive the expiration or earlier termination of this Lease.
(v) notwithstanding any other provisions of this Lease, allow
Landlord, and any authorized representative of Landlord, access and the
right to enter and inspect the Premises for Environmental Activity, at
any time deemed reasonable by Landlord, upon prior notice to Tenant on
the terms set forth in Article 19.
Compliance by Tenant with any provision of this Section 7.5 shall not be deemed
a waiver of any other provision of this Lease. Without limiting the foregoing,
Landlord's consent to any Environmental Activity shall not relieve Tenant of its
indemnity obligations under the terms hereof.
Except as set forth in the Phase I Environmental Assessment dated
January 22, 1996 prepared by William Dubovsky Environmental and that certain
letter dated April 12, 1999 prepared by William Dubovsky Environmental,, to
Landlord's knowledge, (a) no Hazardous Substance is present on the Building or
the soil, surface water or groundwater of the Land, (b) no underground storage
tanks are present on the Land, and (c) no action proceeding or claim is pending
or threatened regarding the Building concerning any Hazardous Substance or
pursuant to any Environmental Law. Landlord shall promptly remedy and shall
indemnify, defend, protect and hold harmless Tenant, its agents, contractors,
stockholders, directors, successors, representatives, and assigns from and
against, all losses, costs, claims, liabilities and damages (including
attorneys' and consultants' fees) of every type and nature, directly or
indirectly arising out of or in connection with any Hazardous Substance present
at any time on or about the Building, or the soil, air, improvements,
groundwater or surface water of the Land, or the violation of any Environmental
Laws, except to the extent that any of the foregoing results from the
Environmental Activity by Tenant or any of Tenant's subtenants or any of their
respective agents, employees, contractors or invitees, in violation of
Environmental Laws.
This Section 7.5 of the Lease constitutes the entire agreement of
Landlord and Tenant regarding Hazardous Substances.
7.6. Special Provisions Relating to The Americans With
Disabilities Act of 1990.
7.6.1. Allocation of Responsibility to Landlord. As
between Landlord and Tenant, Landlord shall be responsible that the Building as
of the Commencement Date complies with the requirements of Title III of the
Americans with Disabilities Act of 1990 (42 U.S.C. 12181, et seq., The
Provisions Governing Public Accommodations and Services Operated by Private
Entities), and all
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regulations promulgated thereunder, and all amendments, revisions or
modifications thereto now or hereafter adopted or in effect in connection
therewith (hereinafter collectively referred to as the "ADA"), and to take such
actions and make such alterations and improvements as are necessary for such
compliance. All costs incurred by Landlord in discharging its responsibilities
under this Section 7.6.1 shall be included in Operating Expenses to the extent
permitted by Section 1.1.
7.6.2. Allocation of Responsibility to Tenant. As between
Landlord and Tenant, Tenant, at its sole cost and expense, shall be responsible
that all Alterations to the Premises (excluding any alterations, additions or
other improvements to the Premises made by or on behalf of Tenant during the
initial improvement of the Premises pursuant to the Work Letter), Tenant's
particular use and occupancy of the Premises, and Tenant's performance of its
obligations under this Lease, comply with the requirements of the ADA, and to
take such actions and make such Alterations as are necessary for such
compliance; provided, however, that Tenant shall not make any such Alterations
except upon Landlord's prior written consent pursuant to the terms and
conditions of this Lease. Tenant shall protect, defend, indemnify and hold
Landlord harmless from and against any claim, demand, cause of action,
obligation, liability, loss, cost or expense (including reasonable attorneys'
fees) which may be asserted against or incurred by Landlord as a result of
Tenant's failure in any respect to comply with its obligations set forth in this
Section 7.6.2. Tenant's indemnity obligations set forth in the immediately
preceding sentence shall survive the expiration or earlier termination of this
Lease.
7.6.3. General. Notwithstanding anything in this Lease to
the contrary, no act or omission of Landlord, including any approval, consent or
acceptance by Landlord or Landlord's agents, employees or other representatives,
shall be deemed an agreement, acknowledgment, warranty, or other representation
by Landlord that Tenant has complied with the ADA or that any action, alteration
or improvement by Tenant complies or will comply with the ADA or constitutes a
waiver by Landlord of Tenant's obligations to comply with the ADA under this
Lease or otherwise. Any failure of Landlord to comply with the obligations of
the ADA shall not relieve Tenant from any obligations under this Lease or
constitute or be construed as a constructive or other eviction of Tenant or
disturbance of Tenant's use and possession of the Premises.
8. Building Services.
8.1. Maintenance of Building. Except as provided in Section 9,
Landlord shall maintain the Building in good order and condition, except for
ordinary wear and tear, damage by casualty or condemnation, or damage occasioned
by the act or omission of Tenant or Tenant's employees, agents, contractors,
licensees or invitees, which damage by Tenant or Tenant's employees, agents,
contractors, licensees or invitees shall be repaired by Landlord at Tenant's
expense. Landlord shall perform and construct, and Tenant shall have no
responsibility to perform or construct, any repair, maintenance or improvements
(a) to the roof or the structural portions of the Building, (b) which could be
treated as a "capital expenditure" under generally accepted accounting
principles, (c) to the heating, ventilating, air conditioning, electrical, fire
and life safety, water, sewer, and plumbing systems serving the Premises and the
Building, (d) to any exterior or other portion of the Land outside of the
demising walls of the Premises, (e) due to negligent acts or omissions of
Landlord or (f) for which Landlord has a right of reimbursement. Notwithstanding
the foregoing, Tenant shall pay for its share of the repairs described above to
the extent such costs are properly included in Operating Expenses.Landlord's
maintenance of, and provision of services to, the Building shall be performed in
a manner consistent with that of comparable office buildings in the San
Francisco, California area. Landlord shall not be in default under this Lease or
liable for any damages directly or indirectly resulting from or incidental to,
nor shall the rental reserved in this Lease be abated by reason of, Landlord's
failure to make any repair or to perform any maintenance required to be made or
performed by Landlord under this Section 8.1, except as otherwise provided in
Section 20.6 or unless such failure shall persist for
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an unreasonable time after written notice of the need for such repair or
maintenance is given to Landlord by Tenant; provided, however, that Landlord
shall be liable only to Tenant for actual, out of pocket, costs or expenses
incurred by Tenant as a direct result of Landlord's failure to cause the floor
lobby or elevators of the Building to comply with laws which are immediately
applicable to, and enforceable against, the Building (subject to Landlord's
reasonable right of contest of such laws).
8.2. Building Standard Services. During the Term, the Premises
shall be furnished with water, gas, electricity and heating, ventilating and air
conditioning in the capacity set forth in the Work Letter. Any additional
utility services required by Tenant shall be procured by Tenant at its sole cost
and expense and shall comply with all regulations and limitations as may be
prescribed by any applicable policies, regulations or guidelines adopted by any
federal, state or local governmental or quasi-governmental entities or utility
suppliers. Landlord may establish in the Premises such measures as are required
by laws, ordinances, rules or regulations or as it deems necessary or
appropriate to conserve energy, including automatic switching of lights and/or
more efficient forms of lighting. Tenant shall have access to the Building and
all of the foregoing services 24 hours a day, 7 days a week.
8.3. Interruption or Unavailability of Services. Rent shall not
abate, no constructive or other eviction shall be construed to have occurred,
Tenant shall not be relieved from any of its obligations under this Lease, and
Landlord shall not be in default hereunder or liable for any damages directly or
indirectly resulting from, the failure of Landlord to furnish, or delay in
furnishing, any maintenance or services under this Article 8 as a result of
repairs, alterations, improvements or any circumstances beyond Landlord's
reasonable control. Landlord shall use reasonable diligence to remedy any
failure or interruption in the furnishing of such maintenance or services.
Notwithstanding anything set forth in this Lease to the contrary, if such
interruption or interference with access to the Premises, or unavailability of
services continues for more than thirty (30) consecutive days and such
interruption or unavailability prevents Tenant from using the Premises, then
commencing upon the expiration of such thirty (30) day period, Rent shall abate
until beneficial use of the Premises is restored.
8.4. Tenant's Payment of Utilities. Commencing on the
Commencement Date and continuing throughout the Term, Tenant shall pay directly
to the utility providing such service, as the same become due, all charges for
water, gas, electricity, steam, telephone, sewer, waste pick-up and any other
utilities, materials or services furnished to the Premises and/or used by Tenant
on or about the Premises during the Term, including, without limitation, (i)
meter, use, connection, hook-up and/or standby fees (including any connection or
hook-up fees which relate to making the existing electrical, steam, gas, and
water service available to the Premises as of or following the Commencement
Date), and (ii) penalties for discontinued or interrupted service relating to
discontinuance and interruptions following the Commencement Date (except
penalties resulting from Landlord's acts or omissions).
9. Maintenance of Premises. Except as set forth in the second sentence
of Section 8.1, Tenant shall, at all times during the Term, at Tenant's cost and
expense, keep the Premises in good condition and repair, except for ordinary
wear and tear and damage by casualty or condemnation. Tenant shall obtain at its
own cost janitorial supplies and services for the Premises (which services shall
at a minimum consist of vacuuming, emptying waste baskets and dusting at least
five days a week) so that the interior of the Premises shall be maintained in a
clean and sanitary order and condition as required by this Article 9. Except as
may be specifically set forth in this Lease (including the Work Letter),
Landlord has no obligation to alter, remodel, improve, repair, decorate or paint
the Premises, or any part thereof, or any obligation respecting the condition,
maintenance and repair of the Premises or any other portion of the Building.
Except as expressly set forth herein, Tenant hereby waives all rights, including
those provided in California Civil Code Section 1941 or any successor statute,
to make repairs which are Landlord's
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obligation under this Lease at the expense of Landlord or to receive any setoff
or abatement of Rent or in lieu thereof to vacate the Premises or terminate this
Lease.
10. Alterations to Premises.
10.1. Landlord Consent; Procedure. Tenant shall not make or
permit to be made any Alterations without Landlord's prior consent, which
consent may be granted or withheld in Landlord's reasonable discretion; no
consent shall be required for non-structural Alterations which do not require a
building permit and which, in the aggregate per project, cost less than
$25,000.00 to construct. Any Alterations to which Landlord has consented shall
be made in accordance with procedures as then established by Landlord and the
provisions of this Article 10.
10.2. General Requirements. All Alterations shall be made at
Tenant's cost and expense. Tenant shall be solely responsible for compliance
with applicable laws, ordinances, rules and regulations in connection with all
Alterations. Tenant shall be responsible for the cost of any additional
alterations required by applicable laws, ordinances, rules and regulations to be
made by Landlord to any portion of the Building as a result of Alterations.
Tenant shall promptly commence or cause the commencement of construction of all
Alterations and complete or cause completion of the same with due diligence as
soon as possible after commencement.
10.3. Removal of Alterations. If required by Landlord at the time
Landlord provides consent to an Alteration, Tenant shall, prior to the
expiration of the Term or termination of this Lease, remove such Alteration at
Tenant's cost and expense and restore the Premises to the condition existing
prior to the installation of such Alteration. If Tenant fails so to do, then
Landlord may remove such Alteration and perform such restoration and Tenant
shall reimburse Landlord for Landlord's cost and expense incurred to perform
such removal and restoration (which obligation of Tenant shall survive the
expiration or earlier termination of this Lease). Tenant shall repair at its
cost and expense all damage to the Premises or the Building caused by the
removal of such Alteration. Subject to the foregoing provisions regarding
removal, all Alterations (including any above Building standard improvements to
the Premises) shall be Landlord's property and from and after the expiration or
earlier termination of this Lease shall remain on the Premises without
compensation to Tenant. Tenant's trade fixtures, furniture, equipment and other
personal property installed in the Premises ("Tenant's Property") shall at all
times be and remain Tenant's property. Tenant may remove Tenant's Property from
the Premises at any time, provided that Tenant repairs all damage caused by such
removal. Landlord shall have no lien or other interest in any item of Tenant's
Property.
11. Liens. Tenant shall keep the Premises and the Building free from any
liens arising out of any work performed or obligations incurred by or for, or
materials furnished to, Tenant pursuant to this Lease or otherwise. Landlord
shall have the right to post and keep posted on the Premises any notices
required by law or which Landlord may deem to be proper for the protection of
Landlord, the Premises and the Building from such liens and to take any other
action at the expense of Tenant that Landlord deems necessary or appropriate to
prevent, remove or discharge such liens. Tenant shall protect, defend, indemnify
and hold Landlord harmless from and against any claim, demand, cause of action,
obligation, liability, loss, cost or expense (including reasonable attorneys'
fees) which may be asserted against or incurred by Landlord as a result of
Tenant's failure to comply with the foregoing obligation (which indemnity
obligation shall survive the expiration or earlier termination of this Lease).
12. Damage or Destruction.
12.1. Obligation to Repair. Except as otherwise provided in this
Article 12, if the
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Premises, or any other portion of the Building necessary for Tenant's use and
occupancy of the Premises, are damaged or destroyed by fire or other casualty,
Landlord shall, within thirty (30) days after such event, notify Tenant of the
estimated time, in Landlord's reasonable judgment, required to repair such
damage or destruction. Unless Landlord terminates this Lease as set forth in
Section 12.2, then (i) Landlord shall proceed with all due diligence to repair
the Premises, and/or the portion of the Building necessary for Tenant's use and
occupancy of the Premises, to substantially the condition existing immediately
before such damage or destruction, as permitted by and subject to then
applicable laws, ordinances, rules and regulations; (ii) this Lease shall remain
in full force and effect; and (iii) Rent shall abate for such part of the
Premises rendered unusable by Tenant in the conduct of its business during the
time such part is so unusable, in the proportion that the Rentable Area
contained in the unusable part of the Premises bears to the total Rentable Area
of the Premises.
12.2. Termination Rights. If Landlord determines that the
necessary repairs cannot be completed within two hundred seventy (270) days
after the date of damage or destruction, or if such damage or destruction arises
from causes not covered by Landlord's insurance policy required to be carried
hereunder, Landlord may elect, in its notice to Tenant pursuant to Section 12.1,
to (i) terminate this Lease or (ii) repair the Premises pursuant to the
applicable provisions of Section 12.1 above. If Landlord terminates this Lease,
then this Lease shall terminate as of the date of occurrence of the damage or
destruction. If Landlord determines that the necessary repairs cannot be
completed within two hundred seventy (270) days after the date of damage but
Landlord does not elect terminate the Lease pursuant to this Section 12.2,
Tenant shall have the right to terminate the Lease upon written notice to Tenant
to be delivered within ten (10) days of receipt by Tenant of Landlord's notice
of Landlord's determination that such damage or destruction cannot be completed
within two hundred seventy (270) days. Notwithstanding anything to the contrary
herein, Landlord shall not have the right to terminate the Lease if (i) that
portion of the damage or destruction arising from causes covered by Landlord's
insurance policy required to be carried hereunder may be completed within two
hundred seventy (270) after the date of damage or destruction; (ii) the cost of
that portion of the damage or destruction arising from causes not covered by
Landlord's insurance policy required to be carried hereunder is less than five
percent (5%) of the replacement cost of the Building; or (iii) Tenant deposits
with Landlord prior to the commencement of any restoration work the full cost of
the uninsured portion of the costs required to repair the Building.
12.3. Cost of Repairs. Landlord shall pay the cost for repair of
the Building and all improvements in the Premises, other than any Alterations.
If Tenant elects to repair any damaged Alterations, Tenant may pay the costs
therfor (but Landlord shall make available to Tenant for such purpose any
insurance proceeds received by Landlord for such purpose under Landlord's
insurance policy then in force). Tenant may also replace or repair, at Tenant's
cost and expense, Tenant's movable furniture, equipment, trade fixtures and
other personal property in the Premises which Tenant shall be responsible for
insuring during the Term of this Lease.
12.4. Damage at End of Term. Notwithstanding anything to the
contrary contained in this Article 12, if the Premises, or any other portion
thereof or of the Building, are materially damaged or destroyed by fire or other
casualty within the last seven (7) months of the Term, then Landlord shall have
the right, in its sole discretion, to terminate this Lease by notice to Tenant
given within ninety (90) days after the date of such event. Such termination
shall be effective on the date specified in Landlord's notice to Tenant, but in
no event later than the end of such 90-day period. For purposes hereof, the
Premises or other portion of the Building shall be deemed to be materially
damaged if such damage costs more than $2,000,000 to repair
12.5. Waiver of Statutes. The respective rights and obligations
of Landlord and Tenant
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in the event of any damage to or destruction of the Premises, or any other
portion of the Building, are governed exclusively by this Lease. Accordingly,
Tenant hereby waives the provisions of any law to the contrary, including
California Civil Code Sections 1932(2) and 1933(4) providing for the termination
of a lease upon destruction of the leased property.
13. Eminent Domain.
13.1. Effect of Taking. Except as otherwise provided in this
Article 13, if all or any part of the Premises is taken as a result of the
exercise of the power of eminent domain or condemned for any public or
quasi-public purpose, or if any transfer is made in avoidance of such exercise
of the power of eminent domain (collectively, "taken" or a "taking"), this Lease
shall terminate as to the part of the Premises so taken as of the effective date
of such taking. On a taking of a portion of the Premises, Tenant shall have the
right to terminate this Lease by notice to Landlord within thirty (30) days
after the effective date of such taking, if the portion of the Premises taken is
of such extent and nature so as to materially impair Tenant's business use of
the balance of the Premises, as reasonably determined by Tenant. Such
termination shall be operative as of the effective date of the taking. Landlord
may terminate this Lease on a taking of any material portion of the Building if
Landlord reasonably determines that such taking is of such extent and nature as
to render the operation of the remaining Building economically infeasible or to
require a substantial alteration or reconstruction of such remaining portion.
Landlord shall elect such termination by notice to Tenant given within thirty
(30) days after the effective date of such taking, and such termination shall be
operative as of the effective date of such taking. Upon a taking of the Premises
which does not result in a termination of this Lease, the Base Rent shall
thereafter be reduced as of the effective date of such taking in the proportion
that the rentable area of the Premises so taken bears to the total rentable area
of the Premises.
13.2. Condemnation Proceeds. Except as hereinafter provided, in
the event of any taking, Landlord shall have the right to all compensation,
damages, income, rent or awards made with respect thereto (collectively an
"award"), including any award for the value of the leasehold estate created by
this Lease. No award to Landlord shall be apportioned and, subject to Tenant's
rights hereinafter specified, Tenant hereby assigns to Landlord any right of
Tenant in any award made for any taking. Notwithstanding the foregoing, Tenant
may seek to recover, at its cost and expense, as a separate claim, any damages
or awards payable on a taking of the Premises to compensate for the unamortized
cost paid by Tenant for the alterations, additions or improvements, if any, made
by or on behalf of Tenant during the initial improvement of the Premises
pursuant to the Work Letter and for any Alterations, or for Tenant's personal
property taken, or for interference with or interruption of Tenant's business
(including goodwill), or for Tenant's removal and relocation expenses.
13.3. Restoration of Premises. On a taking of the Premises which
does not result in a termination of this Lease, Landlord and Tenant shall
restore the Premises as nearly as possible to the condition they were in prior
to the taking in accordance with the applicable provisions and allocation of
responsibility for repair and restoration of the Premises on damage or
destruction pursuant to Article 12 above, and both parties shall use any awards
received by such party attributable to the Premises for such purpose.
13.4. Tenant Waiver. The rights and obligations of Landlord and
Tenant on any taking of the Premises or any other portion of the Building are
governed exclusively by this Lease. Accordingly, Tenant hereby waives the
provisions of any law to the contrary, including California Code of Civil
Procedure Sections 1265.120 and 1265.130, or any similar successor statute.
14. Insurance.
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14.1. Liability Insurance. Landlord, with respect to the
Building, and Tenant, at its cost and expense with respect to the Premises,
shall each maintain or cause to be maintained, from the Lease Date and
throughout the Term, a policy or policies of Commercial General Liability
insurance with limits of liability not less than Two Million Dollars
($2,000,000.00) per occurrence and in the aggregate. Each policy shall contain
coverage for blanket contractual liability, personal injury liability, and
premises operations, coverage deleting liquor liability exclusions and, as to
Tenant's insurance, fire legal liability. Landlord shall have the right to
approve the deductible under each policy of Tenant's liability insurance, such
approval not to be unreasonably withheld.
14.2. Form of Policies. All insurance required by this Article 14
shall be issued on an occurrence basis by solvent companies qualified to do
business in the State of California, with a Best's rating of at least A and a
financial size category of at least Class X, as set forth in the most recent
edition of Best's. Any insurance required under this Article 14 may be
maintained under a "blanket policy", insuring other parties and other locations,
so long as the amount and coverage required to be provided hereunder is not
thereby diminished. Tenant shall provide Landlord a copy of each policy of
insurance or a certificate thereof certifying that the policies contain the
provisions required hereunder. Tenant shall deliver such policies or
certificates to Landlord within (30) days after the Lease Date, but in no event
less than ten (10) business days prior to the Commencement Date or such earlier
date as Tenant or Tenant's contractors, agents, licensees, invitees or employees
first enter the Premises and, upon renewal, not less than thirty (30) days prior
to the expiration of such coverage. All evidence of insurance provided to
Landlord shall provide (i) that Landlord, Landlord's managing agent and any
other person requested by Landlord who has an insurable interest, is designated
as an additional insured without limitation as to coverage afforded under such
policy; (ii) for severability of interests or that the acts or omissions of one
of the insureds or additional insureds shall not reduce or affect coverage
available to any other insured or additional insured; (iii) that the insurer
agrees not to cancel or reduce the coverage under the policy without at least
thirty (30) days prior written notice to all additional insureds; (iv) that the
aggregate liability applies solely to the Premises and the remainder of the
Building; and (v) that Tenant's insurance is primary and noncontributing with
any insurance carried by Landlord.
14.3. Workers' Compensation Insurance. Tenant, at its sole cost
and expense, shall maintain Workers' Compensation insurance as required by law
and employer's liability insurance in an amount of not less than Five Hundred
Thousand Dollars ($500,000).
14.4. Additional Tenant Insurance. Tenant, at its sole cost and
expense, shall maintain such other insurance as Landlord may reasonably require
from time to time, but in no event may Landlord require any other insurance
which is (i) not then being required of comparable tenants leasing comparable
amounts of space in comparable buildings in the vicinity of the Building or (ii)
not then available at commercially reasonable rates.
14.5. Landlord's Casualty Insurance. Landlord shall, during the
Term of this Lease, procure and maintain in full force and effect, a policy or
policies of "all risk" insurance covering the Building and the permanent tenant
improvements in the Premises (including Alterations of which Landlord has
notice), with standard extended coverage, vandalism, malicious mischief and
sprinkler leakage endorsements. The amount and scope of coverage of Landlord's
insurance hereunder shall be determined by Landlord from time to time in its
reasonable discretion based on prudent risk management practices for buildings
comparable to the Building (but shall not be less than 90% of full replacement
value of the Building and Tenant's permanent tenant improvements in the Premises
(including Alterations of which Landlord has notice), and shall be subject to
such deductible amounts as Landlord may reasonably elect based on prudent risk
management practices for buildings comparable to the Building).
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15. Waiver of Subrogation Rights. Notwithstanding anything to the
contrary contained in this Lease, Landlord and Tenant, for themselves and their
respective insurers, agree to and do hereby release each other and their
respective employees, contractors, agents, assignees and subtenants, of and from
any and all claims, demands, actions and causes of action that each may have or
claim to have against the other for loss or damage to property, both real and
personal, notwithstanding that any such loss or damage may be due to or result
from the negligence of either of the parties hereto or their respective
employees, contractors, agents, assignees and subtenant, to the extent such
damage is due to a risk that is required to be insured hereunder. Each party
shall, to the extent such insurance endorsement is lawfully available at
commercially reasonable rates, obtain or cause to be obtained, for the benefit
of the other party, a waiver of any right of subrogation which the insurer of
such party may acquire against the other party by virtue of the payment of any
such loss covered by such insurance.
16. Tenant's Waiver of Liability and Indemnification.
16.1. Waiver and Release. Except to the extent due to the gross
negligence or willful misconduct of Landlord or its agents, employees or
contractors and Landlord's breach of its obligations hereunder, Landlord shall
not be liable to Tenant or Tenant's employees, agents, contractors, licenses or
invitees for, and Tenant waives and releases Landlord and Landlord's managing
agent from, all claims for loss or damage to any property or injury, illness or
death of any person in, upon or about the Premises and/or any other portion of
the Building (including claims caused in whole or in part by the act, omission,
or neglect of other tenants, contractors, licensees, invitees or other occupants
of the Building or their agents or employees). The waiver and release contained
in this Section 16.1 extends to the officers, directors, shareholders, partners,
employees, agents and representatives of Landlord.
16.2. Indemnification of Landlord. Tenant shall indemnify,
defend, protect and hold Landlord harmless of and from any and all loss, liens,
liability, claims, causes of action, damage, injury, cost or expense arising out
of or in connection with (i) the making of any alterations, additions or other
improvements made by or Tenant or by its employees, contractors or agents during
the initial improvement of the Premises pursuant to the Work Letter or any
Alterations, or (ii) injury to or death of persons or damage to property
occurring or resulting directly or indirectly from: (A) the use or occupancy of,
or the conduct of business in, the Premises by Tenant or its subtenants or any
of their respective officers, directors, employees, agents, contractors,
invitees or licensees; (B) any other occurrence or condition in or on the
Premises; and (C) the negligence or willful ,misconduct of Tenant , its
subtenants or any of their respective officers, directors, employees, agents,
contractors, invitees or licensees, in or about any portion of the Building.
Tenant's indemnity obligation includes reasonable attorneys' fees and costs,
investigation costs and all other reasonable costs and expenses incurred by
Landlord. If Landlord disapproves the legal counsel proposed by Tenant for the
defense of any claim indemnified against hereunder, Landlord shall have the
right to appoint its own legal counsel, the reasonable fees, costs and expenses
of which shall be included as part of Tenant's indemnity obligation hereunder.
The indemnification contained in this Section 16.2 shall extend to the officers,
directors, shareholders, partners, employees, agents and representatives of
Landlord.
16.3. Indemnification of Tenant. Notwithstanding anything to the
contrary herein, Landlord shall not be released or indemnified from and shall
indemnify, defend, protect and hold Tenant harmless of and from any and all
loss, liens, liability, claims, causes of action, damage, injury, cost or
expense arising out of or in connection with (i) any breach or default by
Landlord in the performance of any of its obligations under this Lease, (ii) the
negligence or willful misconduct of Landlord or its agents, employees or
contractors, or (iii) any loss or damage to property or injury to person
occurring in the public entrances, stairways, corridors, elevators and elevator
lobbies, and other public areas in the
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Building or the other public areas in the Building (except for such loss, damage
or injury for which Tenant is obligated to indemnify Landlord under Section
16.2).
17. Assignment and Subletting.
17.1. Compliance Required. Tenant shall not, directly or
indirectly, voluntary or by operation of law, sell, assign or otherwise transfer
this Lease, or any interest herein (collectively, "assign" or "assignment"), or
sublet the Premises, or any part thereof, or permit the occupancy of the
Premises by any person other than Tenant (collectively, "sublease" or
"subletting", the assignee or sublessee under an assignment or sublease being
referred to as a "transferee"), without Landlord's prior consent given or
withheld in accordance with the express standards and conditions of this Article
17 and compliance with the other provisions of this Article 17. Any assignment
or subletting made in violation of this Article 17 shall be void. Tenant
acknowledges and agrees that the limitations on Tenant's right to sublet or
assign which are set forth in this Article 17 are reasonable and, in particular,
that the express standards and conditions upon Tenant's right to assign or
sublet which are set forth in this Article 17 are reasonable as of the Lease
Date.
17.2. Request by Tenant; Landlord Response. If Tenant desires to
effect an assignment or sublease, Tenant shall submit to Landlord a request for
consent together with the identity of the parties to the transaction, the nature
of the transferee's proposed business use for the Premises, the proposed
documentation for and terms of the transaction, and all other information
reasonably requested by Landlord concerning the proposed transaction and the
parties involved therein, including certified financial information, credit
reports, the business background and references regarding the transferee, and an
opportunity to meet and interview the transferee. Within fifteen (15) days after
the later of such interview or the receipt of all such information required by
Landlord, or within fifteen (15) days after the date of Tenant's request to
Landlord if Landlord does not request additional information or an interview,
Landlord shall have the right, by notice to Tenant, to: (i) consent to the
assignment or sublease, subject to the terms of this Article 17; or (ii) decline
to consent to the assignment or sublease. Provided that the request for consent
and documentation is marked "LANDLORD'S RESPONSE IS REQUIRED WITHIN 15 DAYS OF
RECEIPT OF THIS NOTICE PURSUANT TO THE TERMS OF THE LEASE BETWEEN LANDLORD AND
THE UNDERSIGNED" and the envelope containing the request is marked "PRIORITY",
Landlord's failure to respond within the fifteen-day period described in the
foregoing sentence shall constitute Landlord's consent to the proposed sublease
or assignment.
17.3. Conditions for Landlord Approval. Landlord shall not
unreasonably withhold its consent to a proposed subletting or assignment by
Tenant. Without limiting the grounds on which it may be reasonable for Landlord
to withhold its consent to an assignment or sublease, Tenant agrees that
Landlord would be acting reasonably in withholding its consent in the following
instances: (i) if Tenant is in default under this Lease after applicable notice
and cure periods; (ii) if the transferee is a governmental or quasi-governmental
agency, foreign or domestic; (iii) if, in Landlord's sole but reasonably
judgment, the transferee's business, use and/or occupancy of the Premises would
(A) violate any of the terms of this Lease , or (B) require any Alterations
which would reduce the value of the existing leasehold improvements in the
Premises; (iv) if the financial condition of the transferee does not meet the
requirements that would be applied by Landlord for a tenant in the Building
under leases with comparable terms. If Landlord consents to an assignment or
sublease, the terms of such assignment or sublease transaction shall not be
modified without Landlord's prior written consent pursuant to this Article 17.
Landlord's consent to an assignment or subletting shall not be deemed consent to
any subsequent assignment or subletting.
17.4. Costs and Expenses. As a condition to the effectiveness of
any assignment or
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subletting under this Article 17, Tenant shall pay to Landlord all reasonable
costs and expenses, including reasonable attorneys' fees and disbursements,
incurred by Landlord in evaluating Tenant's requests for assignment or sublease,
whether or not Landlord consents to an assignment or sublease. Tenant shall pay
the processing fee with Tenant's request for Landlord's consent under Section
17.2.
17.5. Payment of Excess Rent and Other Consideration. Tenant
shall also pay to Landlord, promptly upon Tenant's receipt thereof, fifty
percent (50%) of any and all rent, sums or other consideration, howsoever
denominated, realized by Tenant in connection with any assignment or sublease
transaction in excess of the Base Rent and Escalation Rent payable hereunder
(prorated to reflect the Rent allocable to the portion of the Premises if a
sublease), after first deducting, (i) in the case of an assignment, the
unamortized reasonable cost of Alterations paid for by Tenant and reasonable
attorney's fee and real estate commissions paid by Tenant in connection with
such assignment and, (ii) in the case of a sublease, the reasonable cost of
Alterations made to the Premises at Tenant's cost to effect the sublease, and
the reasonable attorney's fees and the amount of any real estate commissions
paid by Tenant, both amortized over the term of the sublease.
17.6. Assumption of Obligations; Further Restrictions on
Subletting. Each assignee shall, concurrently with any assignment, assume all
obligations of Tenant under this Lease. Each sublease shall be made subject to
this Lease and all of the terms, covenants and conditions contained herein; and
the surrender of this Lease by Tenant, or a mutual cancellation thereof, or the
termination of this Lease in accordance with its terms, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
operate as an assignment to Landlord of any or all such subleases. No sublessee
of a sublessee shall have the right further to sublet more than one additional
time. Any assignment by a sublessee of its sublease shall be subject to
Landlord's prior consent in the same manner as a sublease by Tenant. No
sublease, once consented to by Landlord, shall be modified without Landlord's
prior consent. No assignment or sublease shall be binding on Landlord unless the
transferee delivers to Landlord a fully executed counterpart of the assignment
or sublease which contains the assumption by the assignee, or recognition by the
sublessee, of the provisions of this Section 17.6, in form and substance
satisfactory to Landlord, but the failure or refusal of a transferee to deliver
such instrument shall not release or discharge such transferee from the
provisions and obligations of this Section 17.6, but such failure shall
constitute a breach under this Lease by Tenant.
17.7. No Release. No assignment or sublease shall release Tenant
from its obligations under this Lease, whether arising before or after the
assignment or sublease. The acceptance of Rent by Landlord from any other person
shall not be deemed a waiver by Landlord of any provision of this Article 17. On
a default by any assignee of Tenant in the performance of any of the terms,
covenants or conditions of this Lease, Landlord may proceed directly against
Tenant without the necessity of commencing or exhausting remedies against such
assignee. No consent by Landlord to any further assignments or sublettings of
this Lease, or any modification, amendment or termination of this Lease, or
extension, waiver or modification of payment or any other obligations under this
Lease, or any other action by Landlord with respect to any assignee or
sublessee, or the insolvency, or bankruptcy or default of any such assignee or
sublessee, shall affect the continuing liability of Tenant for its obligations
under this Lease and Tenant waives any defense arising out of or based thereon,
including any suretyship defense of exoneration. Landlord shall have no
obligation to notify Tenant or obtain Tenant's consent with respect to any of
the foregoing matters.
17.8. No Encumbrance. Notwithstanding anything to the contrary
contained in this Article 17, Tenant shall have no right to encumber, pledge,
hypothecate or otherwise transfer this Lease, or any of Tenant's interest or
rights hereunder, as security for any obligation or liability of Tenant without
Landlord's prior written consent.
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17.9 Assignment or Sublease to Related Entity. As long as
Critical Path or a Related Entity (as defined herein) is the Tenant in
possession of the Premises and no default then exists beyond applicable notice
and cure periods, Tenant shall have the right, subject to the terms and
conditions set forth in this Sections 17.9 but not Section 17.5, without the
consent of Landlord, but without in any way releasing Critical Path from any of
its obligations under this Lease, to (a) assign its interest in this Lease to a
corporation or other entity which shall control, be under the control of, or be
under common control with Critical Path (the term "control" as used herein shall
be deemed to mean ownership of more than fifty percent (50%) of the outstanding
voting stock of a corporation, or other majority equity and control interest if
Tenant is not a corporation) or successor entity related to Tenant by merger,
consolidation or reorganization or a purchaser of substantially all of Tenant's
assets (any such entity being a "Related Entity"), or (b) sublease all or any
portion of the Premises to a Related Entity, so long as such sublease does not
result in the demising of any space in the Premises. Any assignment or sublease
to a Related Entity pursuant to this Section 17.9 shall be subject to the
following conditions: (i) the principal purpose of such assignment or sublease
is not the acquisition of Tenant?s interest in this Lease (except if such
assignment or sublease is made to a Related Entity and is made for a valid
intra-corporate business purpose and is not made to circumvent the provisions of
this Article 17), (ii) any such assignee shall have a net worth and annual
income and cash flow, determined in accordance with generally accepted
accounting principles, consistently applied, after giving effect to such
assignment, in amounts necessary to perform its duties, obligations and
liabilities hereunder, as reasonably determined by Landlord, (iii) such
assignment or sublease shall be subject to the terms of this Lease, including
the provisions of Sections 17.6 and 17.7, and (iv) such Related Entity shall
have executed all documents reasonably requested by Landlord to memorialize the
foregoing. Tenant shall, within ten (10) business days after execution thereof,
deliver to Landlord (A) a duplicate original instrument of assignment in form
and substance reasonably satisfactory to Landlord, duly executed by Tenant, (B)
if applicable, evidence reasonably satisfactory to Landlord establishing
compliance by the assignee with the net worth, income and cash flow requirements
of clause (b)(ii) above, (C) an instrument in form and substance reasonably
satisfactory to Landlord, duly executed by the assignee, in which such assignee
shall assume observance and performance of, and agree to be personally bound by,
all of the terms, covenants and conditions of this Lease on Tenant?s part to be
observed and performed or (D) a duplicate original sublease in form and
substance reasonably satisfactory to Landlord, duly executed by Tenant and
subtenant.
18. Rules and Regulations. Tenant shall observe and comply, and shall
cause its sublessees, employees, agents, contractors, licensees and invitees to
observe and comply, with the Rules and Regulations of the Building, a copy of
which are attached to this Lease as Exhibit D, and, after notice thereof, with
all modifications and additions thereto from time to time promulgated in writing
by Landlord. Landlord shall not be responsible to Tenant, or Tenant's
sublessees, employees, agents, contractors, licensees or invitees, for
noncompliance with any Rules and Regulations of the Building by any other
tenant, sublessee, employee, agent, contractor, licensee, invitee or other
occupant of the Building. Tenant shall not be required to comply with any new
rule or regulation unless the same applies non-discriminatorily to all occupants
of the Building, does not unreasonably interfere with Tenant's use of the
Premises or Tenant's parking rights and does not materially increase the
obligations or decrease the rights of Tenant under the Lease
19. Entry of Premises by Landlord.
19.1. Right to Enter. Upon 24 hours advance notice to Tenant
(except in emergencies or in order to provide regularly scheduled or other
routine Building standard services or additional services requested by Tenant,
or post notices of nonresponsibility or other notices permitted or required by
law when no such notice shall be required), Landlord and its authorized agents,
employees, and contractors
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may enter the Premises at reasonable hours to: (i) inspect the same; (ii)
determine Tenant's compliance with its obligations hereunder; (iii) exhibit the
same to prospective purchasers, lenders or tenants; (iv) supply any services to
be provided by Landlord hereunder; (v) post notices of nonresponsibility or
other notices permitted or required by law; (vi) make repairs, improvements or
alterations, or perform maintenance in or to, the Premises or any other portion
of the Building, including Building systems; and (vii) perform such other
functions as Landlord deems reasonably necessary or desirable. Landlord may also
grant access to the Premises to government or utility representatives and bring
and use on or about the Premises such equipment as reasonably necessary to
accomplish the purposes of Landlord's entry. Landlord shall use reasonable good
faith efforts to effect all entries and perform all work hereunder in such
manner as to minimize interference with Tenant's use and occupancy of the
Premises. Landlord shall have and retain keys with which to unlock all of the
doors in or to the Premises (excluding Tenant's vaults, safes and similar secure
areas designated in writing by Tenant in advance), and Landlord shall have the
right to use any and all means which Landlord may deem proper in an emergency in
order to obtain entry to the Premises, including secure areas. Any entry shall
comply with Tenant's reasonable security measures.
19.2. Tenant Waiver of Claims. Except for damages to persons or
property caused by the gross negligence or willful misconduct of Landlord,
Tenant waives any claim for damages for any inconvenience to or interference
with Tenant's business, or any loss of occupancy or quiet enjoyment of the
Premises, or any other loss, occasioned by any entry effected or work performed
under this Article 19, and Tenant shall not be entitled to any abatement of Rent
by reason of the exercise of any such right of entry or performance of such
work. No entry to the Premises by Landlord or anyone acting under Landlord shall
constitute a forcible or unlawful entry into, or a detainer of, the Premises or
an eviction, actual or constructive, of Tenant from the Premises, or any portion
thereof.
20. Default and Remedies.
20.1. Events of Default. The occurrence of any of the following
events shall constitute a default by Tenant under this Lease:
a. Nonpayment of Rent. Failure to pay any Rent when due.
b. Unpermitted Assignment. An assignment or sublease made
in contravention of any of the provisions of Article 17 above.
c. Abandonment. Abandonment of the Premises for a
continuous period in excess of five (5) business days. For purposes hereof,
"abandonment" shall have the meaning provided under California law.
d. Other Obligations. Failure to perform or fulfill any
other obligation, covenant, condition or agreement under this Lease.
e. Bankruptcy and Insolvency. A general assignment by
Tenant for the benefit of creditors, any action or proceeding commenced by
Tenant under any insolvency or bankruptcy act or under any other statute or
regulation for protection from creditors, or any such action commenced against
Tenant and not discharged within thirty (30) days after the date of
commencement; the employment or appointment of a receiver or trustee to take
possession of all or substantially all of Tenant's assets or the Premises which
is not discharged within thirty (30) days; the attachment, execution or other
judicial seizure of all or substantially all of Tenant's assets or the Premises,
if such attachment or other seizure remains undismissed or undischarged for a
period of thirty (30) days after the levy thereof; the admission
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by Tenant in writing of its inability to pay its debts as they become due; or
the filing by Tenant of a petition seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, the filing by Tenant of an answer
admitting or failing timely to contest a material allegation of a petition filed
against Tenant in any such proceeding or, if within thirty (30) days after the
commencement of any such proceeding against Tenant, such proceeding is not
dismissed. For purposes of this Section 20.1(e), "Tenant" means Tenant and any
partner of Tenant, if Tenant is a partnership, or any person or entity
comprising Tenant, if Tenant is comprised of more than one person or entity, or
any guarantor of Tenant's obligations, or any of them, under this Lease.
f. 530 Folsom Street. If, at any time that Landlord is
also the owner of the premises leased by Tenant under that certain Office Lease
of even date herewith for premises commonly known as 530 Folsom Street, San
Francisco (the "Folsom Lease"), Tenant is in default under the Folsom Lease,
beyond any applicable notice and cure period.
20.2. Notice to Tenant. Upon the occurrence of any default,
Landlord shall give Tenant notice thereof. If a time period is specified below
for cure of such default, then Tenant may cure such default within such time
period.
a. Nonpayment of Rent. For failure to pay Rent, within
five (5) days after Landlord's notice, unless Tenant has failed more than two
(2) times during any calendar year to timely pay any Rent, in which event no
cure period shall apply.
b. Other Obligations. For failure to perform any
obligation, covenant, condition or agreement under this Lease (other than
nonpayment of Rent or Tenant's abandonment of the Premises) within ten (10) days
after Landlord's notice or, if the failure is of a nature requiring more than 10
days to cure, then an additional forty five (45) days after the expiration of
such 10-day period, but only if Tenant commences cure within such 10-day period
and thereafter diligently pursues such cure to completion within such additional
45-day period. If Tenant has failed to perform any such obligation, covenant,
condition or agreement more than two (2) times during any calendar year and
notice of such event of default has been given by Landlord in each instance,
then no cure period shall apply.
c. Assignment/Sublease. For an assignment or subletting in
violation of Article 17, within ten (10) days after Landlord's notice.
d. No Cure Period. No cure period shall apply for any
other event of default specified in Section 20.1.
20.3. Remedies Upon Occurrence of Default. On the occurrence of a
default which Tenant fails to cure after notice and expiration of the time
period for cure, if any, specified in Section 20.2 above, Landlord shall have
the right either (i) to terminate this Lease and recover possession of the
Premises, or (ii) to continue this Lease in effect and enforce all Landlord's
rights and remedies under California Civil Code Section 1951.4 (by which
Landlord may recover Rent as it becomes due, subject to Tenant's right to assign
pursuant to Article 17). Landlord may store any property of Tenant located in
the Premises at Tenant's expense or otherwise dispose of such property in the
manner provided by law. If Landlord does not terminate this Lease, Tenant shall
in addition to continuing to pay all Rent when due, also pay Landlord's costs of
attempting to relet the Premises, any repairs and alterations necessary to
prepare the Premises for such reletting, and brokerage commissions and
attorneys' fees incurred in connection therewith, less the rents, if any,
actually received from such reletting. Notwithstanding Landlord's election to
continue this Lease in effect, Landlord may at any time thereafter
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terminate this Lease pursuant to this Section 20.3.
20.4. Damages Upon Termination. If and when Landlord terminates
this Lease pursuant to Section 20.3, Landlord may exercise all its rights and
remedies available under California Civil Code Section 1951.2, including the
right to recover from Tenant the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that the Tenant proves could have been
reasonably avoided. As used herein and in Civil Code Section 1951.2, "time of
award" means either the date upon which Tenant pays to Landlord the amount
recoverable by Landlord, or the date of entry of any determination, order or
judgment of any court or other legally constituted body determining the amount
recoverable, whichever occurs first.
20.5. Computation of Certain Rent for Purposes of Default. For
purposes of computing unpaid Rent pursuant to Section 20.4 above, Escalation
Rent for the balance of the Term shall be determined by averaging the amount
paid by Tenant as Escalation Rent for the calendar year prior to the year in
which the default occurred (or, if the prior year is the Base Year or such
default occurs during the Base Year, Escalation Rent shall be based on
Landlord's operating budget for the Building for the Base Year), increasing such
average amount for each calendar year (or portion thereof) remaining in the
balance of the Term at a per annum compounded rate equal to the mean average
rate of increase for the preceding five (5) calendar years in the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index (All Urban
Consumers, All Items, 1982-1984 = 100) for the Metropolitan Area of which San
Francisco, California, is a part, and adding together the resulting amounts. If
such Index is discontinued or revised, such computation shall be made by
reference to the index designated as the successor or substitute index by the
United States Department of Labor, Bureau of Labor Statistics, or its successor
agency, and if none is designated, by a comparable index as determined by
Landlord in its sole discretion, which would likely achieve a comparable result
to that achieved by the use of the Consumer Price Index. If the base year of the
Consumer Price Index is changed, then the conversion factor specified by the
Bureau, or successor agency, shall be utilized to determine the Consumer Price
Index.
20.6. Right to Cure Defaults. If Tenant fails to pay Rent (other
than Base Rent and Escalation Rent) required to be paid by it hereunder, or
fails to perform any other obligation under this Lease, and Tenant fails to cure
such default within the applicable cure period, if any, specified in Section
20.2 above, then Landlord may, without waiving any of Landlord's rights in
connection therewith or releasing Tenant from any of its obligations or such
default, make any such payment or perform such other obligation on behalf of
Tenant. All payments so made by Landlord, and all costs and expenses incurred by
Landlord to perform such obligations, shall be due and payable by Tenant as Rent
immediately upon receipt of Landlord's demand therefor. If Landlord fails to
make repairs to the Premises or perform any other obligations under this Lease
which Landlord is required to make pursuant to the terms of this Lease within
fifteen (15) days after written notice from Tenant (provided Landlord shall have
a longer time if reasonably necessary if Landlord commences cure within such
fifteen (15) day period and diligently prosecutes such cure to completion) and
such failure to repair materially and adversely affect Tenant's use of the
Premises, then Tenant shall give Landlord an additional three (3) business days
prior notice. If Landlord has not commenced repair within such three (3)
business day period, Tenant shall have the right to repair the Premises, and
Landlord shall reimburse Tenant for the reasonable cost thereof within thirty
(30) days after presentation of a reasonably detailed invoice demonstrating the
expenses incurred by Tenant. In the event Tenant makes such repairs, Tenant
shall be responsible for damages or injuries caused by Tenant or its employees,
contractors and subcontractors in making such repairs or any defect therein and
shall indemnify Landlord against any liability, cost or expense (including
attorneys' fees) arising out of such repair or any defect in the work performed.
If Landlord does not dispute Tenant's
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right to reimbursement and fails to reimburse Tenant within such thirty (30) day
period, Tenant may deduct the cost of such cure from Rent.
20.7. Remedies Cumulative. The rights and remedies of Landlord
under this Lease are cumulative and in addition to, and not in lieu of, any
other rights and remedies available to Landlord at law or in equity. Landlord's
pursuit of any such right or remedy shall not constitute a waiver or election of
remedies with respect to any other right or remedy.
21. Subordination, Attornment and Nondisturbance.
21.1. Subordination and Attornment. This Lease and all of
Tenant's rights hereunder shall be subordinate to any ground lease or underlying
lease, and the lien of any mortgage, deed of trust, or any other security
instrument now or hereafter affecting or encumbering the Building, or any part
thereof or interest therein, and to any and all advances made on the security
thereof or Landlord's interest therein, and to all renewals, modifications,
consolidations, replacements and extensions thereof (an "encumbrance", the
holder of the beneficial interest thereunder being referred to as an
"encumbrancer"). An encumbrancer may, however, subordinate its encumbrance to
this Lease, and if an encumbrancer so elects by notice to Tenant, this Lease
shall be deemed prior to such encumbrance. If any encumbrance to which this
Lease is subordinate is foreclosed, or a deed in lieu of foreclosure is given to
the encumbrancer thereunder, Tenant shall attorn to the purchaser at the
foreclosure sale or to the grantee under the deed in lieu of foreclosure; and if
any encumbrance consisting of a ground lease or underlying lease to which this
Lease is subordinate is terminated, Tenant shall attorn to the lessor thereof.
Tenant shall execute, acknowledge and deliver in the form reasonably requested
by Landlord or any encumbrancer, any documents required to evidence or
effectuate the subordination hereunder, or to make this Lease prior to the lien
of any encumbrance, or to evidence such attornment.
21.2. Nondisturbance. If any encumbrance to which this Lease is
subordinate is foreclosed, or a deed in lieu of foreclosure is given to the
encumbrancer thereunder, or if any encumbrance consisting of a ground lease or
underlying lease to which this Lease is subordinate is terminated, this Lease
shall not terminate, and the rights and possession of Tenant under this Lease
shall not be disturbed if (i) no default by Tenant then exists under this Lease
(after expiration of applicable notice and cure periods); (ii) Tenant attorns to
the purchaser, grantee, or successor lessor as provided in Section 21.1 above
or, if requested, enters into a new lease for the balance of the Term upon the
same terms and provisions contained in this Lease; and (iii) Tenant enters into
a written agreement in a form reasonably acceptable to such encumbrancer with
respect to subordination, attornment and non-disturbance. Concurrent with the
execution of this Lease, Landlord shall use reasonable efforts to obtain a
non-disturbance agreement from the existing encumbrancer in a form reasonably
acceptable to Tenant. . If Tenant and the existing encumbrancer are not able to
agree upon a mutually acceptable non-disturbance agreement within fifteen (15)
days after the Lease Date, Tenant shall have the right to terminate the Lease
within three (3) business days after such fifteenth day.
22. Sale or Transfer by Landlord; Lease Non-Recourse.
22.1. Release of Landlord on Transfer. Landlord may at any time
transfer, in whole or in part, its right, title and interest under this Lease
and in the Building, or any portion thereof. If the original Landlord hereunder,
or any successor to such original Landlord, transfers (by sale, assignment or
otherwise) its right, title or interest in the Building and the transferee
assumes in writing all of landlord's obligations hereunder, all liabilities and
obligations of the original Landlord or such successor under this Lease accruing
after such transfer shall terminate, the original Landlord or such successor
shall automatically be released therefrom, and thereupon all such liabilities
and obligations shall be binding upon the new owner. Tenant shall attorn to each
such new owner.
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22.2. Lease Nonrecourse to Landlord. Landlord shall in no event
be personally liable under this Lease, and Tenant shall look solely to
Landlord's interest in the Building (including insurance and condemnation
proceeds, the Security Deposit and all proceeds thereof) of for recovery of any
damages for breach of this Lease by Landlord or on any judgment in connection
therewith. None of the persons or entities comprising or representing Landlord
(whether partners, shareholders, officers, directors, trustees, employees,
beneficiaries, agents or otherwise) shall ever be personally liable under this
Lease or liable for any such damages or judgment and Tenant shall have no right
to effect any levy of execution against any assets of such persons or entities
on account of any such liability or judgment. Any lien obtained by Tenant to
enforce any such judgment, and any levy of execution thereon, shall be subject
and subordinate to all encumbrances as specified in Article 21 above.
23. Estoppel Certificate.
23.1. Procedure and Content. From time to time, and within ten
(10) days after written notice by Landlord, Tenant shall execute, acknowledge,
and deliver to Landlord a certificate as specified by Landlord certifying: (i)
that this Lease is unmodified and in full force and effect (or, if there have
been modifications, that this Lease is in full force and effect, as modified,
and identifying each modification); (ii) the Commencement Date and Expiration
Date; (iii) that Tenant has accepted the Premises (or the reasons Tenant has not
accepted the Premises), and if Landlord has agreed to make any alterations or
improvements to the Premises, that Landlord has properly completed such
alterations or improvements (or the reasons why Landlord has not done so); (iv)
the amount of the Base Rent and current Escalation Rent, if any, and the date to
which such Rent has been paid; (v) that Tenant has not committed any event of
default, except as to any events of default specified in the certificate, and
whether there are any existing defenses against the enforcement of Tenant's
obligations under this Lease; (vi) that no default of Landlord is claimed by
Tenant, except as to any defaults specified in the certificate; and (vii) such
other matters as may be requested by Landlord.
23.2. Effect of Certificate. Any such certificate may be relied
upon by any prospective purchaser of any part or interest in the Building or
encumbrancer (as defined in Section 21.1) and, at Landlord's request, Tenant
shall deliver such certificate to Landlord and/or to any such entity and shall
agree to such notice and cure provisions and such other matters as such entity
may reasonably require. In addition, at Landlord's request, Tenant shall provide
to Landlord for delivery to any such entity such information, including
financial information, that may reasonably be requested by any such entity. Any
such certificate shall constitute a waiver by Tenant of any claims Tenant may
have in contravention to the information contained in such certificate and
Tenant shall be estopped from asserting any such claim. If Tenant fails or
refuses to give a certificate hereunder within the time period herein specified,
then the information contained in such certificate as submitted by Landlord
shall be deemed correct for all purposes, but Landlord shall have the right to
treat such failure or refusal as a default by Tenant.
23.2. Landlord's Estoppel If Tenant is required by an
unaffiliated third party to produce an estoppel certificate, Landlord shall,
within thirty (30) days after Tenant's request, execute and deliver to Tenant an
estoppel certificate in favor of Tenant and such other persons as Tenant shall
reasonably request, setting forth the following: (a) the Commencement Date and
the Expiration Date; (b) that this Lease is in full force and effect and has not
been assigned, modified, supplemented or amended (except by such writing as
shall be stated); (c) that all conditions under this Lease to be performed by
Tenant have, to Landlord's knowledge, been satisfied, or, in the alternative,
those claimed by Landlord to be unsatisfied; (d) that, to Landlord's knowledge,
no defenses or offsets exist against the enforcement of this Lease by Landlord,
or in the alternative, those claimed by Landlord; (e) that the amount of advance
Rent, if any (or none if such is the case), has been paid by Tenant; (f) the
date to which rent has been paid; and
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(g) such other information as Tenant may reasonably request.
24. No Light, Air, or View Easement. Nothing contained in this Lease
shall be deemed, either expressly or by implication, to create any easement for
light and air or access to any view. Any diminution or shutting off of light,
air or view to or from the Premises by any structure which now exists or which
may hereafter be erected, whether by Landlord or any other person, shall in no
way affect this Lease or Tenant's obligations hereunder, entitle Tenant to any
reduction of Rent, or impose any liability on Landlord.
25. Holding Over. No holding over by Tenant shall operate to extend the
Term. If Tenant remains in possession of the Premises after expiration or
termination of this Lease, unless otherwise agreed by Landlord in writing, then
(i) Tenant shall become a tenant at sufferance upon all the applicable terms and
conditions of this Lease, except that Base Rent shall be increased to equal 150%
of the Base Rent then in effect; (ii) Tenant shall indemnify, defend, protect
and hold harmless Landlord, and any tenant to whom Landlord has leased all or
part of the Premises, from any and all liability, loss, damages, costs or
expense (including loss of Rent to Landlord or additional rent payable by such
tenant and reasonable attorneys' fees) suffered or incurred by either Landlord
or such tenant resulting from Tenant's failure timely to vacate the Premises;
and (iii) such holding over by Tenant shall constitute a default by Tenant.
26. Security Deposit. If so specified in the Basic Lease Information,
Tenant shall deposit with Landlord the Security Deposit upon the execution of
this Lease by Tenant. The Security Deposit shall be held by Landlord as security
for the performance by Tenant of all its obligations under this Lease. If Tenant
fails to pay any Rent due hereunder, or otherwise commits a default (after
applicable notice and cure periods) with respect to any provision of this Lease,
Landlord may use, apply or retain all or any portion of the Security Deposit for
the payment of any such Rent or for the payment of any other amounts expended or
incurred by Landlord by reason of Tenant's default, or to compensate Landlord
for any loss or damage which Landlord may incur thereby (subject to the
provisions of California Civil Code Section 1950.7(c) and any similar or
successor statute providing that Landlord may claim from a security deposit only
those sums reasonably necessary to remedy defaults in the payment of Rent, to
repair damage caused by Tenant, or to clean the Premises). Exercise by Landlord
of its rights hereunder shall not constitute a waiver of, or relieve Tenant from
any liability for, any default. If Landlord so uses or applies all or any
portion of the Security Deposit, Tenant shall, within ten (10) days after demand
by Landlord, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its full amount. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without interest, to
Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's
interest under this Lease) within thirty (30) days after the later of (i) the
date of expiration or earlier termination of this Lease, or (ii) vacation of the
Premises by Tenant if the Premises has been left in the condition specified by
this Lease. Landlord's receipt and retention of the Security Deposit shall not
create any trust or fiduciary relationship between Landlord and Tenant and
Landlord need not keep the Security Deposit separate from its general accounts.
Subject to Section 22.1, upon termination of the original Landlord's (or any
successor owner's) interest in the Premises, the original Landlord (or such
successor) shall be released from further liability with respect to the Security
Deposit upon the original Landlord's (or such successor's) compliance with
California Civil Code Section 1950.7(d), or successor statute.
27. Waiver. Failure of Landlord to declare a default by Tenant upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but Landlord shall have the right to declare such
default at any time after its occurrence. To be effective, a waiver of any
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provision of this Lease, or any default, shall be in writing and signed by the
waiving party. Any waiver hereunder shall not be deemed a waiver of subsequent
performance of any such provision or subsequent defaults. The subsequent
acceptance of Rent hereunder, or endorsement of any check by Landlord, shall not
be deemed to constitute an accord and satisfaction or a waiver of any preceding
default by Tenant, except as to the particular Rent so accepted, regardless of
Landlord's knowledge of the preceding default at the time of acceptance of the
Rent. No course of conduct between Landlord and Tenant, and no acceptance of the
keys to or possession of the Premises by Landlord before the Expiration Date
shall constitute a waiver of any provision of this Lease or of any default, or
operate as a surrender of this Lease.
28. Notices and Consents; Tenant's Agent for Service. All notices,
approvals, consents, demands and other communications from one party to the
other given pursuant to this Lease shall be in writing and shall be made by
personal delivery, by use of a reputable overnight courier service or by deposit
in the United States mail, certified, registered or Express, postage prepaid and
return receipt requested. Notices shall be addressed if to Landlord, to
Landlord's Address, and if to Tenant, to Tenant's Address. Landlord and Tenant
may each change their respective Addresses from time to time by giving written
notice to the other of such change in accordance with the terms of this Article
28, at least ten (10) days before such change is to be effected. Any notice
given in accordance with this Article 28 shall be deemed to have been given (i)
on the date of personal delivery or (ii) on the earlier of the date of delivery
or attempted delivery (as shown by the return receipt or other delivery record)
if sent by courier service or mailed.
29. Authority. Tenant represents and warrants that (i) Tenant is a duly
formed, authorized and existing corporation, (ii) Tenant is qualified to do
business in California, (iii) Tenant has the full right and authority to enter
into this Lease and to perform all of Tenant's obligations hereunder, and (iv)
each person signing on behalf of Tenant is authorized to do so. Tenant shall
deliver to Landlord, upon Landlord's request, such certificates, resolutions, or
other written assurances authorizing Tenant's execution and delivery of this
Lease, and such financial information regarding Tenant and its constituent
members, as requested by Landlord from time to time or at any time in order for
Landlord to assess Tenant's then authority and/or ability to meet its
obligations under this Lease. Landlord represents and warrants that (i) Landlord
is a duly formed, authorized and existing limited liability company (ii)
Landlord is qualified to do business in California, (iii) Landlord has the full
right and authority to enter into this Lease and to perform all of Landlord's
obligations hereunder, and (iv) each person signing on behalf of Landlord is
authorized to do so. Landlord shall deliver to Tenant, upon Landlord's request,
such certificates, resolutions, or other written assurances authorizing
Landlord's execution and delivery of this Lease.
30. Automobile Parking. In consideration for the Base Rent paid
hereunder, Tenant shall have the right to occupy all of the parking stalls in
the Building during the Initial Term and any Extended Term at no additional
cost.
31. Tenant to Furnish Financial Statements. In order to induce Landlord
to enter into this Lease, Tenant agrees that it shall promptly deliver to
Landlord, from time to time, upon Landlord's written request, publicly available
financial statements (including a balance sheet and statement of income and
expenses on an annualized basis) reflecting Tenant's then current financial
condition. Such statements shall be delivered to Landlord within fifteen (15)
days after Tenant's receipt of Landlord's request. Tenant represents and
warrants that all financial statements, records, and information furnished by
Tenant to Landlord in connection with this Lease are and shall be true, correct
and complete in all respects.
32. Tenant's Signs. Tenant shall have the right to exclusive building
signage (including the exclusive right to utilize any billboard signage), but
Tenant shall not place on the Premises or on the
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Building any exterior signs nor any interior signs that are visible from the
exterior of the Premises or Building without Landlord's prior consent, which
Landlord may withhold in its reasonable discretion. Landlord hereby consents to
the signage for the Building substantially similar to that on Tenant's existing
building located at 320 First Street in San Francisco. Tenant shall pay all
costs and expenses relating to any such sign approved by Landlord, including
without limitation, the cost of the installation and maintenance of the sign. On
the date of expiration or earlier termination of this Lease, Tenant, at its sole
cost and expense, shall remove all signs and repair any damage caused by such
removal. If Tenant elects to no longer utilize the billboard signage, Base Rent
payable to Landlord shall be reduced by $6,000 per month for the Initial Term
and any Extended Terms. Tenant shall have the right to terminate the rental of
the billboard signage upon one hundred eighty (180) days' written notice to
Landlord. If Tenant elects to terminate the rental of the billboard signage,
Landlord may rent the billboard signage to a third party, subject to the
reasonable approval of the Tenant. In no case shall Landlord lease any signage
on the Building to a competitor of Tenant.
33. Miscellaneous.
33.1. No Joint Venture. This Lease does not create any
partnership or joint venture or similar relationship between Landlord and
Tenant.
33.2. Successors and Assigns. Subject to the provisions of
Article 17 regarding assignment, all of the provisions, terms, covenants and
conditions contained in this Lease shall bind, and inure to the benefit of, the
parties and their respective successors and assigns.
33.3. Construction and Interpretation. The words "Landlord" and
"Tenant" include the plural as well as the singular. If there is more than one
person comprising Tenant, the obligations under this Lease imposed on Tenant are
joint and several. References to a party or parties refers to Landlord or
Tenant, or both, as the context may require. The captions preceding the
Articles, Sections and subsections of this Lease are inserted solely for
convenience of reference and shall have no effect upon, and shall be disregarded
in connection with, the construction and interpretation of this Lease. Use in
this Lease of the words "including", "such as", or words of similar import when
following a general matter, shall not be construed to limit such matter to the
enumerated items or matters whether or not language of nonlimitation (such as
"without limitation") is used with reference thereto. All provisions of this
Lease have been negotiated at arm's length between the parties and after advice
by counsel and other representatives chosen by each party and the parties are
fully informed with respect thereto. Therefore, this Lease shall not be
construed for or against either party by reason of the authorship or alleged
authorship of any provision hereof, or by reason of the status of the parties as
Landlord or Tenant, and the provisions of this Lease and the Exhibits hereto
shall be construed as a whole according to their common meaning in order to
effectuate the intent of the parties under the terms of this Lease.
33.4. Severability. If any provision of this Lease, or the
application thereof to any person or circumstance, is determined to be illegal,
invalid or unenforceable, the remainder of this Lease, or its application to
persons or circumstances other than those as to which it is illegal, invalid or
unenforceable, shall not be affected thereby and shall remain in full force and
effect, unless enforcement of this Lease as so invalidated would be unreasonable
or grossly inequitable under the circumstances, or would frustrate the purposes
of this Lease.
33.5. Entire Agreement; Amendments. This Lease, together with the
Exhibits hereto and any Addenda identified on the Basic Lease Information,
contains all the representations and the entire agreement between the parties
with respect to the subject matter hereof and any prior negotiations,
correspondence, memoranda, agreements, representations or warranties are
replaced in total by this
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Lease, the Exhibits hereto and such Addenda. Neither Landlord nor Landlord's
agents have made any warranties or representations with respect to the Premises
or any other portion of the Building, except as expressly set forth in this
Lease. This Lease may be modified or amended only by an agreement in writing
signed by both parties.
33.6. Governing Law. This Lease shall be governed by and
construed pursuant to the laws of the State of California.
33.7. Litigation Expenses. If either party brings any action or
proceeding against the other (including any cross-complaint, counterclaim or
third party claim) to enforce or interpret this Lease or otherwise arising out
of this Lease, the prevailing party in such action or proceeding shall be
entitled to its costs and expenses of suit, including reasonable attorneys' fees
and accountants' fees.
33.8. Standards of Performance and Approvals. Unless otherwise
provided in this Lease, (i) each party shall act in a reasonable manner in
exercising or undertaking its rights, duties and obligations under this Lease
and (ii) whenever approval, consent or satisfaction (collectively, an
"approval") is required of a party pursuant to this Lease or an Exhibit hereto,
such approval shall not be unreasonably withheld or delayed. Unless provision is
made for a specific time period, approval (or disapproval) shall be given within
thirty (30) days after receipt of the request for approval. Nothing contained in
this Lease shall, however, limit the right of a party to act or exercise its
business judgment in a subjective manner with respect to any matter as to which
it has been (A) specifically granted such right, (B) granted the right to act in
its sole discretion or sole judgment, or (C) granted the right to make a
subjective judgment hereunder, whether "objectively" reasonable under the
circumstances and any such exercise shall not be deemed inconsistent with any
covenant of good faith and fair dealing implied by law to be part of this Lease.
The parties have set forth in this Lease their entire understanding with respect
to the terms, covenants, conditions and standards pursuant to which their
obligations are to be judged and their performance measured, including the
provisions of Article 17 with respect to assignments and sublettings.
33.9. Brokers. Landlord shall pay to Landlord's Broker and
Tenant's Broker, if any as specified in the Basic Lease Information of this
Lease, a commission in connection with such Brokers' negotiation of this Lease
pursuant to a separate agreement or agreements between Landlord and such
Brokers. Other than such Brokers, Landlord and Tenant each represent and warrant
to the other that no broker, agent, or finder has procured or was involved in
the negotiation of this Lease and no such broker, agent or finder is or may be
entitled to a commission or compensation in connection with this Lease. Landlord
and Tenant shall each indemnify, defend, protect and hold the other harmless
from and against any and all liability, loss, damages, claims, costs and
expenses (including reasonable attorneys' fees) resulting from claims that may
be asserted against the indemnified party in breach of the foregoing warranty
and representation.
33.10. Memorandum of Lease. Either party shall, upon request of
the other, execute, acknowledge and deliver a short form memorandum of this
Lease (and any amendment hereto) in form suitable for recording. Tenant shall
have the right to record the memorandum and, if Tenant elects to do so, Tenant
shall pay all recording fees and transfer taxes in connection therewith. Upon
termination or expiration of the Lease, Tenant shall promptly execute and record
a quit claim deed or other instrument required to remove such memorandum from
the records of the San Francisco County Recorder's office.
In no event shall this Lease be recorded by Tenant.
33.11. Quiet Enjoyment. Upon paying the Rent and performing all
its obligations under
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this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term
as against all persons or entities claiming by or through Landlord, subject,
however, to the provisions of this Lease and any encumbrances as specified in
Article 21.
33.12. Surrender of Premises. Upon the Expiration Date or earlier
termination of this Lease, Tenant shall quietly and peacefully surrender the
Premises to Landlord in the condition specified in Article 9 above. On or before
the Expiration Date or earlier termination of this Lease, Tenant shall remove
all of its personal property from the Premises and repair at its cost and
expense all damage to the Premises or Building caused by such removal. All
personal property of Tenant not removed hereunder shall be deemed, at Landlord's
option, to be abandoned by Tenant and Landlord may store such property in
Tenant's name at Tenant's expense and/or dispose of the same in any manner
permitted by law.
33.13. Building Directory. INTENTIONALLY DELETED.
33.14. Name of Building; Address. Tenant shall not use the name
of the Building for any purpose other than as the address of the business
conducted by Tenant in the Premises. Tenant shall, in connection with all
correspondence, mail or deliveries made to or from the Premises, use the
official Building address specified from time to time by Landlord.
33.15 Year 2000 Compliance. The Premises, Building and Land shall
meet all Year 2000 compliance requirements and the cost of such compliance shall
be at Landlord's sole expense.
33.16. Exhibits. The Exhibits specified in the Basic Lease
Information are by this reference made a part hereof.
33.17. Time of the Essence. Time is of the essence of this Lease
and of the performance of each of the provisions contained in this Lease.
33.18. Reasonable Expenditures Any expenditure by a party
permitted or required under the Lease, for which such party demands
reimbursement from the other party, shall be limited to the fair market value of
the goods and services involved, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by the
other party.
IN WITNESS WHEREOF, the parties have executed this Lease as of
the Lease Date.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-------------------------------
Its:
-------------------------
TENANT: CRITICAL PATH, INC.,
a California corporation
By:
-------------------------------
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Its:
-------------------------
By:
-------------------------------
Its:
-------------------------
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EXHIBIT A
FLOOR PLANS OF PREMISES
<PAGE> 36
EXHIBIT B
LEGAL DESCRIPTION OF LAND
<PAGE> 37
EXHIBIT C
TENANT IMPROVEMENT AGREEMENT
THIS TEN ANT IMPROVEMENT AGREEMENT ("Agreement") is made and entered
into by and between Landlord and Tenant as of the date of the Lease. This
Agreement shall be deemed a part of the Lease to which it is attached.
Capitalized terms which are used in this Agreement and defined in the Lease
shall have the meaning given in the Lease.
1. General.
1.1. The Parties' Respective Obligations. At Landlord's sole cost
and expense, in a good and workman like manner and in compliance with all
workplans and as-built plans approved by the City, Landlord shall construct the
Premises in "shell" condition which shall include only the work (the "Landlord's
Work") described on Schedule I attached to this Agreement and in those certain
plans prepared by Architecture Design Studio dated 10/5/99 (Delta 3 Set) Sheets
A0.1 through A10.2 and S-1 through S-21. At Tenant's sole cost and expense,
subject to the Construction Allowance described below, Landlord shall cause the
contractor (as defined below) to construct all initial leasehold improvements in
compliance with Final Plans (as defined below). The work which is to be
performed pursuant to Final Plans and this Agreement is referred to as the
"Tenant Improvements".
1.2. Tenant Improvement Costs. The cost of performing the Tenant
Improvements, including without limitation the costs described in Section 6
below (collectively, the "Tenant Improvement Costs") shall be paid by Tenant in
the manner set forth in Section 5.
1.3. Construction Allowance. In the manner provided in this
Section 5, Landlord shall provide an allowance for the Tenant Improvement Costs
in an amount equal to equal to Thirty and 00/100 Dollars ($30.00) multiplied by
the Rentable Area of the Premises (the "Construction Allowance"). If the cost of
Tenant Improvements is less than the Construction Allowance, Tenant shall be
entitled to a credit for any unused portion of the Construction Allowance in the
form of rent abatement of the rent first becoming due under the Lease.
2. Approval of Plans for Tenant Improvements.
2.1. Notification of Architect. Tenant hereby notifies Landlord
that it has engaged Richard Pollack & Associates having an address of 214 Grant
Street, San Francisco, California, who is licensed architect, as Tenant's
architect of record for the Tenant Improvements ("Architect"). Tenant's
Architect shall prepare plans for the Tenant Improvements and shall be retained
by Tenant for administrative services throughout the performance of Tenant
Improvements.
2.2. Submittal of Plans.
2.2.1. Preliminary Plans. On or before March 15, 2000,
Tenant shall deliver to Landlord, for Landlord's review and approval,
"Preliminary Plans" which shall include the following: (i) floor plans; (ii)
preliminary architectural finish schedule; and (iii) sufficient detail showing
the location of electrical, mechanical and plumbing to permit pricing. Within
five (5) business days after Landlord's receipt of Preliminary Plans, Landlord
shall either approve or disapprove Preliminary Plans, which approval shall not
be unreasonably withheld. Failure by Landlord to respond within such five (5)
day period shall be conclusively deemed approval. If Landlord disapproves
Preliminary Plans, then Landlord shall state in reasonable detail the changes
which Landlord requires to be made thereto. Landlord hereby approves the
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description of the Tenant Improvements attached as Schedule III hereto and shall
not withhold consent to the Preliminary Plans or the Final Plans to the extent
the same are consistent with such description and provided that the Tenant
Improvements as described therein will not materially adversely affect the
structure of the Building, the Building systems or the exterior of the Building
nor violate any Laws or Environmental Laws.
2.2.2. Preliminary Budget. Landlord shall retain a
third-party general contractor for the construction of the Tenant Improvements.
Tenant shall have the right to approve the fee for the general contractor and
the general conditions of the construction contract between Landlord and
Contractor for the construction of the Tenant Improvements, which approval shall
not be unreasonably withheld or delayed. Ten (10) days after approval by
Landlord and Tenant of Preliminary Plans, Contractor shall prepare a preliminary
budget for the Tenant Improvements based upon the approved Preliminary Plans,
which Contractor shall submit to Tenant for its review and approval. Within five
(5) days after Tenant's receipt of the preliminary budget, Tenant shall either
approve or disapprove the preliminary budget. If Tenant reasonably rejects such
preliminary budget, Tenant shall, within five (5) days of Tenant's delivery of a
written rejection notice to Landlord, require Architect to revise the
Preliminary Plans to reduce the cost of the Tenant Improvements. Following
Tenant's instructions to the Architect, Landlord and Tenant shall again follow
the procedures set forth in Section 2.2.1 and this Section 2.2.2 with respect to
the approval of the Preliminary Plans and to the submission and approval of the
preliminary budget from Contractor.
2.2.3. Final Plans. Within fifteen (15) business days
after Landlord and Tenant's approval of the preliminary budget for the Tenant
Improvements, Tenant shall cause the Architect to deliver to Landlord, for
Landlord's review and approval, complete plans, specifications and working
drawings which incorporate and are consistent with Preliminary Plans and the
preliminary budget, as previously approved by Landlord, and which show in detail
the intended design, construction and finishing of all portions of Tenant
Improvements, in sufficient detail for construction ("Final Plans"). Within ten
(10) business days after Landlord's receipt of Final Plans, Landlord shall
either approve or disapprove Final Plans, which approval shall not be
unreasonably withheld. If Landlord disapproves Final Plans, then Landlord shall
state in reasonable detail the changes which Landlord requires to be made
thereto. If Landlord disapproves the Final Plans, then Landlord shall state in
reasonable detail the changes which Landlord requires to be made thereto. Tenant
shall submit to Landlord revised Final Plans within five (5) business days after
Tenant's receipt of Landlord's disapproval notice. Following Landlord's receipt
of the revised Final Plans from Tenant, Landlord shall have the right to review
and approve the revised Final Plans pursuant to this Section 2.2.3. Landlord
shall give Tenant written notice of its approval or disapproval of the revised
Final Plans within five (5) business days after the date of Landlord's receipt
thereof. If Landlord reasonably disapproves the revised Final Plans, then the
following shall occur: (i) Landlord and Tenant shall continue to follow the
procedures set forth in this Section 2.2.3 until Landlord and Tenant reasonably
approve such Final Plans in accordance with this Section 2.2.3, and (ii) the
period between the date which is ten (10) business after Landlord's reasonable
disapproval (or such earlier date if Landlord approves or disapproves the first
revised Final Plans in a period less than the 5-business days provided Landlord
above) and the eventual mutual approval of such Final Plans shall constitute a
Tenant Delay.
2.3. Landlord's Approval. Landlord's approval of any of Tenant's
plans, signs or materials samples shall not be valid unless such approval is in
writing and signed by Landlord, or otherwise deemed approved in accordance with
the provisions of Sections 2.2.1 and/or 2.2.3 of this Agreement. Landlord's
approval of any of Tenant's plans, including any preliminary draft or version
thereof, shall not be deemed to be a representation as to their completeness,
adequacy for Tenant's intended use of the Premises or compliance with applicable
law. Tenant shall pay to Landlord all reasonable costs incurred by Landlord's
2
<PAGE> 39
architect in the review of Preliminary Plans and Final Plans.
3. Construction Budget. Upon approval by Landlord and Tenant of the
Final Plans, Tenant shall propose preferred subcontractors to Landlord in
certain trades which Landlord shall reasonably approve and in all other trades
Landlord shall propose acceptable subcontractors to Tenant which Tenant shall
reasonably approve and from such lists Landlord shall instruct Contractor to
obtain competitive bids for the Tenant Improvements from at least three (3)
subcontractors for each of the major subtrades and to submit the same to
Landlord and Tenant for their review and approval. Landlord shall select the
lowest bid unless Tenant agrees otherwise. Upon selection of the subcontractors
and approval of the bids, Contractor shall prepare a cost estimate for the
Tenant Improvements described in such Final Plans, based upon the bids submitted
by the subcontractors selected. Contractor shall submit such cost estimate to
Landlord and Tenant for their review and approval. Within five (5) days after
their receipt of the cost estimate, Landlord and Tenant shall each either
approve or disapprove the cost estimate, which approval shall not be
unreasonably withheld. Tenant's failure to approve or disapprove the cost
estimate within such 5-day period shall constitute grounds for the assertion of
a Tenant Delay. Landlord or Tenant may each approve or reject such cost estimate
in their reasonable sole discretion. If either Landlord or Tenant rejects such
cost estimate, Landlord shall resolicit bids based on such Final Plans, in
accordance with the procedures specified above. Following any resolicitation of
bids by Landlord pursuant to this Section 3, Landlord and Tenant shall again
follow the procedures set forth in this Section 3 with respect to the submission
and reasonable approval of the cost estimate from Contractor; provided, however
that the period between Tenant's disapproval of the first revised cost estimate
and the eventual mutual approval of a cost estimate shall constitute a Tenant
Delay. Tenant shall have the right to revise the Final Plans to reduce the
Tenant Improvement Costs but the time required to do so and delays in the
construction schedule as a result thereof shall constitute a Tenant Delay.
4. Landlord to Construct. The construction contract shall specify and
Landlord shall use best efforts to cause Contractor to construct the Tenant
Improvements in a good and workmanlike manner, in accordance with the approved
Final Plans and in compliance with all applicable Laws. Architect shall be
responsible for promptly obtaining all necessary building permits and approvals
and other authorizations from governmental agencies required in connection with
the Tenant Improvements. The cost of all such permits and approvals, including
inspection and other building fees required to obtain the permits for the Tenant
Improvements, shall be included as part of the Tenant Improvement Costs. Tenant
shall have the benefit of any warranties provided by Contractor, the
subcontractors and suppliers in connection with the Tenant Improvements.
Landlord shall diligently prosecute construction of Landlord's Work and the
Tenant Improvements to completion. Landlord, Tenant, Contractor and Architect
shall hold weekly meetings to discuss the status of the construction. Landlord
shall provide Tenant with current construction schedules, including the
estimated date of completion.
5. Payment for Tenant Improvements. The Tenant Improvement Costs shall
be paid solely by Tenant as follows:
5.1 Method of Payment. Landlord shall bear the Tenant Improvement
Costs up to the amount of the Construction Allowance; and Tenant shall be
responsible for paying any excess in the Tenant Improvement Costs over the
amount of such Construction Allowance. For the purposes of this Agreement, the
term "Tenant's Share of Tenant Improvement Costs" shall mean the entire amount
of all Tenant Improvement Costs, less the Construction Allowance provided by
Landlord.
5.1.1. Payment. Within twenty (20) days after Landlord's
receipt of reasonably satisfactory invoices for costs of labor and materials
incurred in connection with the Tenant Improvements, together with such
supporting documentation and lien waivers as Landlord may reasonably require in
order to review the costs covered by the billing, Landlord shall pay the Tenant
Improvement Costs represented by such invoices first coming due for payment, up
to an aggregate
3
<PAGE> 40
amount equal to the Construction Allowance. As and when any amount of Tenant's
Share of Tenant Improvement Costs become due and payable, Tenant shall pay such
Tenant Improvement Costs to Landlord within fourteen (14) days after the date of
Tenant's receipt of Landlord's written request therefor, together with such
supporting documentation and lien waivers as Tenant may reasonably require in
order to review the costs covered by the billing. Any failure by Tenant to pay
any amount of Tenant's Share of Tenant Improvement Costs as and when required
under this Agreement shall constitute a default by Tenant under the Lease after
notice and applicable cure period provided under the Lease. Notwithstanding the
foregoing, Tenant may elect to have Landlord finance Tenant's Share of Tenant
Improvement Costs in an amount up to Five and 00/100 ($5.00) per square foot of
Rentable Area by amortizing the Tenant's Share of Tenant Improvement Costs over
the Initial Term at an interest rate of ten percent (10%) per annum. Tenant
shall make such election within five (5) days of the approval of the
construction budget pursuant to Sections 2 and 3 and within ten (10) days
following such election, Landlord and Tenant shall enter into an amendment to
the Lease providing for the increase in Base Rent.
5.1.2. Penalties. To the extent that any contractor or
subcontractor working on the Tenant Improvements imposes upon Landlord any
penalty or late charge due to Tenant's failure to pay to Landlord any amount due
under this Section 5.1 as and when such amount is due, Tenant shall be solely
responsible for paying such penalty or late charge; provided, however, that if
Tenant disputes the imposition of such penalty or late charge, Tenant shall not
be required to pay the penalty or late charge until the dispute has been settled
or otherwise resolved; provided further, that if any penalty or late charge is
imposed due to Tenant's exercise of its rights under this Section 5.1.3, Tenant
shall pay such penalty or late charge as provided in this Section 5.1.3.
5.2 Extra Work. Tenant shall be solely responsible for any and
all costs and expenses arising from any improvements to or installations in the
Building desired by Tenant and approved by Landlord that are outside the scope
of the Final Plans.
6. Tenant Improvement Costs. The Tenant Improvement Costs shall include
all reasonable costs incurred in connection with the Tenant Improvements, as
determined by Landlord in its reasonable discretion, including the following:
6.1 All costs of space plans and other architectural and
engineering plans and specifications for the Tenant Improvements, including
engineering costs associated with completion of the State of California energy
utilization calculations under Title 24 legislation required in connection with
the Tenant Improvements; provided however that only Two and 50/100 Dollars
($2.50) per square foot of Rentable Area for such costs may be allocated to the
construction allowance and any costs in excess thereof shall be allocated to
Tenant's Share of Tenant's Improvement Costs.
6.2 All costs of obtaining building permits and other necessary
authorizations from the City of San Francisco;
6.3 All costs of interior design and finish schedule plans and
specifications, including as-built drawings by Architect;
6.4 All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee payable to the Contractor for overhead and profit, and
the cost of all on-site supervisory and administrative staff, office, equipment
and temporary services rendered by Contractor in connection with construction of
the Tenant
4
<PAGE> 41
Improvements;
6.5 All fees payable to Architect and Landlord's engineering firm
if they are required by Tenant to redesign any portion of the Tenant
Improvements following Tenant's approval of the Final Plans;
6.6 All costs of installing an emergency power supply systems in
the Building for Tenant's computer rooms, including emergency HVAC;
Tenant Improvement Costs shall not include (and Tenant shall have no
responsibility for and the Construction Allowance shall not be used for) the
following: (a) cost incurred to remove Hazardous Materials from the Premises or
the surrounding areas existing prior to the Commencement Date; (b) attorneys'
fees incurred in connection with the negotiation of construction contracts and
attorneys' fees, experts' fees and other costs in connection with disputes with
third parties; (c) interest and other costs of financing construction costs; (d)
cost incurred as a consequence of delay (unless the delay is caused by Tenant),
construction defects or default by a contractor; (e) costs recoverable by
Landlord upon account of warranties and insurance; (f) restoration costs in
excess of insurance proceeds as a consequence of casualties; (g) penalties and
late charges attributable to Landlord's failure to pay construction costs; (h)
management or other general overhead costs incurred by Landlord except as
provided in the construction contract with the general contractor or pursuant to
Section 6.4; (i) costs to bring the Premises prior to delivery thereof into
compliance with all Laws in effect as of the Possession Date; (j) wages for
overtime except required by Tenant's Delay or Tenant's change orders: and (k)
constructions costs in excess of ten percent (10%) over the final construction
cost estimate.
7. Change Requests. No revisions to the approved Final Plans shall be
made by either Landlord or Tenant unless approved in writing by both parties.
Landlord agrees to make all changes (i) required by any public agency to conform
with governmental regulations, or (ii) requested in writing by Tenant and
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Any costs related to such changes shall be added to the Tenant
Improvement Costs and shall be paid for in accordance with Section 5. The
billing for such additional costs shall be accompanied by evidence of the
amounts billed as is customarily used in the business. Costs related to changes
shall include, without limitation, any architectural, structural engineering, or
design fees, and the Contractor's price for effecting the change. Any change
order which may extend the date of substantial completion of the Tenant
Improvements may be disapproved by Landlord unless Tenant agrees that for all
purposes under this Lease, the Tenant Improvements shall be deemed to have been
substantially completed on that date on which such Tenant Improvements would
have been substantially completed without giving effect to the change order in
question. All change orders shall specify any change in the cost estimate as a
consequence of the change order.
8. Acceptance of Building. When Landlord's Work and Tenant Improvements
are complete Landlord shall deliver possession of the Premises to Tenant. As
used herein, "complete" shall mean the first business day following a weekend
after the date that all of the following have occurred: (i) Landlord shall
certify in writing that Contractor has substantially completed the Landlord's
Work and the Tenant Improvements, notwithstanding that minor details of
construction, mechanical adjustment or decorations which do not materially
interfere with Tenant's use of the Premises remain to be performed (such items
being normally referred to as "punch list" items); (ii) Landlord or Contractor
has obtained "signed-off" building permits and/or a temporary certificates of
occupancy permitting Tenant's occupancy of the Premises; (iii) all sanitary,
electrical, heating, ventilating and air conditioning systems of the Building
are operational; and (iv) access to the Building and parking areas are available
to the Tenant and Tenant's
5
<PAGE> 42
invitees 24 hours per day and 365 days per year. Within thirty (30) days after
completion of the Tenant Improvements, Tenant shall conduct a walk-through
inspection of the Building with Landlord and complete a punch-list of items
needing additional work. Other than the items specified in the punch list, if
any, by taking possession of the Building, Tenant shall be deemed to have
accepted the Building in good, clean and completed condition and repair, subject
to all applicable laws, codes and ordinances, except for latent defects in
Landlord's Work discovered within six (6) months after the Possession Date. Any
damage to the Building caused by Tenant's move-in shall be repaired or corrected
by Tenant, at its sole cost and expense, which repair or corrective work shall
not be paid for out of any Construction Allowance. Tenant acknowledges that
neither Landlord nor Landlord's agents shall be deemed to have made any
representations or warranties as to the suitability or fitness of the Building
for the conduct of Tenant's business or for any other purpose, nor shall
Landlord or Landlord's agents be deemed to have agreed to undertake any
alterations or construct any improvements to the Building except as expressly
provided in the Lease, this Agreement. If Tenant fails to submit a punch-list to
Landlord within such 30-day period, it shall be deemed that there are no items
needing additional work or repair. Contractor shall complete all reasonable
punch-list items within thirty (30) days after the walk-through inspection or as
soon as practicable thereafter. Upon completion of such punch-list items, Tenant
shall approve such completed items in writing to Landlord. If Tenant fails to
approve such items within fourteen (14) days of completion, such items shall be
deemed approved by Tenant. Nothing contained in this Section 9 shall limit,
restrict, or terminate any right of Landlord or Tenant to make any claim against
Contractor based upon the condition of the Building or any and all of
Contractor's warranties (express and implied) with respect to the Building.
Landlord shall use reasonable efforts to obtain a final certificate of occupancy
for the Premises within ninety (90) days after the issuance of the temporary
certificate of occupancy.
[SIGNATURES FOLLOW ON NEXT PAGE]
6
<PAGE> 43
IN WITNESS WHEREOF, Landlord and Tenant have each caused their
duly authorized representatives to execute this Agreement on their respective
behalf as of the day and year first above written.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-------------------------------
Its:
-------------------------
TENANT: CRITICAL PATH, INC.,
a California corporation
By:
-------------------------------
Its:
-------------------------
7
<PAGE> 44
SCHEDULE 1 TO TENANT IMPROVEMENT AGREEMENT
LANDLORD'S WORK
CORE AND SHELL DESCRIPTION
(DESCRIPTION OF THE BUILDING, SYSTEMS AND FINISHES)
REVISED DECEMBER 13, 1999
STEEL
STRUCTURE
The purpose of this Exhibit is to define general and specific parameters
of architectural and engineering design practice to be employed by
Landlord to the benefit of Tenant.
BUILDING
1. Landlord shall cause the building to be designed,
engineered and constructed.
2. Details of architecture shall be in substantial
conformance with details of design as demonstrated by
Landlord's building plans dated 10/5/99 (Delta 3 Set)
Sheets A0.1 through A10.2 and S-1 through S-21.
3. All areas of the Premises (as defined within the Lease)
and all common areas shall be fully permitted by
Landlord and shall be in compliance with the most recent
version of all local, state and federal building codes
and regulations including the Americans with
Disabilities Act, necessary for occupancy.
4. At time of delivery, Landlord shall provide all areas
within the Premises in broom clean condition and all
systems serving the Premises or within the Premises
shall be in good working order.
5. Landlord shall be responsible for the improvement within
the building's main lobby including finished floor,
painted smooth drywall finish, ceiling and lighting
treatments, all subject to the reasonable approval of
Tenant.
6. All perimeter gypsum board details/treatment taped and
mudded, including all areas above and below perimeter
glazing, at soffits, columns, etc.
8
<PAGE> 45
STRUCTURE
1. The design of the building shall integrate all current
codes, regulations and utilize the highest level of
engineering practice.
2. The floors of the Premises shall be finished in
accordance with the mutually approved plans and
specifications for the building.
3. Landlord shall provide finished gypcrete floors. The
floors shall be ready to accept Tenant's carpeting
and/or hard surface floor covering without further
treatment.
4. Floor flatness within the Premises shall be within a
tolerance of 5/16 of an inch in ten feet.
5. Tenant's space shall be designed to accommodate a
combined live weight load of no less than 70 lbs per
square foot and dead load of 35lbs per square foot and
shall be designed to minimize vibration caused by people
movement.
ROOF
1. The design of the roof structure shall incorporate
accommodations for all equipment to be located upon the
roof.
2. At a minimum the roof shall have a minimum 10-year
warranty.
BUILDING CORE
1. The building structure shall be constructed with
sufficient provisions for thermal insulation, acoustic
control and vibration isolation to limit noise and
structural vibration transmission generated from
building equipment.
2. Noise levels found in all occupied office space within
the Premises created or dispersed by equipment and
ductwork shall be measured in all eight (8) octave
bands.
3. The maximum acceptable noise levels relating
specifically to noise generated from the HVAC system,
elevators and toilet rooms shall conform to the
following.
a. Adjacent to the building core and extending out
a distance of 10 feet NC 35.
b. Lobbies, toilets, commercial area NC 40
c. Perimeter offices NC 35 d. Adjacent to roof
penetrations and HVAC supply NC 35
TOILET ROOMS
1. Women's and men's toilet rooms, within the Premises,
shall be in compliance with all code requirements and
law and recommendations for size and quantity including
the Americans with Disabilities Act.
2. Each toilet room shall be consistent with details of
design and finish
9
<PAGE> 46
developed by Landlord's architect and mutually approved
by Tenant and Landlord including details and methods of
installation.
3. The minimum level of design and finish shall not be less
than the following. - Water (hot at 110 degrees and
cold) shall be provided for all rest rooms.
- Lavatory counters shall have high quality tops
with bull nose leading edges.
- Recessed lavatories with splashes.
- All vertical walls shall be finished with full
height ceramic tile.
- Floors shall be finished with ceramic tile.
- The ceilings shall be painted, water proof
drywall.
- Metal toilet partitions shall be ceiling mounted
with concealed latch and coat hooks.
- Urinal partitions shall be wall mounted.
- Toilets and urinals shall be wall mounted in all
rest rooms.
5. Notwithstanding the foregoing, Tenant shall have the
right to review and approve the finishes in the toilet
rooms.
TENANT PLUMBING SYSTEM
1. One point of access to domestic cold and hot water,
sanitary waste and vent for Tenant's distribution shall
be provided on each floor to allow for Tenant's coffee
bars and service kitchens.
HVAC SYSTEM
1. Landlord shall provide and operate a first class quality
Heating, Ventilating and Air Conditioning System with
service available on a year round basis in all occupied
areas of each of the buildings.
2. The systems shall include controls that can monitor and
manage each zone and can be centrally located for
climate management.
3. The systems shall have sufficient cooling and heating
capacity to maintain an average inside temperature of
72f +/- 2 FDB during summer and 68 FDB during winter
based on 99% ASHRAE standards for minimum / maximum
exterior temperature and humidity.
4. Internal heat loads for the building shall be calculated
and generated by occupancy levels of one person per 140
useable sq. ft., lighting load of 1.5 watts/sq. ft., and
miscellaneous power loads equivalent to a heat output of
8.5 watts per useable square foot.
5. Outdoor air ventilation shall be consistent with ASHRAE
Standard 62-1989. The building shall employ a variable
volume fan system.
6. Landlord shall make available condenser water for
Tenant's supplemental cooling requirements.
7. The supplemental cooling capability shall be 20 tons per
floor and shall be designed into the building cooling
system.
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<PAGE> 47
8. The exact type of system(s), water cooled VAV or air
cooled roof mounted package units, and related
requirements shall be mutually agreed upon.
9. Landlord has provided a description of acceptable HVAC
systems which is dated _____ and is authored by _____,
PE (Exhibit _____).
10. The HVAC system(s) includes the completed primary
pneumatic trunks within the Premises of each floor,
ventilation make-up air systems, toilet exhaust systems
and direct digital controls for primary systems and an
energy management system, including HVAC and lighting
control.
11. The energy management system shall be capable of
allowing Tenant to request floor by floor after hours
HVAC
12. Landlord's HVAC system shall be designed to accommodate
the general exhaust requirements related to performing
general business services.
ELECTRICAL AND POWER SYSTEM
1. Landlord shall provide the main power service from
multiple sub stations, if available, from utility
provider to the entry point of each building and to
Tenant distribution panels which shall be at 277/480
volts, three-phase, four wire from multiple feeds
located in a vault(s) within each of the buildings.
2. 277/480 volt power is to be delivered by Landlord to
lighting panels and 120/208 volt transformers (K-rated)
and panels for Tenant power distribution.
3. Each tenant floor shall be provided with 277/480 volt
lighting panels and 120/208 volt power panels sufficient
to provide the following connected capacities:
- Distributable power for lighting at a minimum of
1.5 watts per rentable square foot of the
Premises or as permitted by the local energy
code.
- Distributable 120/208 volt power at 8.5 watts of
connected power per rentable square foot of the
Premises and an additional 3 watts per rentable
square foot of capacity for use by Tenant.
4. Landlord shall provide emergency power to operate
lighting and fire and life safety systems as required by
code.
FIRE AND LIFE SAFETY SYSTEMS
1. Base building fire and life safety systems shall meet
all local codes and regulations and all requirements of
California State Title 24, the Americans with
Disabilities Act and shall be capable of being extended
beyond the core or the Premises with adequate capacity
to accommodate Tenant's improvements.
2. Fire alarm pull stations and fire extinguishers only as
required by code shall be at each stairwell entry along
with fire alarm pulls, strobes, exit
11
<PAGE> 48
signs, as required by code at each elevator lobby.
3. The shell and core building improvements shall include a
fire sprinkler system, main loop, and lateral runs.
Tenant to pay for relocated or added heads.
ACCESS SYSTEMS
1. The building shall have a fully operable security
system, with card readers at all points of entry.
2. Landlord shall provide adequate card access devices to
Tenant's employees.
3. All building security equipment shall be separate from
Tenant's security system(s).
COMMUNICATION SYSTEM(S)
1. A main telephone terminal room within the building
garage, shall be provided by Landlord with multiple
feeder ducts and service from the telephone company(s).
2. Conduits shall be provided by Landlord from this
terminal room to the main telephone risers and conduits
that services Tenant's premises.
3. Fire resistant plywood telephone backboards shall be
provided for each building in the telephone room.
4. Fire sealed floor openings shall be provided in the
telephone room on each floor for additional risers,
conduits and cables.
5. Vertical and horizontal shaft and raceway space shall be
provided and identified, for the exclusive use of Tenant
within the core.
6. Landlord shall provide conduit raceway for
building-to-building connections for data and
telecommunications and security transmission and to the
point of utility demarcation to accommodate requirements
for Tenant's private telephone, electrical, data,
security and CTV systems.
ELEVATORS
1. Elevator cab shall be equipped with security code push
button access and will have 2,500 lb. capacity at 125
feet per minute.
2. All elevator cabs shall be in compliance with all codes
and regulations including the Americans with
Disabilities Act.
3. This elevator shall provide access to all floors of
Tenant's Premises, the building, the garage, and other
equipment levels of the Building (excluding the roof).
12
<PAGE> 49
EXHIBIT D
RULES AND REGULATIONS
No rules and regulations exist at this time. Landlord reserves the right
to promulgate rules and regulations at a future date in accordance with the
terms of the Lease.
<PAGE> 50
EXHIBIT E
CONFIRMATION OF LEASE TERM
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC
TENANT: CRITICAL PATH, INC.
LEASE DATE: December _______, 1999
PREMISES: 33 Clementina Street, San Francisco, California
Pursuant to Section 3 of the above referenced Lease, the Commencement Date as
defined in Section 3 shall be _________________________.
LANDLORD: ECKER-FOLSOM PROPERTIES, LLC,
a California limited liability company
By:
-------------------------------
Its:
-------------------------
TENANT: CRITICAL PATH, INC.,
a California corporation
By:
-------------------------------
Its:
-------------------------
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Definitions 1
1.1. Terms Defined 1
2. Lease of Premises 3
3. Term; Condition and Acceptance of Premises 3
4. Rent 6
4.1. Obligation to Pay Base Rent 6
4.2. Manner of Rent Payment 6
4.3. Additional Rent 6
4.4. Late Payment of Rent; Interest 6
5. Calculation and Payments of Escalation Rent 6
5.1. Payment of Estimated Escalation Rent 6
5.2. Escalation Rent Statement and Adjustment 7
5.3. Proration for Partial Year 7
5.4. Tenant's Right to Contest Taxes 7
6. Impositions Payable by Tenant 8
7. Use of Premises 8
7.1. Permitted Use 8
7.2. No Violation of Legal and Insurance Requirements 8
7.3. Compliance with Legal, Insurance and Life Safety Requirements 8
7.4. No Nuisance 9
7.5. Hazardous Substances 9
7.6. Special Provisions Relating to The Americans With Disabilities Act of 1990 10
7.6.1. Allocation of Responsibility to Landlord 10
7.6.2. Allocation of Responsibility to Tenant 11
7.6.3. General 11
8. Building Services 11
8.1. Maintenance of Building 11
8.2. Building Standard Services 12
8.3. Interruption or Unavailability of Services 12
8.4. Tenant's Payment of Utilities 12
9. Maintenance of Premises 12
10. Alterations to Premises 13
10.1. Landlord Consent; Procedure 13
10.2. General Requirements 13
10.3. Removal of Alterations 13
11. Liens 13
12. Damage or Destruction 13
12.1. Obligation to Repair 13
12.2. Termination Rights 14
12.3. Cost of Repairs 14
12.4. Damage at End of Term 14
12.5. Waiver of Statutes 14
13. Eminent Domain 15
13.1. Effect of Taking 15
13.2. Condemnation Proceeds 15
13.3. Restoration of Premises 15
13.5. Tenant Waiver 15
14. Insurance 15
</TABLE>
<PAGE> 52
<TABLE>
<S> <C>
14.1. Liability Insurance 16
14.2. Form of Policies 16
14.3. Workers' Compensation Insurance 16
14.4. Additional Tenant Insurance 16
15. Waiver of Subrogation Rights 17
16. Tenant's Waiver of Liability and Indemnification 17
16.1. Waiver and Release 17
16.2. Indemnification of Landlord 17
16.3. Indemnification of Tenant 17
17. Assignment and Subletting 18
17.1. Compliance Required 18
17.2. Request by Tenant; Landlord Response 18
17.3. Conditions for Landlord Approval 18
17.4. Costs and Expenses 18
17.5. Payment of Excess Rent and Other Consideration 19
17.6. Assumption of Obligations; Further Restrictions on Subletting 19
17.7. No Release 19
17.8. No Encumbrance 19
18. Rules and Regulations 20
19. Entry of Premises by Landlord 20
19.1. Right to Enter 20
19.2. Tenant Waiver of Claims 21
20. Default and Remedies 21
20.1. Events of Default 21
20.2. Notice to Tenant 22
20.3. Remedies Upon Occurrence of Default 22
20.4. Damages Upon Termination 23
20.5. Computation of Certain Rent for Purposes of Default 23
20.6. Right to Cure Defaults 23
20.7. Remedies Cumulative 24
21. Subordination, Attornment and Nondisturbance 24
21.1. Subordination and Attornment 24
21.2. Nondisturbance 24
22. Sale or Transfer by Landlord; Lease Non-Recourse 24
22.1. Release of Landlord on Transfer 24
22.2. Lease Nonrecourse to Landlord 25
23. Estoppel Certificate 25
23.1. Procedure and Content 25
23.2. Effect of Certificate 25
23.2. Landlord's Estoppel 25
24. No Light, Air, or View Easement 26
25. Holding Over 26
26. Security Deposit 26
27. Waiver 26
28. Notices and Consents; Tenant's Agent for Service 27
29. Authority 27
30. Automobile Parking 27
31. Tenant to Furnish Financial Statements 27
32. Tenant's Signs 27
33. Miscellaneous 28
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
33.1. No Joint Venture 28
33.2. Successors and Assigns 28
33.3. Construction and Interpretation 28
33.4. Severability 28
33.5. Entire Agreement; Amendments 28
33.6. Governing Law 29
33.7. Litigation Expenses 29
33.8. Standards of Performance and Approvals 29
33.9. Brokers 29
33.10. Memorandum of Lease 29
33.11. Quiet Enjoyment 29
33.12. Surrender of Premises 30
33.13. Building Directory 30
33.14. Name of Building; Address 30
33.16. Exhibits 30
33.17. Time of the Essence 30
33.18. Reasonable Expenditures 30
</TABLE>
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
Amplitude Software Ltd.
Apollo Acquisition Corp.
Compass Acquisition Corp.
Compass Holding Corp.
CP AG (Switzerland)
CP A/S (Denmark)
CP B.V.
CP Data Center UK
CP Germany
CP Ireland
CP Latin America
CP SA (France)
CP SpA (Italy)
Critical Path GmbH
Critical Path UK Ltd.
Critical Path US
DotOne Acquisition Corp.
FaxNet Acquisition Corp.
FaxNet SA
FaxNet Services Corp.
Initialize Acquisition Corp.
UI Telecom Inc.
Unicom Int'l LLC
Wellfleet Acquisition Corp.
Xeti Acquisition Corp.
3034996 Nova Scotia Company, a Nova Scotia Company
3034997 Nova Scotia Company, a Nova Scotia Company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-95933, 333-95279, and 333-87553) of Critical
Path, Inc. of our report dated March 17, 2000 relating to the consolidated
financial statements, which appears in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 76,257
<SECURITIES> 0
<RECEIVABLES> 11,439
<ALLOWANCES> 623
<INVENTORY> 0
<CURRENT-ASSETS> 127,204
<PP&E> 67,505
<DEPRECIATION> (14,988)
<TOTAL-ASSETS> 673,805
<CURRENT-LIABILITIES> 50,929
<BONDS> 0
0
0
<COMMON> 864,699
<OTHER-SE> 247,201
<TOTAL-LIABILITY-AND-EQUITY> 673,805
<SALES> 16,157
<TOTAL-REVENUES> 16,157
<CGS> 0
<TOTAL-COSTS> 21,557
<OTHER-EXPENSES> 123,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (752)
<INCOME-PRETAX> (116,941)
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,941
<EPS-BASIC> (3.93)
<EPS-DILUTED> (3.93)
</TABLE>
