<PAGE>
As filed with the Securities and Exchange Commission on April 20, 1999
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WATCHGUARD TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 91-1712427
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
316 Occidental Avenue South, Suite 200
Seattle, Washington 98104
(206) 521-8340
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
CHRISTOPHER G. SLATT
President, Chief Executive Officer and Chairman of the Board
WatchGuard Technologies, Inc.
316 Occidental Avenue South, Suite 200
Seattle, Washington 98104
(206) 521-8340
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Stephen M. Graham Robert P. Latta
Michael C. Piraino Patrick J. Schultheis
Ann L. McGuire Christian E. Montegut
Perkins Coie LLP Wilson Sonsini Goodrich & Rosati
1201 Third Avenue, 48th Floor Professional Corporation
Seattle, Washington 98101-3099 650 Page Mill Road
(206) 583-8888 Palo Alto, California 94304-1050
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- --------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to Be Registered Price(1) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par value per share.. $46,000,000 $12,788
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
---------------
The registrant hereby amends this registration statement on such dates as
may be necessary to delay its effective date until the registrant files a
further amendment which specifically states that this registration statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement becomes effective
on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell our common stock until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is offering +
+to sell our common stock, and seeking offers to buy our common stock, only in +
+states where the offer or sale is permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
INITIAL PUBLIC OFFERING
PROSPECTUS
[LOGO OF WATCHGUARD TECHNOLOGIES, INC.]
SHARES OF COMMON STOCK
$ per share
This is the initial public offering of WatchGuard Technologies, Inc. We are
selling shares of our common stock. In addition, we have granted the
underwriters a 30-day option to purchase up to an additional shares
of common stock to cover any over-allotments.
We expect that the initial public offering price will be between $
and $ per share. We have requested quotation on the Nasdaq National
Market under the symbol "WGRD."
Investing in this stock involves significant risks. See "Risk Factors"
beginning on page 7.
-----------
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
$ $ $
Price to Public........................
Underwriting Discounts & Commissions...
WatchGuard's Proceeds..................
</TABLE>
-----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Warburg Dillon Read LLC
SoundView Technology Group
Wit Capital Corporation
as e-Manager(TM)
, 1999
<PAGE>
SELECTION OF
REPRESENTATIVE
CUSTOMERS
[List of representative customers to be provided by amendment]
GATEFOLD ARTWORK DESCRIPTION
Circles containing the WatchGuard logo or the word "ISP" or photographs of
business people, children, or a government building, with the following language
under individual circles: Business; Government; Education; WatchGuard; and ISP.
Single arrows representing WatchGuard LiveSecurity emanating from WatchGuard
circle to each of Business, Government, Education and ISP circles and double
arrows representing WatchGuard LiveSecurity Plus 24 hour monitoring emanating
from and returning to ISP circles to each of Business, Government and Education
circles.
The WatchGuard LiveSecurity/tm/ Internet Broadcast Network
With the rapid growth of business conducted via the Internet, security has
become a pivotal issue for many organizations. WatchGuard's innovative
LiveSecurity service enables organizations to keep their security systems
current with minimal effort through our broadcasts of threat responses, software
updates and information alerts over the Internet. The result is a comprehensive,
easy-to-use and cost-effective Internet security solution.
Internet Service Providers (ISPs) like AT&T EasyLink Asia/Pacific Ltd., GTE
Internetworking, Inc., PSINet Inc. and others use WatchGuard for MSS (Managed
Security Services) to deliver Internet security to organizations around the
world.
See Back Page Schematic
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to give you any different information or representations.
We are offering to sell, and seeking offers to buy, shares of our common stock
only in jurisdictions where offers and sales are permitted. The information in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of our common stock.
Until , 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 3 Management....................... 51
Risk Factors........................ 7 Certain Transactions............. 57
Use of Proceeds..................... 20 Principal Stockholders........... 59
Dividend Policy..................... 20 Description of Capital Stock..... 62
Capitalization...................... 21 Shares Eligible for Future Sale.. 66
Dilution............................ 22 Underwriting..................... 68
Selected Financial Data............. 23 Legal Matters.................... 70
Management's Discussion and Analysis Experts.......................... 70
of Financial Condition and Results Additional Information........... 70
of Operations...................... 24 Index to Financial Statements.... F-1
Business............................ 32
</TABLE>
We own or have rights to various trademarks and trade names used in our
business. These include WatchGuard(R), Firebox(TM) and LiveSecurity(TM). This
prospectus also includes trademarks, service marks and trade names of other
companies, which remain the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the rest of
this prospectus. This summary is not complete and does not contain all the
information you should consider before buying shares in this offering. You
should read the entire prospectus carefully.
Except where stated otherwise, the information we present in this prospectus
assumes (1) the conversion of all outstanding shares of convertible preferred
stock into 13,425,316 shares of common stock at the closing of this offering,
(2) the exercise before the closing of this offering of warrants issued on
March 9, 1999, to purchase 42,856 shares of common stock at an exercise price
of $7.00 per share, (3) no exercise by the underwriters of their over-allotment
option and (4) a 2-for-1 split of our common stock, to be effected before the
closing of this offering. See "Description of Capital Stock" and
"Underwriting."
WatchGuard Technologies, Inc.
WatchGuard is a leading provider of dynamic, comprehensive Internet security
solutions designed to protect small- to medium-sized enterprises (SMEs)--those
businesses, governmental entities and educational institutions with fewer than
1,000 employees--that use the Internet for electronic commerce and
communications. According to The Yankee Group, SMEs represent 98% of U.S.
businesses, account for about 50% of the gross national product and spend
approximately $445 billion annually on information technology products and
services. SMEs are increasingly utilizing the Internet to maintain a
competitive advantage and to compete effectively against enterprises with
greater resources. In the United States, International Data Corporation
estimates that approximately 3.5 million SMEs will be connected to the Internet
by the end of 1999, increasing to approximately 4.7 million by the end of 2000.
Our innovative LiveSecurity solution enables SMEs to keep their security
systems current with minimal effort through our broadcast of threat responses,
software updates and information alerts over the Internet. LiveSecurity is made
possible through an updatable security appliance that executes software sent
from a remote management system that receives our LiveSecurity broadcasts. Our
solution is a fully integrated, easy-to-install package featuring a firewall,
virtual private networking, user authentication and Web surfing control.
We provide SMEs a security management choice through our two product
offerings, the LiveSecurity System and LiveSecurity for MSS (managed security
service). Our LiveSecurity System enables SMEs to manage their own Internet
security with an easy-to-install and configure solution that provides point-
and-click security management and advanced real-time graphical monitoring of
network traffic. The LiveSecurity System allows SMEs to rapidly distribute
security protection from their desktop personal computer to all security
appliances on their corporate network, while retaining centralized control and
administration. SMEs can also outsource their security management to Internet
service providers (ISPs) that have implemented our LiveSecurity for MSS.
Through LiveSecurity for MSS, SMEs can sign up with an ISP to centrally
configure, monitor and update the SME's network security. For the ISP, our
technology greatly improves the economics of managed security services through
a scalable delivery platform that enables the ISP to remotely configure and
manage thousands of sites quickly, easily and economically.
3
<PAGE>
Our objective is to be the leading provider of Internet security systems and
services to SMEs worldwide by
. maintaining our market leadership position in comprehensive and
distributed Internet security for SMEs;
. capitalizing on the desire of many SMEs to outsource their security
management and facilitating the widespread adoption of our LiveSecurity
solution by continuing to establish strategic relationships with
industry-leading ISPs;
. expanding and enhancing our innovative LiveSecurity broadcast service to
provide SMEs with the latest threat responses, software updates and
information alerts;
. expanding WatchGuard brand awareness in the SME market; and
. expanding our worldwide sales and distribution.
We sell our Internet security solutions directly to ISPs and indirectly to
end users through more than 230 distributors and resellers covering 48
countries. We have contracted with the following ISPs to implement LiveSecurity
for MSS: AT&T Easy Link Services Asia/Pacific Ltd., GTE Internetworking, Inc.,
Interpath Communications, Inc., PSINet Inc., Verio, Inc. and You Tools
Corporation/FASTNET.
We initially incorporated in Washington in 1996 and reincorporated in
Delaware in 1997. References to "we," "our," "us," and "WatchGuard" in this
prospectus refer to WatchGuard Technologies, Inc. and its predecessors and not
to the underwriters. Our executive offices are located at 316 Occidental Avenue
South, Suite 200, Seattle, Washington 98104, and our telephone number is (206)
521-8340. Our Web site is located at http://www.watchguard.com. Any information
that is included on or linked to our Web site is not a part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after this
offering.................................... shares
Use of proceeds.............................. For repayment of debt, working capital and
other general corporate purposes
Proposed Nasdaq National Market symbol....... WGRD
</TABLE>
The number of shares of outstanding common stock is based on shares
outstanding on March 1, 1999, and excludes
. 1,594,974 shares available for grant under our stock option plan;
. 5,255,814 shares of common stock issuable upon exercise of options
outstanding under our stock option plan, at a weighted average exercise
price of $0.37 per share, of which options to purchase 1,796,769 shares
are currently exercisable; and
. 245,000 shares of common stock issuable upon exercise of warrants
outstanding as of March 1, 1999, at a weighted average exercise price of
$0.32 per share, all of which are currently exercisable.
5
<PAGE>
Summary Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period From
February 14,
1996 Year ended
(Inception) December 31,
to December 31, -----------------
1996 1997 1998
--------------- ------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Total revenues............................. $ 331 $ 5,098 $ 11,379
Operating loss............................. (462) (4,396) (9,000)
Net loss................................... (468) (4,334) (9,119)
Pro forma basic and diluted net loss per
share..................................... $ (0.68)
Shares used in calculation of pro forma
basic and diluted net loss per share...... 13,374
</TABLE>
See note 6 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net loss per share.
The following table summarizes
. actual balance sheet data and
. pro forma balance sheet data as adjusted to give effect to the conversion
of all outstanding preferred stock into 13,425,316 shares of common
stock, the issuance of 42,856 shares of common stock at an exercise price
of $7.00 per share upon the exercise of warrants issued on March 9, 1999
and the sale by WatchGuard of shares of common stock offered
through this prospectus at an assumed initial public offering price of
per share and after deducting underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1998
------------------
Pro Forma
Actual as Adjusted
------ -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................... $1,712 $
Working capital.............................................. 119
Total assets................................................. 9,032
Long-term debt, less current portion......................... 393 393
Total stockholders' equity................................... 881
</TABLE>
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this prospectus, you should
carefully read and consider the following risk factors before purchasing our
common stock. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to
us or that we currently consider to be immaterial may also impair our business
operations. If any of these risks actually occur, our business, financial
condition or operating results could be adversely affected. In that case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus.
Our limited operating history makes predicting our future performance
difficult.
Our limited operating history makes predicting our future performance
difficult. We began operations in February 1996 and released the first version
of our Internet security appliance later that year. You should consider our
business and prospects in light of the risks and uncertainties encountered by
early-stage technology companies, particularly companies in new and rapidly
evolving markets such as ours. Some of these risks relate to our ability to
. introduce new Internet-based security products and services and enhance
our existing products and services to address new technologies, evolving
standards and emerging security threats;
. successfully market our Internet-based security products and services to
new and existing customers;
. attract, train, motivate and retain qualified personnel; and
. respond to competitive pressures as the market for Internet security
products and services matures.
If we do not succeed in addressing these risks, our business may be adversely
affected.
We have incurred losses since inception and expect losses to continue.
We expect our operating losses and negative cash flows to continue for the
foreseeable future. Although our revenues have increased each year since we
began operations, we may be unable to sustain any revenue growth in the future.
We may never generate profits, and if we do become profitable, we may be unable
to sustain or increase profitability on a quarterly or annual basis. We have
incurred net losses and experienced negative cash flows in each quarter since
we began doing business. As of December 31, 1998, we had an accumulated deficit
of approximately $13.9 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our operating results fluctuate, which could cause our operating results to
fall below expectations of securities analysts and investors.
Our quarterly and yearly operating results have varied widely in the past and
will probably continue to fluctuate. Because of these fluctuations, our
operating results for a particular quarter or year may fall below the
expectations of securities analysts and investors. We believe that
7
<PAGE>
period-to-period comparisons of our operating results are not meaningful.
Numerous factors contribute to the unpredictability of our operating results,
including
. changing demand for our products and services;
. changing product and price competition;
. timing of the announcement, introduction and market acceptance of new or
enhanced products and services by us or our competitors; and
. timing and magnitude of our expenditures.
We base our spending levels for product development, sales and marketing, and
other operating expenses largely on our expected future revenues. Because our
expenses are largely fixed in the short term, we may be unable to adjust our
spending in time to compensate for any unexpected quarterly or annual shortfall
in revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Our operating results may vary by season, which could cause our operating
results to fall below expectations of securities analysts and investors.
Our operating results may vary by season, which also may cause our operating
results to fall below expectations of securities analysts and investors for a
particular quarter. Our domestic and international sales tend to be lower in
the summer months, when businesses often defer purchasing decisions. We believe
that seasonality also results from the efforts of our sales force to meet or
exceed quarterly and year-end quotas. As a result, within quarters, we
generally earn a substantial portion of a quarter's revenues during its last
month and, within that month, during the last two weeks. We expect this
seasonality and concentration of revenues to continue. If expected revenues at
the end of any quarter are delayed, our revenues for that quarter could fall
below the expectations of securities analysts and investors, and the price of
our common stock could decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We rely on sales of one product family and related services.
If SMEs do not accept our LiveSecurity products and services, our business
will not succeed. We expect all revenues for the foreseeable future to be
generated through sales of our LiveSecurity Internet security products and
related services, particularly subscription and license fees. Our end-users
will be required to subscribe to our Internet broadcasts of security software
and related information to keep their security systems up to date. Our ISP
partners will be required to obtain annual licenses from us for each ISP
customer obtaining our LiveSecurity products and services through the ISP. Our
success depends upon market acceptance of our LiveSecurity products and
services and our ability and the ability of our ISP partners to obtain and
retain LiveSecurity customers.
Our LiveSecurity products and services, however, are new and unproven. The
broadcast portion of our LiveSecurity products has been available only since
February 1999, and our LiveSecurity for MSS product has been available only
since September 1998. These new products may not gain significant market
acceptance. They may also require additional development that could be costly
or delay market acceptance of our products and services. Our primary
concentration on Internet security products and services leaves us more
vulnerable to adverse events affecting the use of the Internet or other
developments affecting the need for Internet security than if we offered a more
diverse group of products. See "Business -- Strategy."
8
<PAGE>
Our market is new and uncertain and we cannot assure the success of our
products and services.
Because the market for Internet security products and services is still
emerging, we cannot be certain of the demand for or acceptance of our products
and services. A number of factors could cause demand for our products and
services to flatten or decline, including those risks described in this section
and elsewhere in this prospectus.
We believe that many potential customers, particularly SMEs, are not fully
aware of the need for Internet security products and services. Also, there is a
perception that Internet security is costly and difficult to implement. We will
therefore not succeed unless we can educate our market of the need for Internet
security and convince SMEs of our ability to provide security in a cost-
effective and administratively feasible manner. Historically, only enterprises
having substantial resources have developed or purchased Internet security
solutions. In addition, most businesses implementing security services have
managed their own Internet security rather than seeking the services of third-
party service providers. Our success substantially depends upon widespread
acceptance of the outsourcing of Internet security services to third parties.
Finally, many enterprises do not separately budget for Internet security
products. If they have already invested resources in other methods of Internet
security, they may be reluctant to adopt new products and services that may
limit or compete with their existing investment. We have spent, and will
continue to spend, considerable resources educating potential customers about
the need for Internet security and the benefits of our products and services.
Our efforts may be unsuccessful.
If the market rejects service-based Internet security products and services,
our business will not succeed.
Our future growth will largely depend on the market acceptance of our
enhanced Internet security services designed to capitalize on our ability to
broadcast security software and related information over the Internet. We are
not aware of any other Internet security product that allows enterprises to
keep their security solution current by receiving broadcasts of software
updates and related information over the Internet. However, in order to receive
our broadcasts, enterprises will be required to pay an annual subscription fee,
either to us or, if they obtain LiveSecurity through an ISP, to the ISP. SMEs
may be unwilling to pay a subscription fee to keep their Internet security up
to date or otherwise may reject our security solution.
We rely on third parties for our sales.
Historically, we have sold our products through value-added resellers and
distributors, and we expect our success to continue to be dependent in large
part upon their performance. Selling through these indirect channels involves a
number of risks, including
. the general ability of our resellers and distributors to terminate their
relationships with us on short notice;
. the ability of our resellers and distributors to sell products and
services that are competitive with ours, and to devote more resources to
those competitive products;
. our inability to effectively manage conflicts between our resellers and
distributors over the territory that they cover;
. turnover in our resellers and distributors; and
. our inability to replace lost resellers or distributors on acceptable
terms, in a timely manner or at all.
9
<PAGE>
While no single reseller or distributor currently accounts for more than 10%
of our total revenues, the loss of or reduction in sales to several value-added
resellers or a distributor, particularly to competitive products offered by
other companies, could adversely affect our revenues. If we fail to maintain
our existing relationships with our resellers and distributors or establish new
relationships, or if our resellers and distributors do not perform to our
expectations, our business could be adversely affected.
We provide some of our distributors and resellers with limited product return
rights for stock rotation. We may experience significant returns in the future
and may not have adequate allowances to offset such returns. We also provide
some of our distributors and resellers with limited price protection rights,
whereby we grant retroactive price adjustments for inventories of our products
held by those distributors or resellers if we lower our prices for those
products. The short life cycles of our products and the difficulty of
predicting future sales increase the risk that new product introductions, price
reductions by us or our competitors or other factors affecting the markets in
which we compete could result in significant product returns. In September
1998, when we introduced the latest version of our security appliance, we
experienced an increase in returns. In addition, new product introductions by
competitors or other market factors could require us to reduce prices in a
manner or at a time that has an adverse effect on our business.
Recently, we have contracted with several domestic and international ISPs to
implement our LiveSecurity for MSS solution. In the future, we expect a
substantial percentage of our revenues to be derived from these relationships.
Because our relationships with the ISPs are new, we cannot predict whether the
ISPs will succeed in marketing and selling services based on our products and
services. The ISPs have not had an opportunity to fully develop and implement
service offerings incorporating LiveSecurity and we cannot predict how long
they will take to complete such development and implementation. Until and
unless such development and implementation is achieved, our revenues from ISPs
will be limited. If the ISPs fail to provide adequate installation, deployment
and support of our products and services, end-users could cease subscribing for
managed services that use our solution. The ISPs will offer our products in
combination with other products and services, some of which may be competitive
with our products and services. In addition, ISPs may not renew their contracts
with us and generally may terminate their relationships with us on short
notice. See "Business -- Sales, Marketing and Distribution."
We may be unable to compete successfully in the highly competitive market for
Internet security products and services.
The market for Internet security products is intensely competitive and we
expect competition to intensify in the future. We may be unable to successfully
compete in this market. Our current and potential competitors include hardware,
software and operating system vendors such as Axent Technologies, Inc., Check
Point Software Technologies Ltd., Cisco Systems, Inc., Lucent Technologies,
Inc., Microsoft Corporation, Network Associates, Inc., Novell, Inc., Sun
Microsystems, Inc. and a number of smaller companies. Our competitors may
develop security products or implement services that are comparable or superior
to our current or future products and services. In addition, our competitors
may bundle products competitive with ours with other products that they may
sell to our current or potential customers. These customers may accept these
bundled products rather than separately purchasing our products. Many of our
current competitors have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical, marketing
and other resources than we do. As a result, they may be able to adapt more
quickly to new technologies and customer needs, devote greater resources to the
promotion or
10
<PAGE>
sale of their products and services, begin or withstand substantial price
competition, take advantage of acquisition or other opportunities more readily
or develop and expand their product and service offerings more quickly. For
these reasons, we may be unable to compete successfully against our current and
future competitors. An increase in competitive pressures in our market may
result in pricing reductions, reduced gross margins and loss of market share.
See "Business -- Competition."
Rapid changes in technology and industry standards could render our products
and services unmarketable or obsolete.
As a business in the Internet security market, we face challenges that could
render our products and services unmarketable or obsolete. These challenges
result from many factors, including
. rapid technological developments;
. evolving industry standards in computer hardware and software
technology;
. frequent product and service introductions and enhancements;
. changing customer needs and preferences; and
. governmental regulation.
In addition, advances in technology, whether developed by those trying to
make networks more secure or by persons seeking to gain unauthorized access,
could make our existing products and services ineffective or obsolete. We must
continually change and improve our products in response to changes in operating
systems, Internet access and communications, application and networking
software, computer and communications hardware, programming tools, computer
language technology and hacker techniques. Often, our products and services
must be compatible with new technologies as soon as the new technologies are
available.
We may be unable to introduce new products and services timely and
successfully.
To succeed, we must develop and introduce new and enhanced Internet security
solutions to address the changing needs of the Internet security market. We may
be unable to successfully and timely develop these new products and services or
achieve and maintain market acceptance. In the past, we have on occasion
experienced delays in the scheduled introduction of new and enhanced products
and services, and we may experience such delays in the future.
The development of new, technologically advanced products and services is a
complex and uncertain process requiring great innovation and the ability to
anticipate technological and market trends. Because Internet security
technology is complex, it can require long development and testing periods.
Releasing new products and services prematurely may result in quality problems,
and releasing them late may result in loss of customer confidence and market
share. When we do introduce new or enhanced products and services, we must
manage the transition from the older products and services to minimize
disruption in customer ordering patterns, avoid excessive inventories of older
products and maximize our ability to deliver enough new products and services
to meet customer demand. We may be unable to successfully develop, introduce or
manage the transition to new products and services.
We face potential liability for the content of our products and services.
Because our products and services provide and monitor Internet security and
may protect valuable information, we may face claims for product liability,
tort or breach of warranty relating to
11
<PAGE>
our products and services. Anyone who circumvents our security measures could
misappropriate the confidential information or other property of end-users
utilizing our products and services or interrupt their operations. If that
happens, affected end-users or ISPs may sue us. In addition, we may face
liability for breaches caused by faulty installation of our products by
resellers or end-users. Although we attempt to reduce the risk of losses from
claims through contractual warranty disclaimers and liability limitations,
these provisions may be unenforceable. Some courts, for example, have found
contractual limitations of liability in "shrink wrap" licenses to be
unenforceable because the licensee does not sign them. Defending a suit,
regardless of its merit, could be costly and could divert management attention.
Although we currently maintain business liability insurance, this coverage may
be inadequate or may be unavailable in the future on acceptable terms, if at
all.
A breach of security could harm public perception of our products and services.
We will not succeed unless the marketplace is confident that we provide
effective Internet security protection. Despite our efforts, our software
products may be vulnerable to electronic break-ins and computer viruses. If an
actual or perceived breach of Internet security occurs in an SME end-user's
systems, regardless of whether the breach is attributable to us, the market
perception of the efficacy of our products and services could be harmed. This
could cause us and our ISP partners to lose current and potential customers or
cause us to lose potential resellers, distributors and ISP partners. Because
the techniques used by computer hackers to access or sabotage networks change
constantly and generally are not recognized until launched against a target, in
most cases we are unable to anticipate these techniques.
As the public becomes more aware of our capabilities in monitoring, detecting
and thwarting the activities of computer hackers, we may become a target of
attacks by computer hackers who seek to infiltrate our internal network system
to obtain sensitive data and information or create viruses in an attempt to
sabotage our network or services. We may be unable to respond to such attacks
in a timely or effective manner.
We may experience difficulties in managing our growth.
Our current systems, management and resources will be inadequate if we
continue to grow. Our business has grown rapidly in size and complexity in the
last three years. This rapid expansion has placed significant strain on our
administrative, operational and financial resources and has resulted in ever-
increasing responsibilities for our management personnel. As we intend to
continue to expand our operations for the foreseeable future, we will need to
. recruit additional key managerial, technical, operations and sales
personnel;
. train, motivate and manage additional employees;
. expand our sales force;
. expand our research and development capabilities;
. improve or replace our operational, financial and management controls,
reporting systems and procedures; and
. expand our customer support, finance, administrative and operations
staff.
We may be unable to timely and successfully accomplish these tasks.
12
<PAGE>
We may be unable to adequately expand our operational systems to accommodate
growth.
Our operational systems have not been tested at the customer volumes that may
be required in the future. We may encounter performance difficulties when
operating with a substantially greater number of customers. In our
implementation of our LiveSecurity products, we have experienced periodic
interruptions affecting all or a portion of our systems, and we believe that
such interruptions will continue to occur from time to time. These
interruptions could harm our ability to deliver our products and services. An
inability to add software and hardware or to develop and upgrade existing
technology or operational systems to handle increased traffic may cause
unanticipated system disruptions, slower response times and poor customer
service, including problems filling customer orders.
We may be unable to adequately protect our operational systems from damage,
failure or interruption.
Our operations, customer service, reputation and ability to attract and
retain customers greatly depend on the uninterrupted operation of our
operational systems. Although we have off-site backup facilities and take other
precautions to prevent damage, failure or interruption of our systems, our
precautions may be inadequate. Any damage, failure or interruption of our
computer or communications systems could lead to service interruptions, delays,
loss of data and inability to accept and fill customer orders and provide
customers with LiveSecurity updates.
We depend on third-party relationships for software technology.
We license third-party technology that we incorporate into our products and
services. Our success will depend in part on our continued ability to license
technology that is important for the functionality of our products. Third-party
technology licenses may be unavailable to us in the future on acceptable terms,
if at all. Although we believe that we could find other sources for at least
some of the technologies we license, a significant interruption in the supply
of a third-party technology could delay our development and sales until we can
find, license and integrate equivalent technology. This could damage our brand
and result in loss of current and potential customers. Additionally,
alternative technologies may be unavailable on acceptable terms, if at all. We
depend on our third-party licensers to deliver reliable, high-quality products,
develop new products on a timely and cost-effective basis and respond to
evolving technology and changes in industry standards. The third-party software
currently used in our products may become obsolete or incompatible with future
versions of our products. See "Business -- Proprietary Rights."
We rely on third parties for hardware manufacturing and assembly.
We outsource all of our hardware manufacturing and assembly to one
motherboard manufacturer and one assembly house. While these single-source
vendors have produced hardware with acceptable quality, quantity and cost in
the past, they may be unable to meet our future demands. Although we believe
that we could find another manufacturer and assembly house, our operations
could be disrupted if we have to switch to a replacement vendor or if our
hardware supply is interrupted for an extended period. This could result in
loss of customer orders and revenue.
We rely on third-party Internet service infrastructure and capacity.
Our business relies on third parties that provide Internet service to SMEs
worldwide. The LiveSecurity service depends on the efficient operation of the
Internet connections from our Web sites and broadcast server to our customers.
These connections depend upon efficient operation of
13
<PAGE>
Web browsers, ISPs and Internet backbone service providers, all of which have
had periodic operational problems or outages. A problem or failure in the
infrastructure for providing Internet access and carrying Internet traffic
could adversely affect customer satisfaction. In addition, our third-party
suppliers may be unable to provide additional Internet service capacity when we
need it. See "Business -- Products and Services -- Implementation" and " --
Technology and Architecture."
Without a robust and efficient Internet, our business will not succeed.
Because our products are designed to allow enterprises to use the Internet
safely and monitor Internet activity, our products and services are not
valuable without a robust, efficient Internet. Use of the Internet is a recent
development, and no one can be sure that acceptance and use of the Internet
will continue. Stagnant or decreasing usage of the Internet by businesses and
consumers, or a decrease in the number of businesses adopting the Internet as a
fundamental component of their business infrastructure, could cause demand for
our products and services to flatten or decline.
Continued growth in the number of Internet users and amount of Internet
traffic may overwhelm the existing Internet infrastructure. This could result
in slower response times or declining use of the Internet. Our business may not
succeed if improvements are not made to the entire Internet infrastructure to
alleviate any overloading and congestion.
Increased governmental regulation of the Internet could also affect Internet
usage. The adoption of additional laws or regulations concerning user privacy,
pricing, content and distribution may decrease the growth of the Internet,
which in turn could decrease the demand for our products and services.
Moreover, critical issues exist concerning the commercial use of the Internet,
including security, reliability, cost, ease of access and use, quality of
service and necessary increases in capacity. Commerce and communication on the
Internet may become less attractive if these issues remain unresolved.
We may be unable to obtain any additional funding necessary to meet our working
capital requirements.
Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts or cease operations. We believe that the net proceeds from
this offering, together with our existing cash balances and our existing lines
of credit, should be sufficient to meet our capital requirements for at least
the next eighteen months. Our capital requirements depend on several factors,
however, including the rate of market acceptance of our products and services,
our ability to expand our customer base, the growth of sales and marketing
capabilities and other factors. If our capital requirements vary from our
current plans, we may require additional financing sooner than we anticipate.
Financing may be unavailable to us when needed or may be unavailable on
acceptable terms.
We may be unable to adequately protect our proprietary rights, and we may face
liability for infringement of third parties' proprietary rights.
Despite our efforts to protect our proprietary rights, unauthorized parties
may misappropriate or infringe on our trade secrets, copyrights, trademarks,
service marks and similar proprietary rights. We face additional risk when
conducting business in countries that have poorly developed or inadequately
enforced intellectual property laws. While we are unable to determine the
extent to
14
<PAGE>
which piracy of our software products exists, we expect piracy to be a
continuing concern, particularly in international markets and as a result of
the growing use of the Internet. In any event, competitors may independently
develop similar or superior technologies or duplicate the technologies we have
developed, which could substantially limit the value of our intellectual
property. See "Business -- Proprietary Rights."
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Although we have not
been sued for intellectual property infringement, we may face infringement
claims from third parties in the future. The software industry has seen
frequent litigation over intellectual property rights, and we expect that
participants in the Internet security industry will be increasingly subject to
infringement claims as the number of products, services and competitors grows
and functionality of products and services overlaps. Claims and any resulting
litigation could subject us to significant liability for damages and
invalidation of our proprietary rights. Any litigation, regardless of its
success, would probably be costly and require significant time and attention of
our key management and technical personnel. Litigation could also force us to
. stop or delay selling, incorporating, or using products that incorporate
the challenged intellectual property;
. pay damages;
. enter into licensing or royalty agreements, which may be unavailable on
acceptable terms; or
. redesign products or services that incorporate infringing technology.
Our products may have defects.
Our products and services may contain undetected errors or defects,
especially when first released, that could adversely affect our business.
Despite extensive testing, some errors are discovered only after a product has
been installed and used by customers. Any errors discovered after commercial
release could result in
. adverse publicity;
. loss of revenues and market share;
. delay of market acceptance;
. diversion of development resources;
. increased service, warranty or insurance costs; or
. claims against us.
Governmental regulation of technology imports or exports could decrease our
sales.
Any additional governmental regulation of imports or exports, trade
restrictions, changes in tariffs or failure to obtain required export approval
could adversely affect our international and domestic sales. The United States
and various foreign governments have imposed controls, export license
requirements and restrictions on the import or export of certain technologies,
especially encryption technology. For example, the imposition of governmental
regulations requiring the escrow and governmental recovery of private
encryption keys, as has been proposed from time to time by various U.S. law
enforcement agencies, could have an adverse effect on the acceptance and use of
15
<PAGE>
encryption products and public networks for secure communications. This, in
turn, could result in decreased demand for our products and services. See
"Business -- U.S. Government Export Regulation Compliance."
In addition, certain foreign competitors may be subject to less stringent
controls on exporting their products. As a result, they may be able to compete
more effectively than we can in the United States and international Internet
security market.
We depend on certain key employees that could leave at any time.
Our future success will depend largely on the efforts and abilities of our
senior management and our key development, technical, operations, information
systems, customer support and sales and marketing personnel and our ability to
retain them. These employees are not obligated to continue their employment
with us, and may leave us at any time. See "Management" and "Business --
Employees."
We may be unable to hire and retain the qualified personnel we need.
Our future success will depend on our ability to attract, train, retain and
motivate qualified, experienced employees, both in the United States and
abroad. Competition for these personnel is intense and in the past we have
experienced difficulty in hiring desired personnel. Many of the companies with
which we compete for experienced personnel have greater financial and other
resources than we do. In particular, we compete for product development
engineers with Microsoft Corporation, which is also located in the Seattle area
and hires many software engineers each year. We may be unsuccessful in
recruiting and retaining enough qualified personnel to meet our needs.
Our international sales are subject to certain risks.
Our international sales are subject to the risks inherent in international
business activities, which include
. cost of customizing products for foreign countries;
. export and import restrictions, such as those affecting encryption
technology and products incorporating that technology;
. difficulties in acquiring and authenticating customer information;
. reduced protection of intellectual property rights; and
. regional economic and political conditions.
Any of these factors could adversely affect our current or future
international sales. In addition, increases in the value of the dollar against
local currency could cause our products to become relatively more expensive to
customers in a particular country, leading to reduced sales or profitability in
that country. International sales accounted for approximately 35% of our net
sales in 1998. We expect international sales to continue to account for a
significant part of our revenue, and we intend to continue to expand our
international sales.
The Year 2000 computer problem could disrupt our operations and harm our
business.
Year 2000 compliance efforts may involve significant time and expense, and
uncorrected problems could adversely affect our business. Computer systems,
software and computer chips
16
<PAGE>
embedded in products that use only two digits to store dates in their year code
fields are incapable of distinguishing 21st century dates from 20th century
dates. As a result, many computers, programs and chips are unable to process
date-related information beyond December 31, 1999. Unless they are upgraded to
process date information correctly, they will fail or produce erroneous results
when the century changes on January 1, 2000.
Although we believe that the current versions of the internally developed
software technologies incorporated in our products and services are Year 2000
compliant, we may face claims based on Year 2000 issues arising from third-
party products that we integrate into our products and services or with which
our systems and products exchange data. If our suppliers, vendors or
distributors fail to timely correct their own Year 2000 software, firmware and
hardware problems, or if any of them convert to a system that is incompatible
with our systems, our business operations could be adversely affected. In
addition, our Year 2000 compliance plan may not adequately address any Year
2000 issues relating to our internal management information and other systems.
Any Year 2000 issues that are not identified and corrected in a timely fashion
would adversely affect our business. We may also experience reduced sales of
our products and services as potential customers reduce their budgets for
Internet security because of their own expenditures for Year 2000 compliance.
"See Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
Our charter, Delaware law and Washington law contain provisions that could
discourage a takeover or a change in our management.
Provisions of our certificate of incorporation and bylaws and of Washington
and Delaware law could make it more difficult for a third party to take control
of our company, even on terms a stockholder might consider favorable. These
provisions, together with the ownership position of our executive officers and
directors, could discourage potential takeover attempts and make more difficult
any attempt by our stockholders to change our management. These provisions
could diminish the opportunities for a stockholder to participate in tender
offers, including tender offers at a price above the then-current market value
of our common stock. See "Description of Capital Stock -- Antitakeover Effects
of Certain Provisions of Certificate of Incorporation, Bylaws, Delaware Law and
Washington Law."
You may be unable to resell your shares at or above the initial public offering
price, and the price of our stock is likely to be volatile.
Before this offering, there has been no public market for our common stock.
An active trading market may not develop or be sustained following this
offering. The initial public offering price of our common stock, which will be
determined through negotiations between us and the representatives of our
underwriters, may not be indicative of future market prices. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. You may be unable to resell your shares at or above the
initial public offering price due to a number of factors, including
. actual or anticipated variations in quarterly or annual operating
results;
. changes in analysts' earning projections or analysts' recommendations;
. our inability to successfully implement our business strategy; and
. changes in business conditions affecting our customers, our competitors
and us.
17
<PAGE>
In recent years, moreover, the stock market in general and the market for
Internet-related technology companies in particular have experienced extreme
price and volume fluctuations, often unrelated to the operating performance of
the affected companies. Our common stock may experience such fluctuations in
price, regardless of our performance. Market fluctuations or volatility could
cause the market price of our common stock to decline.
The concentrated ownership of our common stock could delay or prevent a change
of control, which could reduce the market price of our common stock.
After this offering, we will be controlled by certain stockholders, which
could delay or prevent acts that would result in a change of control of
WatchGuard. This, in turn, could reduce the market price of our common stock.
After this offering, our directors, officers, principal stockholders and their
affiliates will beneficially own approximately % of our outstanding common
stock ( % if the underwriters exercise their over-allotment option in full).
These stockholders, acting together, will be able to exert great influence over
our management and affairs, including our strategic and operating activities.
They will effectively control all matters requiring stockholder approval,
including
. election and removal of our directors;
. merger or consolidation; and
. sale of all or substantially all of our assets.
See "Principal Stockholders."
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of our
common stock. After this offering, we will have outstanding shares
of common stock. All the shares sold in this offering will be freely tradable.
The remaining shares of common stock outstanding after this offering will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
90 days after the date of this prospectus..................... 257,776
180 days after the date of this prospectus.................... 14,581,738
At various times thereafter upon the expiration of one-year
holding periods.............................................. 42,856
</TABLE>
See "Shares Eligible for Future Sale."
We may apply the net proceeds from this offering to uses that stockholders may
find undesirable.
Our management will have broad discretion in allocating the net proceeds of
this offering and may apply them to uses that our stockholders may find
undesirable. While we intend to use the net proceeds from this offering for
repayment of debt, working capital and other general corporate purposes, we
cannot specify with certainty how we will use the net proceeds.
Changes in accounting standards could affect our future revenues and earnings.
Unanticipated changes in our revenue accounting practices could adversely
affect our future revenues and earnings. The American Institute of Certified
Public Accountants has recently issued
18
<PAGE>
Statement of Position 98-9, which we adopted January 1, 1998, which amends the
AICPA's statement of position on software revenue recognition. However, the
AICPA has not yet issued full implementation guidelines for this new accounting
standard. Once available, the new implementation guidelines could lead to
unanticipated changes in our current revenue accounting practices. These
changes could cause our operating results for a particular quarter to fall
below the expectations of securities analysts and investors.
You should not unduly rely on forward-looking statements in this prospectus.
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus,
are forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, but are not limited to, statements about
our plans, objectives, expectations, intentions, future financial performance
and other statements that are not historical facts. We use words such as
"anticipate," "believes," "expects," "future" and "intends," and similar
expressions, to identify forward-looking statements, but the absence of such
words does not mean that the statement is not forward-looking. You should not
unduly rely on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in the forward-looking statements for many reasons, including the
risks described under "Risk Factors" and elsewhere in this prospectus.
19
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the sale
of the shares of common stock in this offering, assuming an initial public
offering price of $ per share (approximately $ million if the underwriters
exercise their over-allotment option in full).
We plan to use approximately $3.0 million of the net proceeds from this
offering to repay all debt to entities affiliated with Matrix IV Management
Co., L.P., OVMC III, L.P. and OVMC IV, LLC ($3.0 million outstanding principal
balance, plus accrued interest, as of March 31, 1999). This debt matures on
March 9, 2000 and bears interest at the rate of 6% per annum. See "Certain
Transactions" for a description of this debt.
We intend to use the remainder of the net proceeds primarily for additional
working capital and other general corporate purposes. The amounts that we
actually spend for working capital purposes will vary significantly depending
on a number of factors, including any future revenue growth, the amount of cash
we generate from operations and the progress of our product development
efforts. Although we have no present plans, agreements or proposals to do so,
we may also use a portion of the net proceeds to license or acquire new
products or technologies or to acquire or invest in businesses complementary to
our own. As a result, we will retain broad discretion in allocating the net
proceeds from this offering. Pending their use, we will invest the net proceeds
in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we do not anticipate paying any cash dividends in the foreseeable
future. In any event, our line of credit agreement with Silicon Valley Bank
prohibits the payment of dividends without the bank's prior written consent.
20
<PAGE>
CAPITALIZATION
The following table shows our actual capitalization on December 31, 1998, our
pro forma capitalization assuming the conversion of all outstanding preferred
stock into common stock and our pro forma capitalization as adjusted to reflect
the issuance of 42,856 shares of common stock upon the exercise of warrants
issued March 9, 1999 at an exercise price of $7.00 per share and the sale of
shares of common stock at an assumed initial public offering price of
$ per share, after deducting underwriting discounts and commissions and
estimated expenses we expect to pay. You should read this table in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," our historical financial statements and the notes to the
financial statements included in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands, except share
data)
<S> <C> <C> <C>
Long-term debt, less current portion........... $ 393 $ 393 $ 393
Stockholders' equity:
Convertible preferred stock, $0.001 par value
per share: 10,000,000 shares authorized;
6,712,658 shares issued and outstanding,
actual; no shares issued and outstanding,
pro forma and pro forma as adjusted......... 13,204 -- --
Common stock, $0.001 par value per share:
80,000,000 shares authorized; 1,362,744
shares issued and outstanding, actual;
14,788,060 shares issued and outstanding,
pro forma; shares issued and
outstanding, pro forma as adjusted.......... 3,064 16,268
Deferred stock-based compensation............ (1,466) (1,466) (1,466)
Accumulated deficit.......................... (13,921) (13,921) (13,921)
-------- -------- --------
Total stockholders' equity................. 881 881
-------- -------- --------
Total capitalization..................... $ 1,274 $ 1,274 $
======== ======== ========
</TABLE>
The number of shares of common stock issued and outstanding excludes
. 1,756,974 shares available for grant under our stock option plan;
. 5,145,268 shares of common stock issuable upon exercise of options
outstanding under our stock option plan, at a weighted average exercise
price of $0.16 per share, of which options to purchase 1,618,038 shares
are currently exercisable; and
. 245,000 shares of common stock issuable upon exercise of warrants
outstanding, at a weighted average exercise price of $0.32 per share,
all of which are currently exercisable.
21
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share
and the net tangible book value per share after this offering. We calculate net
tangible book value per share by dividing the net tangible book value (total
assets less intangible assets and total liabilities) by the number of
outstanding shares of common stock.
Our pro forma net tangible book value at December 31, 1998, after giving
effect to the conversion of all outstanding preferred stock into common stock,
was $867,000, or $0.06 per share of common stock. After giving effect to the
issuance of 42,856 shares of common stock upon the exercise of warrants issued
March 9, 1999 at an exercise price of $7.00 per share and the sale of
shares of common stock offered through this prospectus at an assumed initial
public offering price of $ per share (less underwriting discounts and
commissions and estimated expenses we expect to pay), our net tangible book
value at December 31, 1998 would have been $ million, or $ per share. This
represents an immediate increase in the net tangible book value of $ per share
to existing stockholders and an immediate dilution of $ per share to new
investors, or approximately % of the assumed initial offering price of $ per
share. The following table illustrates this per-share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share at December 31, 1998... $0.06
Increase per share attributable to new investors...................
Net tangible book value per share after this offering................
----- ----
Dilution per share to new investors.................................. $
====
</TABLE>
The following table shows, at December 31, 1998, the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price paid per share by existing stockholders and by new investors
purchasing common stock in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 14,788,060 % $13,287,281 % $0.90
New investors.............
---------- ----- ----------- -----
Total................. 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
At December 31, 1998, we had outstanding options and warrants to purchase
shares of common stock as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Stock option plan................................. 5,145,268 $0.16
Warrants.......................................... 245,000 0.32
---------
5,390,268 0.17
=========
</TABLE>
Additionally, there were 1,756,974 option shares available for future grant
under our stock option plan. There will be further dilution to new investors to
the extent that option holders exercise these outstanding options or any
options we grant in the future.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data and other operating information are
derived from our financial statements, which have been audited by Ernst & Young
LLP, independent auditors. When you read this selected financial data, it is
important that you also read the historical financial statements and related
notes included in this prospectus, as well as the section of this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The historical results are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
Period From Year Ended
February 14, 1996 December 31,
(Inception) to ----------------
December 31, 1996 1997 1998
----------------- ------- -------
(In thousands, except per share
data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues, net:
Product................................. $ 329 $ 4,975 $10,678
Service................................. 2 123 701
----- ------- -------
Total revenues........................ 331 5,098 11,379
Cost of revenues.......................... 104 1,610 3,925
----- ------- -------
Gross margin.............................. 227 3,488 7,454
Operating expenses:
Sales and marketing..................... 224 4,369 8,666
Research and development................ 274 2,192 5,273
General and administrative.............. 191 1,323 2,515
----- ------- -------
Total operating expenses.............. 689 7,884 16,454
----- ------- -------
Operating loss............................ (462) (4,396) (9,000)
Interest income (expense), net............ (6) 62 (119)
----- ------- -------
Net loss.................................. $(468) $(4,334) $(9,119)
===== ======= =======
Pro forma basic and diluted net loss per
share.................................... $ (0.68)
=======
Shares used in calculation of pro forma
basic and diluted net loss per share..... 13,374
=======
</TABLE>
See note 6 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 1998
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 232 $ 603 $1,712
Working capital (deficit)................................. (464) 658 119
Total assets.............................................. 597 3,303 9,032
Long-term debt, less current portion...................... -- -- 393
Total stockholders' equity (deficit)...................... (318) 1,382 881
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and related notes
included elsewhere in this prospectus.
Overview
WatchGuard is a leading provider of dynamic, comprehensive Internet security
solutions designed to protect small- to medium-sized enterprises (SMEs) that
use the Internet for electronic commerce and communications. Our innovative
subscription-based LiveSecurity solution broadcasts threat responses, software
updates and information alerts over the Internet, enabling SMEs to keep their
security systems current with minimal effort. Since our inception, we have
invested heavily in the development of our products and services. In September
1996, we introduced our initial Internet security appliance and began selling
our products both domestically and internationally. In 1997, we significantly
expanded our sales force, adding 12 sales employees to recruit indirect channel
partners around the world, and expanded our distribution efforts in the
European and Asia/Pacific markets. In September 1998, we launched our managed
security service offering for ISPs. We also continued to recruit and hire
additional employees in marketing, development, technical support and finance
and invested in our operational infrastructure to support the growth of our
company.
Our revenues in 1996 totaled $331,000 and grew significantly in 1997 to $5.1
million. Our revenues in 1998 totaled $11.4 million, representing a 123%
increase over 1997. Product revenues as a percentage of total revenues were 99%
in 1996, 98% in 1997 and 94% in 1998. Service revenues, although small, are
growing and are expected to be a significant component of our revenues in the
future as we expand our LiveSecurity subscription-based broadcast service. As a
result of our investments in our worldwide sales and distribution channels,
development of new products and services, brand development and our operational
infrastructure, we have incurred net losses in each fiscal quarter. As of
December 31, 1998, we had an accumulated deficit of $13.9 million. We
anticipate significant growth in our operating expenses as we continue to
expand our business. In the future, however, we expect our operating expenses
to begin to decline as a percentage of revenues.
Sources of Revenues and Revenue Recognition Policy
We generate revenues through:
. sales of products and service subscriptions through our indirect
distribution partners at a discount from list price, typically 40%;
. sales of products and service subscriptions directly to our ISP customers
at volume pricing rates; and
. from time to time, sales of service subscription renewals directly to our
enterprise customers at list price.
Product revenues include perpetual software license fees and sales of our
security appliance. Service revenues include fees for access to our
LiveSecurity broadcast service for product updates, security threat responses,
general security information and technical support. Service revenues also
include annual fees for our LiveSecurity for MSS, which allows our ISP
customers access to the LiveSecurity broadcast service and the ability to
manage and update a specific number of their customers' security appliances.
24
<PAGE>
We recognize revenues only when a contract or agreement has been executed,
delivery has occurred, the fee is fixed and determinable and we believe
collection is probable. We recognize product revenues upon shipment and service
subscription revenues ratably on a monthly basis, generally over a one-year
period.
Results of Operations for the Twelve Months Ended December 31, 1996, 1997 and
1998
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Revenues, net:
Product................... 99.4 % 97.6 % 93.8 %
Service................... 0.6 2.4 6.2
------ ----- -----
Total revenues.......... 100.0 100.0 100.0
Cost of revenues............ 31.4 31.6 34.5
------ ----- -----
Gross margin................ 68.6 68.4 65.5
Operating expenses:
Sales and marketing....... 67.7 85.6 76.2
Research and development.. 82.8 43.0 46.3
General and
administrative........... 57.7 26.0 22.1
------ ----- -----
Total operating
expenses............... 208.2 154.6 144.6
------ ----- -----
Operating loss.............. (139.6) (86.2) (79.1)
Interest income (expense),
net........................ (1.8) 1.2 (1.0)
------ ----- -----
Net loss.................... (141.4)% (85.0)% (80.1)%
====== ===== =====
</TABLE>
Revenues
Total revenues, which consist of product revenues and service revenues,
increased from $331,000 in 1996 to $5.1 million in 1997 and to $11.4 million in
1998, an increase of 123% from 1997 to 1998. During this period, no one
customer accounted for 10% or more of total revenues.
Product revenues include the perpetual software license fees and the sale of
our security appliance as part of the LiveSecurity System and the sale of our
NOC Security Suite software and security appliance as part of LiveSecurity for
MSS. Product revenues were $329,000 in 1996, $5.0 million in 1997 and $10.7
million in 1998, an increase of 115% from 1997 to 1998. As a percentage of
total revenues, product revenues have decreased from approximately 99% in 1996
to 98% in 1997 and to 94% in 1998. Historically, we have generated the majority
of our revenues from our product sales, which, until the introduction of
LiveSecurity for MSS in late 1998, consisted primarily of the sale of our
LiveSecurity System for the enterprise. Product revenues from LiveSecurity for
MSS are growing and are expected to be a significant component of our revenues
in the future.
Service revenues include the annual fee for our LiveSecurity broadcast
service sold as a part of the LiveSecurity System and LiveSecurity for MSS.
Service revenues increased from $2,000 in 1996 to $123,000 in 1997 and to
$701,000 in 1998, representing approximately 1%, 2% and 6% of total revenues.
As renewals of our service subscriptions for the LiveSecurity System and
LiveSecurity for MSS increase, we expect service revenues as a percentage of
total revenues to increase significantly.
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<PAGE>
The increase in total revenues from 1996 to 1998 was primarily due to
increases in volume due to increased distribution in European and Asia/Pacific
markets and increased market awareness of our products in North America. Total
international revenues represented 56% of total revenues in 1997 and 35% of
total revenues in 1998.
We do not believe that the historical percentage growth rates of product
revenues will be sustainable as our revenue base increases.
Cost of Revenues
Cost of revenues consists of product and service costs, which include the
costs of manufacturing our security appliance, product packaging, third-party
product licensing fees and our technical support organization. Historically,
cost of revenues has increased in total dollar amount and as a percentage of
total revenues in each year. Cost of revenues were $104,000 in 1996, $1.6
million in 1997 and $3.9 million in 1998. The dollar increases in cost of
revenues from 1996 to 1998 were primarily due to increases in sales volume. As
a percentage of total revenues, cost of revenues increased from approximately
31% in 1996 to 32% in 1997 and to 35% in 1998. The percentage increase in cost
of revenues from 1997 to 1998 was primarily due to an increase in the cost of
manufacturing our security appliance. In the third quarter of 1998, we released
an enhanced version of our security appliance, the Firebox II, which
incorporated additional features that were required to support our LiveSecurity
for MSS product. The Firebox II is more expensive to manufacture than the
previous version of our security appliance, which increased our cost of
revenues. Over time, as volume levels increase, the unit cost to manufacture
the Firebox II should decrease. We expect service costs to increase in total
dollar amount and as a percentage of cost of revenues in the future as our
enterprise customer base expands and our LiveSecurity for MSS product for ISPs
is deployed. Depending on our product and service mix, which may affect our
margins, we expect our cost of revenues as a percentage of total revenues to
remain at or slightly above our fourth quarter 1998 level for the foreseeable
future.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries, travel
expenses, recruiting fees, commissions, public relations costs, marketing
collateral, trade show expenses and costs associated with our Web site. Sales
and marketing expenses were $224,000 in 1996, $4.4 million in 1997 and $8.7
million in 1998. Sales and marketing expenses represented approximately 68%,
86% and 76% of our total revenues for 1996, 1997 and 1998. The dollar increase
in sales and marketing expenses was primarily due to recruiting, training and
supporting our domestic and international resellers and distributors, and to a
lesser extent, to establishing brand recognition of our products and services.
In 1998, the dollar increase also included a $470,000 charge for a common stock
warrant issued to a strategic partner. The decrease in 1998 sales and marketing
expenses as a percentage of revenues reflects increased productivity of and
efficiencies in managing our indirect channel network and our utilization of
our prior years' investment in marketing programs and tools. We expect to
significantly increase overall sales and marketing expenses in total dollar
amounts in the future to expand distribution, capture market share and continue
to establish brand recognition of our products. We expect to see a gradual
reduction in sales and marketing expenses as a percentage of revenues.
Research and Development. Research and development expenses consist of
salaries, computing equipment and software tools, nonrecurring costs associated
with our security appliance prototypes and payment of designers and
contractors. Research and development expenses were
26
<PAGE>
$274,000 in 1996, $2.2 million in 1997 and $5.3 million in 1998. Research and
development expenses represented approximately 83%, 43% and 46% of total
revenues in 1996, 1997 and 1998. The dollar increase in research and
development expenses reflects the growth of our research and development
organization to expand our enterprise product line, development of our recently
released LiveSecurity for MSS and our efforts to respond to new and emerging
security threats through our LiveSecurity broadcast service. We will continue
to increase our research and development expenses in total dollar amount in the
future to expand our current product offerings, develop new products and
enhance our Rapid Response Team and Advisory Council, which analyze new
security vulnerabilities and threats and provide continuing education on
Internet security. We expect total research and development expenses as a
percentage of total revenues to remain relatively constant for the foreseeable
future.
General and Administrative. General and administrative expenses include costs
of executive, human resource, finance and administrative support functions and
legal and accounting professional services. General and administrative expenses
were $191,000 in 1996, $1.3 million in 1997 and $2.5 million in 1998. General
and administrative expenses represented approximately 58%, 26% and 22% of total
revenue in 1996, 1997 and 1998. We expect that in the future these expenses
will continue to increase in total dollar amounts, but will decrease as a
percentage of revenues.
Deferred Compensation. We recorded $1.9 million in total deferred stock-based
compensation in 1998, representing the difference between the exercise price
and the deemed fair market value for financial reporting purposes of certain
stock options. We amortized deferred compensation expense of $411,000 in 1998.
Deferred compensation is amortized over the vesting periods of the related
options.
Interest Income (Expense)
Interest expense in 1996 of $6,000 resulted from borrowing on our bank line
of credit. Interest income in 1997 of $88,000 was generated from our investment
of preferred stock proceeds and was partially offset by $26,000 of interest
expense that resulted from borrowings. Interest expense in 1998 of $203,000
resulted from borrowings on our bank line of credit and equipment term loan,
and was partially offset by $84,000 of interest income generated from our
investment of preferred stock proceeds.
Income Taxes
We have experienced losses since inception resulting in a net operating loss
carryforward position of $9.9 million as of December 31, 1998. These
carryforwards, if not utilized, will begin to expire in 2011.
27
<PAGE>
Quarterly Results of Operations
The following table sets forth both our unaudited quarterly results of
operations for eight quarters ending December 31, 1998, and our results of
operations expressed as a percentage of our total revenues. In our opinion,
this unaudited information has been prepared on the same basis as our audited
financial statements and includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information for
the quarters presented, when read in conjunction with our financial statements
and related notes included elsewhere in this prospectus. The results of
operations for any quarter are not necessarily indicative of our future
results.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues, net:
Product............... $ 615 $ 836 $ 1,704 $ 1,820 $ 1,993 $ 2,867 $ 2,544 $ 3,274
Service............... 4 8 44 67 41 116 205 339
----- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 619 844 1,748 1,887 2,034 2,983 2,749 3,613
Cost of revenues........ 247 284 547 532 619 872 1,038 1,396
----- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 372 560 1,201 1,355 1,415 2,111 1,711 2,217
Operating expenses:
Sales and marketing... 267 824 1,286 1,992 1,637 2,654 2,080 2,295
Research and
development.......... 202 596 674 720 805 1,104 1,465 1,899
General and
administrative....... 149 291 351 532 374 597 645 899
----- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 618 1,711 2,311 3,244 2,816 4,355 4,190 5,093
----- ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (246) (1,151) (1,110) (1,889) (1,401) (2,244) (2,479) (2,876)
Interest income
(expense), net......... (8) 7 53 10 (23) (60) 24 (60)
----- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(254) $(1,144) $(1,057) $(1,879) $(1,424) $(2,304) $(2,455) $(2,936)
===== ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth unaudited quarterly results of operations as a
percentage of revenues for 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues, net:
Product............... 99.4% 99.1% 97.5% 96.4% 98.0% 96.1% 92.5% 90.6%
Service............... 0.6 0.9 2.5 3.6 2.0 3.9 7.5 9.4
----- ------ ----- ------ ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 39.9 33.6 31.3 28.2 30.4 29.2 37.8 38.6
----- ------ ----- ------ ----- ----- ----- -----
Gross margin............ 60.1 66.4 68.7 71.8 69.6 70.8 62.2 61.4
Operating expenses:
Sales and marketing... 43.1 97.6 73.6 105.6 80.4 89.0 75.7 63.5
Research and
development.......... 32.6 70.6 38.6 38.1 39.6 37.0 53.3 52.6
General and
administrative....... 24.1 34.5 20.0 28.2 18.4 20.0 23.4 24.9
----- ------ ----- ------ ----- ----- ----- -----
Total operating
expenses............ 99.8 202.7 132.2 171.9 138.4 146.0 152.4 141.0
----- ------ ----- ------ ----- ----- ----- -----
Operating loss.......... (39.7) (136.3) (63.5) (100.1) (68.9) (75.2) (90.2) (79.6)
Interest income
(expense), net......... (1.3) 0.8 3.0 0.5 (1.1) (2.0) 0.9 (1.7)
----- ------ ----- ------ ----- ----- ----- -----
Net loss................ (41.0)% (135.5)% (60.5)% (99.6)% (70.0)% (77.2)% (89.3)% (81.3)%
===== ====== ===== ====== ===== ===== ===== =====
</TABLE>
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<PAGE>
The trends discussed in the annual comparison of operating results from 1996
to 1998 generally apply to the comparison of results of operations for the
eight quarters in the period ended December 31, 1998. We were 90 days late in
delivering the latest version of our security appliance, the Firebox II, in the
third quarter of 1998, and the cost to manufacture the Firebox II increased
from the previous version of our security appliance. As a result of our 90-day
delay, product revenues in the third quarter of 1998 decreased by approximately
11% over the previous quarter, while our cost of product revenues increased by
19% over the same period. The increase in sales and marketing expenses in the
second quarter of 1998 was primarily due to the fair market value of a common
stock warrant provided to a strategic partner. Our quarterly operating results
have fluctuated significantly in the past and will continue to fluctuate in the
future as a result of a number of factors, many of which are outside our
control.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private placements of convertible preferred stock. These preferred shares will
automatically convert into common stock at the closing of this offering.
Through December 31, 1998, net proceeds from private placements of preferred
stock totaled $13.2 million. We have also financed our operations through
equipment financing and traditional financing arrangements.
We have a working capital revolving line of credit with a financial
institution, secured by our accounts receivable. The amount available under
this facility is limited to the greater of our "Borrowing Base" or $4.5
million. For purposes of this loan, the "Borrowing Base" means the sum of 75%
of the net amount of our eligible domestic accounts receivable and 50% of the
net amount of our eligible foreign accounts receivable. As of December 31,
1998, we had borrowed $2.5 million on this line of credit, which expires in
September 1999. We also have two term-loan facilities with a financial
institution for the purpose of financing new capital equipment purchases. The
first facility closed to further advances on March 5, 1998 and will be paid in
36 equal monthly payments. The first of these payments was due at April 5,
1998. The loan matures March 5, 2001, at which time all unpaid principal and
accrued but unpaid interest will be due and payable. The second facility closed
to further advances on December 31, 1998 and will be paid in 36 equal monthly
payments. The first of these payments was due at January 31, 1999. The loan
matures December 31, 2002, at which time all unpaid principal and accrued but
unpaid interest will be due and payable. As of December 31, 1998, we had a
combined principal balance of $609,000 due under these term loans. The
agreements under which the line of credit and the term loans were established
contain financial covenants, including a provision requiring us to maintain
specified financial ratios. At December 31, 1998, we were not in compliance
with the financial covenants, but we obtained a waiver for non-compliance at
December 31, 1998. In addition, the bank has deleted these covenants through
the earlier of June 30, 1999 or the completion of an initial public offering of
our stock.
Our operating activities resulted in net cash outflows of $131,000 in 1996,
$5.3 million in 1997 and $7.6 million in 1998. The operating cash outflow in
1997 and 1998 resulted from significant investments in sales and marketing and
research and development, all of which led to operating losses. The cash
outflows resulting from operating losses, increases in accounts receivable and
inventories were partially offset by increases in current liabilities,
including accounts payable and deferred revenue. Inventory increases were
primarily due to larger initial manufacturing volumes of the Firebox II in the
third and fourth quarters of 1998.
29
<PAGE>
Investing activities used cash of $87,000 in 1996, $461,000 in 1997 and $1.0
million in 1998, primarily for capital expenditures, including computing
equipment.
Financing activities provided cash of $450,000 in 1996, $6.1 million in 1997
and $9.7 million in 1998, primarily from the issuance of preferred stock and
borrowings on our line of credit.
As of December 31, 1998, we had $1.7 million in cash and cash equivalents
invested primarily in money market accounts. We have financed our operations to
date through the issuance of equity securities and debt financing. Further
development and establishment of our business will require additional equity or
debt financing, which we believe can be obtained from existing or new sources.
We believe that existing cash balances, cash equivalents and lines of credit,
together with the net proceeds of this offering, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures at least
for the next 18 months. The underlying assumed levels of revenues and expenses,
however, may not prove to be accurate, and we may need to seek additional
funding through public or private financings or other arrangements before such
time. Adequate funds may be unavailable when needed or unavailable on
acceptable terms. If funding is insufficient at any time in the future, we may
be unable to develop or enhance our products or services, take advantage of
business opportunities or respond to competitive pressures. If we raise
additional funds by issuing equity securities, dilution to existing
stockholders will result.
We believe that the market risk arising from holdings of our financial
instruments is not material.
Year 2000 Compliance
Like many companies, we face certain risks relating to Year 2000 computer
issues. These issues result from computer systems, software and computer chips
embedded in products that use only two digits to store dates in their year code
fields and are therefore incapable of distinguishing 21st century dates from
20th century dates. As a result, many computers, programs and chips are unable
to process date-related information beyond December 31, 1999. Unless they are
upgraded to process date information correctly, they will fail or produce
erroneous results when the century changes on January 1, 2000. If our internal
management and external information systems are not Year 2000 compliant when
the century changes, some or all of our business operations could be disrupted.
Our products and LiveSecurity service utilize a mixture of hardware and
software technologies. The hardware technology utilized in our Firebox family
of security appliance products consists of a combination of industry-standard
components, configured to our specifications, driven by internally developed
software technologies. We have tested current versions of these internally
developed software technologies in conjunction with our security appliances and
believe them to be Year 2000 compliant. These current versions include the
latest version of our software that drives the Firebox 10 & 100 (release 3.0b)
and the version currently shipping, which drives the Firebox II (release 3.3).
While we are not aware of any Year 2000 issues with previous versions, we are
recommending to our customers that they upgrade to the current versions. In
addition to internally developed software, our LiveSecurity service
incorporates current technologies acquired from third-party vendors. We expect
to complete our Year 2000 assessment of our internally developed software
incorporated in our LiveSecurity service by June 30, 1999. In addition, we are
in the process of surveying the third-party vendors to determine whether their
products are Year 2000 compliant and, if not, what updates or arrangements are
required to correct any Year 2000 problems. We have identified several of these
vendors whose products are not Year 2000 compliant and are currently
determining the updates or arrangements they require to correct these problems.
We expect to complete this phase of our Year 2000 plan by September 30, 1999.
30
<PAGE>
We are currently reviewing our internal management information and other
administrative systems in order to identify and modify any products, services
or systems that are not Year 2000 compliant. Our internal information
management and other administrative systems are generally based on technologies
and products acquired from industry-leading third-party vendors. We are
currently identifying all of these vendors whose products, services or systems
may be impacted by Year 2000 compliance issues. Upon identification, we will
contact these vendors and determine whether their products, services or systems
are Year 2000 compliant and, if not, whether they have plans in place to make
them Year 2000 compliant. We expect to complete this phase of our Year 2000
plan by April 30, 1999.
Our plan may not adequately and timely address the Year 2000 issue and we may
be unable to upgrade any or all of our products, services and internal
information management and other administrative systems in accordance with our
plan. In addition, any upgrades may not effectively address the Year 2000
issue. If required upgrades are incomplete, untimely or unsuccessful, our
business may be adversely affected. Furthermore, if our suppliers, vendors,
distributors or producers of products that we utilize or with which our
products exchange data fail to timely correct their own Year 2000 software,
firmware and hardware problems, or if any of them convert to a system that is
incompatible with our systems, our business could be adversely affected. We may
also experience reduced sales of our products and services as potential
customers reduce their budgets for Internet security because of their own
expenditures for Year 2000 compliance. We currently expect that the total cost
of our efforts to assess Year 2000 compliance will not be material. The most
reasonably likely, worst-case scenario, however, would involve the incomplete,
untimely or unsuccessful identification or correction of Year 2000 compliance
issues of multiple third-party vendors whose technology is incorporated into
our LiveSecurity service. If this were to occur, interruptions in our ability
to deliver our LiveSecurity service would result and our business would be
adversely affected.
Our LiveSecurity service gives us a distribution channel for the rapid
implementation of software patches in the event that a Year 2000 problem is
found with our internally developed software. In addition, we intend to
establish a contingency plan detailing actions that will be taken in the event
that we do not successfully complete the execution of our Year 2000 plan on a
timely basis. Still, some problems may remain undetected or uncorrected, and
our continuing efforts to address the Year 2000 issue could involve unforeseen
time and expense. Any Year 2000 issues that are not identified and corrected in
a timely fashion would adversely affect our business. We expect that the cost
to remediate any Year 2000 issues that may be identified, however, will involve
internal man-hours and will not be material.
31
<PAGE>
BUSINESS
Overview
WatchGuard is a leading provider of dynamic, comprehensive Internet security
solutions designed to protect small- to medium-sized enterprises (SMEs) that
use the Internet for electronic commerce and communications. Our innovative
subscription-based LiveSecurity solution broadcasts threat responses, software
updates and information alerts over the Internet, enabling SMEs to keep their
security systems current with minimum effort. The dynamic nature of our
solution is made possible through an updatable security appliance that executes
software sent from the remote management system receiving our LiveSecurity
broadcasts. Our comprehensive, fully integrated LiveSecurity solution features
a firewall, encryption, user authentication, virtual private networking and Web
surfing control. We make installing, configuring and monitoring our solution
easy with point-and-click security management and advanced real-time graphical
monitoring of network traffic.
Our LiveSecurity solution gives SMEs, which are those businesses,
governmental entities and educational institutions with fewer than 1,000
employees, a security management choice. SMEs can manage their own Internet
security through our LiveSecurity System or outsource their security management
to an ISP implementing our LiveSecurity for MSS. Enterprises using the
LiveSecurity System may rapidly distribute security protection from their
desktop personal computer to all security appliances on their corporate
network, while retaining centralized control and administration. Enterprises
that do not want to be directly involved with their security management may
outsource the function to an ISP providing this value-added service. For the
ISP, our technology greatly improves the economics of managed security services
through a scalable delivery platform that enables the ISP to remotely configure
and manage thousands of sites quickly, easily and economically.
We sell our Internet security solutions directly to ISPs and indirectly to
end users through more than 230 distributors and resellers covering 48
countries. We have contracted with the following ISPs to implement LiveSecurity
for MSS: AT&T EasyLink Services Asia/Pacific Ltd., GTE Internetworking, Inc.,
Interpath Communications, Inc., PSINet Inc., Verio, Inc. and You Tools
Corporation/FASTNET. We have shipped over 7,000 WatchGuard security solutions.
Industry Background
The growth of the Internet
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation estimates that there were over 38 million Web
users in the United States and over 68 million worldwide at the end of 1997.
IDC projects the number of Web users to increase to over 135 million users in
the United States and 319 million worldwide by the end of 2002. IDC also
estimates that the number of customers buying goods and services on the
Internet will grow from approximately 18 million worldwide in 1997 to
128 million in 2002, with the value of electronic commerce transactions growing
from $12 billion to over $400 billion in the same period.
The growth in the Internet provides enterprises, regardless of size, with new
revenue opportunities through global distribution of products and services and
with significant reductions of sales and marketing costs through automation and
instantaneous access. Because of its affordability,
32
<PAGE>
global reach and versatility, the Internet is a particularly powerful and
necessary tool for SMEs. SMEs are increasingly required to establish secure
Internet access to facilitate and support strategic business objectives. In a
marketplace that is becoming more and more competitive, SMEs are increasingly
utilizing new business tools and initiatives such as remote access, e-commerce
and online customer service and supply chain management to gain competitive
advantage. IDC projects that over 3.5 million SMEs will be connected to the
Internet in the United States by the end of 1999 and 4.7 million SMEs will be
connected by the end of 2000.
The need for Internet security
The increased importance of electronic commerce and the proliferation and
growth of corporate intranets have dramatically increased the openness of
computer networks, with the Internet becoming a widely accepted platform for
many business-to-business and direct-to-consumer transactions. The
accessibility and the relative anonymity of users in open computing
environments, however, make systems and the integrity of information stored on
them increasingly vulnerable to security threats. Open systems present inviting
opportunities for computer hackers, curious or disgruntled employees,
contractors and competitors to compromise or destroy sensitive information
within the system or to disrupt operations and Internet access. In addition,
open computing environments are complex and typically involve a variety of
hardware, operating systems and applications supplied by a variety of vendors,
making these networks difficult to manage, monitor and protect from
unauthorized access.
The annual Computer Security Institute survey conducted in early 1999
highlights the potential risks faced by organizations connected to the
Internet. The CSI poll of 521 computer security specialists at U.S.
corporations, government agencies, financial institutions and universities
revealed that 62% of respondents had experienced security breaches within the
past 12 months. The damage caused by a security breach is often difficult to
quantify and may include the loss of irreplaceable proprietary information or
data, damage to business reputation or undetected theft or alteration of
information. The 163 organizations in the CSI poll that were able to quantify
losses reported an average total loss of over $75,000 per organization, up from
an average of approximately $56,000 per organization reported last year.
Breached computer security has become such an extensive problem that the U.S.
Federal Bureau of Investigation has recently established the National
Infrastructure Protection Center to prevent and respond to cyber attacks on the
nation's infrastructure.
The Internet security challenge
Internet security begins with a firewall, a security component of varying
complexity designed to provide a barrier and control the flow of information
between a company's internal network and the Internet. Firewalls, however, are
often difficult to install, must be configured by skilled personnel and, to
maximize effectiveness, must be continually monitored and updated. A
comprehensive security solution also typically integrates several other
sophisticated security components, such as virtual private networking (which
secures encrypted communications between two points on the Internet) and access
control mechanisms. These components use a complex mixture of technologies,
including user authentication, passwords, packet filters, proxies and
encryption.
With SMEs increasingly dependent on the Internet for external and internal
communications and for facilitating and conducting business, they need
comprehensive Internet security solutions. Traditional Internet security
solutions, however, are generally difficult to install and expensive to
maintain. Additionally, the technological complexity of traditional solutions
introduces a new set of
33
<PAGE>
risks -- their many interacting components can easily be misconfigured. A study
conducted by the FBI and the CSI revealed that because of configuration errors,
30% of all reported successful break-ins took place despite the presence of a
firewall. SMEs therefore face increasing pressure to hire trained security
personnel to ensure that traditional security solutions are installed and
maintained properly. The scarcity of skilled network and Internet security
personnel, however, makes the cost of hiring in-house personnel prohibitive for
many enterprises, particularly SMEs. Because of the financial and technical
resources necessary to implement, maintain and update these complex security
solutions, they tend to be better suited for larger enterprises than for SMEs.
Traditional security solutions are also expensive to maintain because they
must be updated continually to maximize effectiveness. These security solutions
tend to be static, while the dangers against which they must protect are
dynamic, with new types of intrusion schemes and other security threats and
vulnerabilities emerging on a monthly or weekly basis. In 1998, the Computer
Emergency Response Team, a federally funded research and development center,
published 41 responses to security threats or vulnerabilities, an average of
one every 9 days. Even if updates are available to allow an enterprise's
security systems to respond to the changing security landscape, the enterprise
needs dedicated security experts to proactively identify, obtain and manually
implement these updates quickly and correctly.
The Internet "security gap"
Despite the obvious and compelling reasons for Internet security, most SMEs
on the Internet do not even have a firewall. The expense and complexity of
traditional security solutions incorporating a firewall puts protection out of
the reach of millions of SMEs that do not have the resources to adopt these
solutions, contributing to a "security gap."
In the United States, IDC estimates that approximately 3.5 million SMEs will
be connected to the Internet by the end of 1999. IDC projects, however, that
from 1995, when IDC reports that firewalls first became widely available, until
the end of 1999, less than 450,000 firewalls will be shipped, leaving more than
3 million SMEs without a firewall. This security gap is increasing, with IDC
projecting that in the United States more than 1.1 million new SMEs will
connect to the Internet in the year 2000, but less than 260,000 firewalls will
be shipped during the same period. We believe that the security gap for SMEs
results from the cost and complexity of traditional comprehensive solutions,
combined with the ineffectiveness of lower-end firewall solutions, which lead
many SMEs to choose not to adopt any Internet security solution at all.
Moreover, many enterprises that have installed security systems continue to
experience significant security breaches because their systems are either
configured improperly or are not timely or properly updated in response to the
latest security threats.
SMEs require an easy-to-use, highly effective, fully integrated Internet
security solution with low installation and maintenance costs that can be
installed quickly and kept up to date easily. In addition, many SMEs would
rather outsource the management of any Internet security system to vendors such
as ISPs. ISPs, however, face challenges in economically delivering affordable,
value-added security services that can be rapidly deployed to thousands of
customer sites and easily managed from a central location.
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<PAGE>
The WatchGuard Solution
WatchGuard's LiveSecurity products and services offer a fundamentally new
approach to Internet security. We provide SMEs with a comprehensive, easy-to-
use and cost-effective Internet security solution that we keep up to date
through our innovative Internet-based broadcast service. Our solution has the
following key benefits:
<TABLE>
<C> <S>
Comprehensive, fully integrated We offer a comprehensive security solution
security integrated into a single package that
includes (1) a firewall, (2) virtual private
networking for secure, encrypted
communication between remote offices, mobile
employees and trading partners,
(3) authentication functions that identify
network users and define user-group security
policies and (4) Web surfing control.
Dynamic protection Our subscription-based Internet broadcast
service keeps SMEs and their systems up to
date with (1) security threat responses that
specifically address newly discovered
security vulnerabilities or hacker
techniques, (2) software updates and
(3) information alerts concerning current
news in network security.
Easy installation and use We offer (1) a plug-and-play security
appliance, (2) management and security
software with an installation wizard and (3)
point-and-click centralized management. These
features make it easy for the non-security
professional to install, configure and
monitor our security system and to receive
and implement the threat responses, software
updates and information alerts we broadcast
over the Internet.
Viable ISP outsourcing Through its centralized configuration and
management capabilities, LiveSecurity for MSS
enables ISPs to provide outsourced Internet
security services to thousands of customers
quickly, easily and at a price SMEs can
afford.
Affordability We minimize SMEs' overall ownership cost with
easy deployment and management that reduces
the requirements for information technology
personnel. Our broadcast updating enables
users of LiveSecurity to address their
security needs by leveraging our team of
security experts.
</TABLE>
Strategy
Our objective is to be the leading provider of Internet security systems and
services to SMEs worldwide. Our strategy to achieve this goal is based on the
following key elements:
Maintain our market leadership position in comprehensive security for
SMEs. We intend to maintain our leadership position in comprehensive security
for SMEs by expanding and enhancing our Internet security product and service
offerings. We were the first, and remain the leader, in developing updatable
security appliances that execute software sent from a remote management system.
Our architecture allows SMEs to quickly and easily deploy new products and
services from
35
<PAGE>
the central management system, which utilizes a familiar Windows-based
interface. This distributed architecture also facilitates the scalability
necessary for ISPs to provide our products and services to their customers at
a price SMEs can afford. Because our security appliances are placed at each
end-user's site, updates and future offerings can be delivered to thousands of
customers directly from the ISP's network operations center. We intend to
continue to enhance our technology and architecture, hire additional network
and Internet security experts and continue to invest in product development
and product and service enhancements.
Expand our strategic relationships with leading Internet service
providers. To capitalize on the desire of many SMEs to outsource their
Internet security management, we have established relationships with industry-
leading ISPs, including FASTNET, GTE Internetworking, Interpath, PSINet and
Verio in the United States and AT&T EasyLink Services Asia/Pacific Ltd. in the
Asia/Pacific region. We intend to continue to establish such relationships and
expect that these relationships will facilitate the widespread adoption of our
LiveSecurity solution by enabling us to capitalize on the brand recognition
and customer bases of the ISPs. In addition, these strategic relationships
should enhance WatchGuard brand awareness and provide a powerful endorsement
of our security technology and services. For example, PSINet uses LiveSecurity
for MSS to provide managed security services to its customer base, and its
marketing of these services prominently features the WatchGuard brand.
Expand and enhance our innovative LiveSecurity broadcast service. We have
created an innovative LiveSecurity solution that broadcasts threat responses,
software updates and information alerts over the Internet directly to our
subscribers and ISP partners. We plan to expand and enhance our LiveSecurity
broadcast content, and therefore the value of our subscription service,
through additional investment in three areas:
. expansion of our Rapid Response Team of dedicated internal security
experts;
. expansion of our LiveSecurity Advisory Council of industry experts; and
. development of third-party industry relationships that will allow us to
broadcast third-party software and content to our subscribers.
As we expand and enhance our broadcast content, we plan to ensure that it
remains easy to implement and use by enterprises and ISPs.
Expand WatchGuard brand awareness in the SME market. Currently, there
appears to be little or no brand awareness in the SME market for any Internet
security product. We therefore believe that we have a unique opportunity to
make the WatchGuard brand synonymous with Internet security for SMEs
worldwide. We intend to increase our telemarketing and direct mail programs to
companies that fit our target subscriber profile. We also plan to create a
"security portal" for SMEs, with the goal of establishing www.watchguard.com
as the first location SMEs will visit with questions about Internet security,
by further integrating our Web sites with the Web sites of our ISP partners.
In addition, we intend to continue to invest in marketing programs jointly
executed with our distribution partners around the world. These programs
include WatchGuard Web site content and links placed on over 100 reseller
sites, regionally-targeted public relations activities and events worldwide,
and use of the WatchGuard brand name when ISP partners market their managed
security services.
Expand worldwide sales and distribution. We intend to expand our
international distribution capabilities to allow any SME with an Internet
connection to purchase the WatchGuard LiveSecurity
36
<PAGE>
solution, no matter where the SME is located. Our goal is to make our security
solutions the easiest to purchase and deploy, whether by the enterprise or by
the ISP. We plan to expand our base of resellers, distributors and ISP partners
and make our solution available for purchase through our resellers' Web sites.
We will continue to invest in Web-based training programs that educate our
worldwide resellers and subscribers about our product and service features and
benefits and that assist our customers in deployment of our products and
services.
Products and Services
Our comprehensive LiveSecurity solution includes an integrated suite of
monitoring and management software, an Internet security appliance and a
dynamic broadcast service to keep security defenses current. Businesses,
government agencies and educational institutions may use our LiveSecurity
System to internally manage their Internet security or elect to outsource
security management to an ISP implementing our LiveSecurity for MSS.
The LiveSecurity System for enterprise-managed security
We designed our LiveSecurity System for use by enterprises that want to
manage their own Internet security. With the LiveSecurity System, an enterprise
can quickly and affordably deploy comprehensive security protection to all
sites on its network, while retaining centralized control and administration.
[Diagram depicting the LiveSecurity System of enterprise-managed security:
WatchGuard sends LiveSecurity broadcast over the Internet to the Firebox and
the security manager at SME headquarters; the SME security manager manages the
Fireboxes at SME branch offices from SME headquarters.]
37
<PAGE>
The LiveSecurity System has three key components: Security Management System
software with security and management features, a security appliance and a
subscription to our Internet-based broadcast service.
Security features. The LiveSecurity System contains the following security
features:
. Firewall. Our firewall controls incoming and outgoing traffic between the
Internet and an enterprise's systems and data. The firewall incorporates
access control, logging and notification, and detection and blocking
features.
. Authentication. Our authentication features identify network users and
define user and user-group security policies.
. Virtual private networking. Our software enables enterprises to create
virtual private networks by using encryption technology to allow data to
flow securely across the Internet between two predetermined points. Our
Remote User VPN secures communications with telecommuters and traveling
employees, while our Branch Office VPN secures communications with branch
offices and trading partners. Our virtual private networking solutions
implement industry standard protocols.
. Web surfing control. Our WebBlocker feature enables enterprises to
restrict site access privileges by user, group, time of day, site type or
particular site.
Management features. Our Windows-based software manages and monitors an
enterprise's Internet security with an intuitive, point-and-click user
interface.
. Integrated suite of system management tools. Our Security Management
System packages, configures and deploys security software, security
policies and the operating system to an enterprise's security appliances.
Our management tools feature real-time monitoring and historical
reporting of network, service and bandwidth usage and allows management
of multiple security appliances from a single location.
. Installation wizard. Our installation wizard enables enterprises to
install our system and define user and user-group security policies in as
quickly as 20 minutes.
Security appliance. Our security appliance, the WatchGuard Firebox, is a
standalone, "plug-and-play" Internet security appliance that runs the security
functions of the LiveSecurity System. The Firebox's security capabilities come
entirely from the operating system, security software and security policies
directed to it from the remote management software. It simply plugs in and
resides between an enterprise's Internet router and its internal network of
servers and workstations. The Firebox has three independent, separately-
monitored connections: one to the enterprise's network, one to the Internet and
one to the enterprise's public network for hosting Web and email servers. The
LiveSecurity System encrypts communications between the Firebox and the
management software on the in-house manager's desktop.
Broadcast service. We keep our security solution current and our customers
informed through a subscription-based broadcast service that securely transmits
new security content over the Internet directly to the in-house manager's
desktop computer. Our broadcasts include:
. Threat responses. When our Rapid Response Team discovers and neutralizes
a security vulnerability or new hacker technique, we broadcast software
that specifically addresses that security threat.
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<PAGE>
. Software updates. We broadcast software updates that enhance the function
of the LiveSecurity System as a whole.
. Information alerts. We notify our customers of breaking Internet security
news and upcoming enhancements. In addition, our team of industry-leading
security advisors provides continuing education on the rapidly changing
field of Internet security.
Our LiveSecurity broadcast service enables SMEs to augment their information
technology staff with our security experts, thereby substantially reducing
personnel costs. Every new LiveSecurity System includes a one-year subscription
to our broadcast service.
LiveSecurity for MSS for Internet service providers
To serve the needs of enterprises that want to outsource their Internet
security and the needs of ISPs that want to provide this service, we have
created LiveSecurity for MSS. LiveSecurity for MSS allows an ISP to centrally
configure, monitor and update the Internet security of thousands of managed
customers. The ISP can economically deliver a full range of value-added
security services while their subscribing customers enjoy the benefit of our
up-to-date protection at an affordable price.
[Diagram depicting LiveSecurity for MSS for Internet service providers:
WatchGuard sends LiveSecurity broadcast to the ISP security manager at the ISP
network operations center; ISP security manager manages and monitors Fireboxes
at the premises of the ISP's subscribing customers.]
LiveSecurity for MSS has four components: NOC Security Suite software with
security and management features, security appliances, our LiveSecurity
broadcast service and optional monitoring software for the ISP's customers.
Security features. LiveSecurity for MSS includes the same comprehensive set
of security features offered with the LiveSecurity System.
Management features. Centrally located at the ISP's network operations
center, our Global Policy Manager software provides security intelligence and
configuration for all customer sites under management. Our software allows the
ISP to create and store various security policy configurations for different
customer groups or service plans. Our WatchGuard Event Processor software
provides scalable monitoring and reporting for customer sites.
39
<PAGE>
Security appliances. One or more of our security appliances resides on the
ISP customer's premises. The appliances receive and implement the operating
system, security software and security policies that the ISP sends.
Broadcast service. Through our LiveSecurity broadcast service, the ISP's
network operations center receives threat responses, system updates and
information alerts. The ISP then updates the security policy of its customers
and transmits these policy updates over its network to these customers.
Monitoring software for the ISP's customers. The optional Firebox Monitor
software allows the ISP's customer to view its network activity on-site while
otherwise leaving the management of the customer's Internet security to the
ISP.
Receiving the benefits of our security solution through an ISP gives an
enterprise a number of added advantages. ISPs
. monitor and manage customers' security 24 hours a day, 7 days a week;
. define and implement professional, customized Internet security
policies;
. automatically install software updates and threat responses;
. regularly review customers' security and provide detailed reporting and
analysis; and
. mitigate the up-front cost of security system purchase and setup.
Implementation
The WatchGuard LiveSecurity System. Once an enterprise registers on one of
our LiveSecurity Web sites, its registration information is automatically
transferred to our LiveSecurity database. Upon verification, the enterprise can
download and install our Security Management System software and begin
receiving our LiveSecurity broadcasts. The Security Management System
configures the LiveSecurity System, implements security protection and manages
the installed security features with a point-and-click user interface. Our
LiveSecurity broadcasts go directly to the Windows desktop of the person
responsible for Internet security, who follows our easy installation
instructions to send the updated security software, security policy or
operating system to all of the enterprise's security appliances for automatic
implementation. We send our LiveSecurity broadcasts from a redundant, secured
broadcast server, using digital certificates and public key encryption.
Communications between the management software and the security appliances are
also encrypted.
LiveSecurity for MSS. Our scalable NOC Security Suite software enables an ISP
to economically and efficiently configure, monitor and update the Internet
security of thousands of managed customers from its network operations center.
The ISP uses our Global Policy Manager's security policy templates to
streamline initialization and configuration of security policies to match the
ISP's specific service offerings and customer needs. The Global Policy Manager
then sends the desired operating system, security software or policy
configuration to subscribing customers' security appliances. The security
appliances implement the new security policies and forward activity logs back
to WatchGuard Event Processor software, which monitors network activity and
reports back to the Global Policy Manager. Communications between the network
operations center, the event processors and the security appliances are
encrypted, and we have implemented automatic failover features to protect
valuable log information against being lost due to hardware or network failure.
ISP personnel at the network operations center use our suite of real-time
monitoring tools to track
40
<PAGE>
each security appliance on the ISP's network and transmit LiveSecurity
broadcast content to all ISP subscribers. In addition, the ISP can offer its
customers a Firebox Monitor, a Windows-based monitoring tool that allows
subscribers to view their network activity and defenses in real time while
leaving management of the system to the ISP.
Customer service. We make customer service a priority. Our staff of support
representatives serves our end-users and ISP partners by phone and email from
6:00 a.m. to 5:00 p.m. PST, Monday through Friday (excluding national
holidays). As of March 31, 1999, we had 12 customer support representatives. We
also offer 24-hour-a-day, 7-day-a-week Web support tools. Our computerized
customer center manages all support requests and allows customers to check
resolution status on-line. We provide on-line answers to frequently asked
questions about our products, descriptions of how to configure WatchGuard
products to work with other products and other technical information.
The WatchGuard team of experts
Rapid Response Team. Our Rapid Response Team identifies, analyzes and
generates responses to new Internet security threats. To identify new threats,
the team continually monitors a wide variety of Internet sources related to
network security, including news groups, vendor Web sites and hacker bulletin
boards. Upon identification of a new security threat by the Rapid Response
Team, we send an advisory to our subscribers while software or configuration
changes to neutralize the threat are developed and tested. We then broadcast
the software updates or configuration recommendations to our subscribers. The
team sends other information of interest as information alerts, which include
cautionary notices, general usage guidelines and other important announcements.
LiveSecurity Advisory Council. Our LiveSecurity Advisory Council provides
continuing education on the rapidly changing subject of Internet security. The
council also oversees and contributes to the efforts of our Rapid Response
Team. We intend to expand the council as opportunities arise. Currently, the
council is composed of Messrs. Frederick M. Avolio and Rik Farrow.
Frederick M. Avolio. Mr. Avolio has been involved in Internet computing
and communication since the early 1980s and has worked with Internet
security systems for over 10 years. He assisted in the creation of the
first commercial Internet firewall offering and helped create the
commercial security products division of Trusted Information Systems. His
areas of expertise include firewalls, intrusion detection, cryptography,
security management and electronic mail systems. Mr. Avolio is the co-
author, with Paul Vixie, of Sendmail Theory and Practice, published by
Digital Press. He holds a B.S. in Computer Science from the University of
Dayton and an M.S. in Computer Science from Indiana University.
Rik Farrow. Mr. Farrow provides UNIX and Internet security consulting and
training. He has been working with UNIX system security since 1984 and with
TCP/IP networks since 1988. He has taught in a number of countries and for
a variety of organizations. He also consults with firms for the design and
implementation of security applications. Mr. Farrow is the author of UNIX
System Security, published by Addison-Wesley, and is the co-author, with
Rebecca Thomas, of UNIX Administrator's Guide to System V, published by
Prentice Hall. He writes a column for ;login:, the magazine of the USENIX
Association, and a network security column for Network magazine. Mr.
Farrow's article on the technical details of the Internet Worm won an
Excellence in Technology Communications award.
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<PAGE>
Licensing and pricing
For an enterprise purchasing our LiveSecurity System, we include in the
system price a perpetual license for the security and management software. The
enterprise also receives a renewable one-year subscription to our LiveSecurity
broadcast service, through which it receives threat responses, software updates
and information alerts.
For LiveSecurity for MSS, an ISP buys a license to use our NOC Security Suite
management and security software and makes an annual license payment for each
customer security appliance it manages. The licenses, whose cost varies
depending on the ISP's volume commitment, allow the ISP to manage its
subscribers' security appliances from its network operations center. Each
annual license includes a subscription to our LiveSecurity broadcast service.
The following table lists our end-user product prices as of January 1, 1999.
We offer reseller discounts, educational discounts and occasional promotional
pricing.
<TABLE>
<CAPTION>
Product Components List Price
- -----------------------------------------------------------------------
<C> <S> <C>
LiveSecurity System $ 4,990
LiveSecurity System Security Management System
Firebox II security appliance
12-month LiveSecurity subscription
----------------------------------------------
LiveSecurity subscription renewal $ 995
- -----------------------------------------------------------------------
LiveSecurity for MSS Platform Pack $ 64,475
NOC Security Suite
Firebox II for MSS (5 appliances)
MSS client licenses (5 licenses)
MSS technical certification class (1
attendee)
LiveSecurity broadcast service
----------------------------------------------
NOC Security Suite $ 50,000
----------------------------------------------
Firebox II for MSS $ 1,300
----------------------------------------------
LiveSecurity For MSS MSS technical certification class $ 2,500
----------------------------------------------
Firebox Monitor $ 195
----------------------------------------------
MSS annual client license
Block of 25 ($1,695 per license) $ 42,375
Block of 50 ($1,495 per license) 74,750
Block of 100 ($1,395 per license) 139,500
Block of 250 ($1,295 per license) 323,750
Block of 500 ($1,095 per license) 547,500
Block of 1,000 ($945 per license) 945,000
</TABLE>
Sales, Marketing and Distribution
We employ a global marketing strategy. Because the need for Internet security
crosses geographic and economic boundaries, our business opportunity extends
worldwide to all business segments. Since our inception, we have invested
heavily in worldwide sales and marketing. For the 1998 fiscal year,
international sales generated over 35% of our revenues.
42
<PAGE>
We sell our products and services through indirect channels covering 48
countries. Over 230 companies resell our products and services, including
. distributors, such as Eltrax Systems, Inc., Ingram Micro, Otsuka Shokai
Co., Ltd., Tech Data and Wick Hill Group, Plc;
. value-added resellers, such as CDW Computer Centers, Inc. (Computer
Discount Warehouse), Integrated Network Technologies, Kent DataComm,
Network Computing Architects, Inc. and Solunet; and
. ISPs, such as AT&T EasyLink Services Asia/Pacific Ltd., FASTNET, GTE
Internetworking, Interpath, PSINet and Verio.
Our agreements with our resellers are nonexclusive and provide for discounts
based on the reseller's minimum purchase commitment or the volume that the
reseller purchases or resells.
We divide our sales organization regionally among North America, Latin
America, Europe and Asia/Pacific, and also between the enterprise and managed
security market segments. In North America, we have sales personnel located in
Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, New York, Philadelphia,
San Francisco, Seattle and Toronto. Internationally, we have sales personnel
located in Amsterdam, Melbourne, Munich, Surrey and Tokyo, and in Buenos Aires
and Miami to cover Latin America. Assisting our reseller network within a
specific region is a central responsibility of our regional sales
representatives. Regional sales representatives manage our relationships with
our network of distributors, resellers and ISPs, help our reseller network sell
and support key customer accounts, and act as liaison between our reseller
network and our marketing and product development organizations. We expect to
continue to expand our field sales organization in support of both the managed
security and enterprise market segments.
We conduct a number of marketing programs to support the sale and
distribution of our products. These programs inform existing and potential
resellers, distributors, ISPs and end-user customers about the capabilities and
benefits of our products. Marketing activities include advertising, publication
of technical and educational articles in industry journals, participation in
industry tradeshows and product technology conferences, sales training and
marketing on our Web site. As of March 31, 1999, we had 46 employees in our
sales and marketing organization.
Preferred Service Provider Program. For our partner ISPs, we instituted the
Preferred Service Provider Program in 1999. The goal of the program is to
partner with managed security service providers to jointly promote LiveSecurity
protection to SMEs worldwide. Joining the program gives ISPs access to several
marketing and promotional opportunities, including special placement on the
WatchGuard Web site, prominence in WatchGuard marketing materials and joint
participation in tradeshows and events. For example, PSINet is featured on the
WatchGuard Web site and the WatchGuard LiveSecurity service registration site.
The WatchGuard sites have an active link to PSINet's site, which contains
instructions on how to sign up for WatchGuard-based managed security services.
The program also includes several options for joint promotions, which leverage
the marketing and sales abilities of both WatchGuard and the ISP.
WatchGuard LiveSecurity Alliance. In November 1998, we launched the
WatchGuard LiveSecurity Alliance, a technology and marketing program designed
to support the LiveSecurity concept and WatchGuard products and services. The
purpose of the Alliance program is to enhance the interoperability of our
LiveSecurity products and services with alliance partner products and
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<PAGE>
services and to engage in cooperative marketing. Vendors in the Alliance
include BackWeb Technologies, Clarent Corporation, CRYPTOCard, eSafe
Technologies, Inc., FASTNET, Finjan, Inc., Funk Software, ISS Group, Inc.,
PSINet, Rainbow Technologies, RSA Data Security, Inc., WebTrends Corporation
and Verio.
Customers
As of March 31, 1999, we had shipped over 7,000 of our security appliances to
our reseller network, which resold our products and services to end-users
spanning a wide variety of countries and industries. Representative ISPs and
end-users include:
Internet Service
Providers Technology Manufacturing
- -------------------------- ------------------------ -----------------------
AT&T EasyLink Services AlphaBlox Corporation Blair Inc.
Asia/Pacific Ltd. Inc. Brown Shoe Company
GTE Internetworking, Inc. Applied Voice Durkan Patterned
Interpath Communications, Recognition, Inc. Carpet, Inc.
Inc. Bentley Systems, Ferguson
PSINet Inc. Incorporated Metals/Aerospace
Verio, Inc. JDA Software Group, Inc. Alloys Inc.
You Tools Corporation/ Pentax Technologies Graham Steel
FASTNET Sheridan Software Corporation
Systems, Inc. J.E. Dunn Construction
Company
The Mitchell Gold
Services Education Company
- ------------------------- -------------------------
Boullioun Aviation Boston Architectural Governnment
Services Center -----------------------
Bull Housser & Tupper Canon City Schools City of Bellingham, WA
Camp, Inc. Englewood Public Schools City of Dandenong,
Catholic Charities Huntsville Intermediate Australia
Digital Magic School District City of Garden Grove,
Javelin Technology Summit Board of Education CA
Lyra Research, Inc. Woodridge School District Lenoir County (NC) MIS
#68 Mornington Peninsula
Medical Shire Council,
- -------------------------- Financial Services Australia
Bendigo Health Care Group -------------------------- North Carolina State
CoreCare Systems, Inc. Atlantic Mortgage & Ports
Health Technologies Pty Investment Corp. Pierce County (WA)
Ltd Hudson Valley Federal Library Service
NeoTherapeutics, Inc. Credit Union
PATH KDP Investment Advisors Entertainment
Southeast Alabama McMahan Securities Co., LP ----------------------
Medical Center Seritis Services Group, LLC Argosy Gaming Company
Unimed Pharmaceuticals, Sunflower Bank Black Hawk Gaming &
Inc. Crave Entertainment,
Inc.
Media Retail Everton Football Club
- ------------------------ --------------------------
KSTW-UPN 11 Television Norm Thompson Outfitters, Utilities and
The Herald Inc. Telecommunications
University of Toronto Rebel Sport Limited -----------------------
Press Globecomm Systems,
Inc.
MACtel
Case Studies
PSINet Inc. -- An ISP providing managed Internet security services
PSINet Inc., the largest independent commercial ISP, was the first WatchGuard
customer to implement a complete managed security service using LiveSecurity
for MSS. PSINet operates a
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<PAGE>
sophisticated international frame relay network with over 500 points-of-
presence worldwide, servicing over 32,000 business accounts in 11 countries.
PSINet launched its PSINet SecurityCentral(TM) service in December 1998, and
today its dedicated team of security administrators manages SecurityCentral
from PSINet's network operations center in Troy, NY. The SecurityCentral
service is available to both current and new PSINet Internet connectivity
subscribers, at either a standard or premier level. Both service levels include
installation, security and operating system software upgrades, all equipment
and services and 24-hour monitoring and response by PSINet's Security Planning
and Response Team. SecurityCentral premier customers also receive scheduled
Internet scans and content-filtering software. The WatchGuard LiveSecurity
broadcast service keeps PSINet's network operations center informed and current
with threat responses, software updates and breaking Internet security news,
which enables PSINet to deliver a high level of security to its SecurityCentral
subscribers.
To further its commitment as a strategic partner with WatchGuard, PSINet has
joined the Preferred Service Provider Program and is actively involved in
developing cooperative marketing campaigns with WatchGuard to raise public
awareness for SecurityCentral.
GTE Internetworking, Inc. -- An ISP providing managed Internet security
services
GTE Internetworking, Inc., part of one of the largest publicly held
telecommunications companies in the world, has been providing managed Internet
access and related services worldwide for more than 20 years. In April 1999,
GTE introduced a new LiveSecurity for MSS-based security service, GTE Security
Advantage(TM), which enables GTE to offer a cost-effective managed Internet
security service to SMEs and branch offices of large corporations.
GTE has integrated LiveSecurity for MSS into its sophisticated, $6 million,
5,000-square-foot network operations center in Burlington, MA, and offers GTE
Security Advantage to both current and new customers. In the past, GTE focused
its managed security services on Fortune 500 corporations. By partnering with
WatchGuard, however, GTE Internetworking can expand its range of services by
offering SMEs the same level of security it could only offer in the past to
large enterprises, due to the cost and complexity of its previous service
offerings.
GTE is a Preferred Service Provider Program member, which enables GTE and
WatchGuard to combine their marketing expertise and resources in joint
marketing activities that promote GTE Security Advantage through various media.
GTE will also promote the GTE Security Advantage service through its network of
independent local exchange carriers, which deliver telephone service and
Internet connectivity to SMEs.
Bentley Systems, Incorporated -- An enterprise protecting its offices with the
WatchGuard LiveSecurity System
Bentley Systems, Inc. is a worldwide leader in quality engineering software
products and user services, serving over 250,000 professionals in building
engineering, geoengineering and mechanical engineering. Its MicroStation(TM)
products, used by over 70% of the largest engineering firms in the United
States, are used to design buildings, airports, hospitals, facilities,
highways, bridges and industrial plants throughout the world. Founded in 1984,
Bentley has become one of the world's fastest-growing software companies.
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Bentley protects itself with the WatchGuard LiveSecurity System, deploying 11
WatchGuard Fireboxes. The company has implemented WatchGuard's Branch Office
VPN software to secure communications between its headquarters in Exton, PA and
its branch offices in Huntsville, AL and Littleton, MA, and relies on
WatchGuard's Remote User VPN software to encrypt communications between its
offices and approximately 55 traveling salespeople. Now that Bentley has
established interconnectivity between offices with its network of WatchGuard
security appliances, it is in the process of moving from a private frame WAN to
a virtual private network of Internet sites, which will reduce its remote
access costs by over 60%.
Technology and Architecture
Our LiveSecurity solution utilizes an innovative distributed architecture
through which a basic processor in a security appliance receives and executes
software directed to it from a remote management system. Because the security
intelligence resides in the software and not in the hardware, we can keep our
customers' Internet security up to date with periodic broadcasts of new
security software and operating system configurations. Our LiveSecurity
solution encrypts and authenticates communications between WatchGuard, the
management system software and the security appliance. This allows the
management system and the appliance to be separated within an enterprise's
local or wide area network or between an ISP and its subscriber. Typically, to
install software on a computer using a general-purpose operating system such as
Windows, a person must be physically present at the computer. Our distributed
architecture, however, allows our customers to remotely install our software on
the security appliances and receive updated software broadcast over the
Internet.
The diagram below depicts the core technologies we use to deliver our
products and services. Our approach gives us flexibility, reliability and
scalability.
[Diagram depicting the components of WatchGuard's security appliance, operating
system software, security software, management software and Internet
distribution.]
Security appliance. Our security appliance uses a standard Intel Pentium
processor, which is dedicated solely to running security functions. The
security appliance has no other function and no hard drive memory storage.
46
<PAGE>
Operating system software. Our security appliance's operating system is a
custom-configured Linux kernel. Using Linux under an open source license, we
have been able to review the source code and generate a flexible, robust and
secure operating system. We use specially designed application programming
interfaces to facilitate secure loading of new operating system and security
software that our management software sends to the appliance.
Security features. The LiveSecurity solution implements our security features
in a number of software modules. Each module provides the specific function
that the management system defines in security rules and transmits to the
appliance. For example, the firewall features that control network traffic are
based around an extensible set of network service protocols, such as HTTP and
SMTP. The appliance applies the security policies defined by the management
system to all incoming or outgoing traffic. Certain network services, such as
mail and file transfers, require special security, and these are directed to
specific modules. Additional modules implement other security features, such as
authentication and Web surfing control, which also are defined in the security
policies that the management system transmits to the appliance. If Web surfing
control is activated, for example, the Web surfing control software module will
automatically check the details of all outgoing Web traffic to make sure it
complies with the defined policies.
We use an open architectural structure to allow integration with common
standards for network security. For example, our virtual private networking
component currently supports IPSec and PPTP standards, and our authentication
module supports a variety of standard authentication methods. We intend to
adopt additional standards as they mature in the market.
Management features. Because enterprise and ISP environments are very
different, we designed a separate management system for each. Our LiveSecurity
System management software allows for quick installation and management by a
typical SME in-house manager using a standard Windows system. We designed the
LiveSecurity for MSS management software, on the other hand, for a trained
operator using a dedicated management console to configure and manage the
security of a large subscriber base. Both management systems have the ability
to remotely deploy new security software to the appliances or update their
security engines from the management console. Our ISP customers can choose to
separately and remotely deploy certain security features, such as virtual
private networking and Web blocking. This gives ISPs the ability to
incrementally add for-fee services to their basic service offering, without the
expense of sending personnel to their customers' sites.
To enable ISPs to configure, monitor and manage the Internet security of
thousands of customers, LiveSecurity for MSS includes scalable logging and
monitoring software called WatchGuard Event Processors. The event processors
run on UNIX-based workstations and can be located in the network operations
center or distributed at the ISP's point of presence. Each event processor
manages the logging and notification features of up to 500 security appliances,
via commands issued from the Global Policy Manager at the network operations
center.
LiveSecurity broadcast. Our scalable LiveSecurity broadcast system is a
collection of secured servers that registers subscribers, facilitates the
download of our software to the desktop computers of registered subscribers and
broadcasts threat responses, software updates and information alerts to
subscribers. To facilitate a high level of security and authenticity, we
protect our servers with our own security system and strongly encrypt data
communication between servers. We also encrypt and digitally sign broadcasts to
ensure that subscribers receive only authentic LiveSecurity broadcast content.
We can replicate and distribute our LiveSecurity servers throughout the world,
which should
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<PAGE>
enable us to meet growth in demand for our LiveSecurity service. We have
initially deployed one primary server and two replicated servers to reach North
America, Asia and Europe.
Research and Development
To maintain our product and service leadership position, we focus our
research and development efforts on enhancing our existing products, developing
new products based on our innovative distributed appliance architecture and
developing services that capitalize on our LiveSecurity broadcast
infrastructure. We utilize a modular design, which allows us to develop new
applications that plug into our existing product line. As a result, our
products can be deployed in stages, whether directly by an enterprise or by an
ISP if the enterprise has outsourced its security management. As we develop new
products, our LiveSecurity end users and ISP partners can incorporate the new
products into their systems with minimal system interruption.
As of March 31, 1999, we employed 38 people on our research and development
staff. We spent approximately $274,000, $2.2 million, and $5.3 million on
research and development in 1996, 1997 and 1998. All of our product development
activities are conducted at our principal facility in Seattle, Washington.
Competition
We compete in a market that is new, intensely competitive, highly fragmented
and rapidly changing. We face competition in sales both of products and
services designed for enterprises and of those designed for ISPs. We have
experienced and will continue to experience increased competition from current
and emerging competitors, many of which have significantly greater financial,
technical, marketing and other resources.
In the market for Internet security solutions, we compete on the basis of
technological expertise and functionality, breadth of service and product
features, ease of installation and management, updatability, scalability, brand
recognition, price and customer support. Competitors offering security products
include hardware and software vendors such as Axent Technologies, Inc., Check
Point Software Technologies Ltd., Cisco Systems, Inc., Lucent Technologies,
Inc., Network Associates, Inc. and a number of smaller companies, and operating
system vendors such as Microsoft Corporation, Novell, Inc. and Sun
Microsystems, Inc.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
current and future competitors may bundle their products with other software or
hardware, including operating systems and browsers, in a manner that may
discourage users from purchasing the products and services we offer. Certain
current and potential competitors have greater name recognition, larger
customer bases to leverage and access to proprietary technology, and could
therefore gain market share to our detriment. We expect additional competition
as other established and emerging companies enter the Internet security market
and new products and technologies are introduced.
While most of our competitors have generally targeted large-enterprise
security needs, using complex products that run on general purpose hosts such
as UNIX or Windows NT and require full training and support programs, these
vendors could adapt their existing products to make them more attractive to
SMEs. If our competitors were to focus their greater financial, technical and
marketing resources on the SME market, our business could be adversely
affected. While none of our competitors currently offer a technology similar to
our LiveSecurity solution architecture to address
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<PAGE>
changing security threats, they could develop such technology as part of any
SME appliance offering. Increased competition in the SME market could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could adversely affect our business.
Proprietary Rights
To protect our proprietary rights, we rely primarily on
. copyright, trademark, service mark and trade secret laws;
. license agreements with third parties, including a printed "shrink wrap"
license for our product users;
. confidentiality agreements with our employees and third parties;
. invention assignment agreements with our employees and contractors;
. protective contractual provisions in our agreements with certain
consultants, resellers and customers; and
. limited access to our software, documentation and other proprietary
information.
"WatchGuard" is a registered trademark in the United States, Norway and New
Zealand. "Firebox" and "LiveSecurity" are trademarks in the United States and
in certain foreign jurisdictions. We have no patents, and do not have any
patents pending. We copyright our software.
We currently license and use the following technologies in our products and
services:
. BSAFE encryption toolkit from RSA Data Security, Inc. This industry-
standard product provides us with common encryption functions.
. Cyber Patrol database from the Learning Company. This database provides
URL blocking as part of our WebBlocker module.
. Linux kernel. We use a customized version of the Linux operating system
for our security appliance platform. This license is a no-cost, open-
source license.
. BackWeb Technologies Client Software and Server. We use this technology
to facilitate the distribution of our LiveSecurity content.
U.S. Government Export Regulation Compliance
Our products are subject to federal export restrictions on encryption
strength. To comply with these restrictions, we have developed separate
domestic (U.S. and Canada) and international versions of some of our products.
Recent federal legislation, however, has increased exportable encryption
strength and allows the export of any-strength encryption to certain business
sectors overseas, including U.S. subsidiaries, banks, financial institutions,
insurance companies and health and medical end-users. In addition, we have
obtained a federal export license that allows us to export encryption of any
strength to commercial entities in 45 approved countries. With these expanded
export rights, we may export strong encryption to a wide range of foreign end-
users, subject to certain conditions, limitations and record keeping
requirements. To comply with these constraints, we obtain from our distributors
and resellers detailed information about each foreign end-user customer that
will obtain strong encryption.
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<PAGE>
Manufacturing
We currently outsource all hardware manufacturing and assembly to two
companies in California: Smart Modular Technologies, Inc., our motherboard
manufacturer, and Streamlined Electronics Manufacturing, our final assembly
house. We then distribute the finished products worldwide from our Seattle
distribution center. Both the motherboard manufacturer and final assembly house
test our hardware to confirm that all components function properly. Both
companies are certified as meeting the International Organization for
Standardization's quality assurance standards: Smart Modular Technologies
against ISO 9001 and 9002, and Streamlined Electronics Manufacturing against
ISO 9002.
Employees
As of March 31, 1999, we had 121 employees. Of these, 46 were employed in
sales and marketing, 11 in finance and administration, 12 in customer support
and 52 in development and operations. We are not parties to any collective
bargaining agreements with our employees and we have not experienced any work
stoppages. We believe we have good relations with our employees.
Facilities
Our principal administrative, marketing, sales, development and operations
facility is located in Seattle, Washington. We occupy approximately 20,200
square feet in this facility, under two leases that expire in April 2001. We
will be expanding our general office space within the next 12 months, and we
expect adequate space to be available on commercially reasonable terms. We also
maintain a 3,000-square-foot warehouse for product fulfillment and
distribution. The warehouse lease expires in August 2000, but has two one-year
renewal options.
Legal Proceedings
We currently are not a party to any material legal proceeding.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table lists the executive officers, directors and key employees
of WatchGuard as of March 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors
Christopher G. Slatt............ 40 President, Chief Executive Officer and
Chairman of the Board
Steven N. Moore................. 41 Executive Vice President of Finance,
Chief Financial Officer, Secretary and
Treasurer
R. Michael Peronto.............. 42 Vice President and Chief Operating
Officer
Stuart J. Ellman................ 32 Director
Andrew W. Verhalen.............. 42 Director
Charles P. Waite, Jr............ 43 Director
Key Employees
David W. Bonn................... 35 Chief Technology Officer
Randall C. Boroughs............. 42 Vice President of LiveSecurity
Dennis R. Cloutier.............. 48 Executive Vice President of Sales
Todd A. Hooper.................. 33 Vice President of Business Development
Michael V. Martucci............. 40 Vice President of Marketing
</TABLE>
We have no employment agreements with our executive officers. Directors
Ellman, Verhalen and Waite are members of both the compensation committee and
the audit committee.
Christopher G. Slatt cofounded WatchGuard in February 1996. Mr. Slatt has
served WatchGuard as President, Chief Executive Officer and Director since its
inception, and as Chairman of the Board since April 1999. From September 1993
to October 1995, he served as a Vice President and a General Manager of Legent
Corporation, a computer software company. Legent Corporation was acquired by
Computer Associates International, Inc., a computer software company, in August
1995. He is also a director of a privately held company. Mr. Slatt holds a
B.S.E.E. in Electrical Engineering from the University of Notre Dame.
Steven N. Moore cofounded WatchGuard in February 1996. Mr. Moore has served
WatchGuard as Executive Vice President of Finance, Chief Financial Officer,
Secretary, Treasurer and Director since its inception, and as its Vice
President of Finance and Operations from its inception until March 1999. From
September 1993 to September 1995, he served as a Director of Finance of Legent
Corporation. Mr. Moore holds a B.S. in Finance from Central Washington
University.
R. Michael Peronto joined WatchGuard as Vice President and Chief Operating
Officer in March 1999. From February 1997 to November 1998, Mr. Peronto served
as President and Chief Executive Officer of Endura Software Corporation, a
management software supply company. From September 1994 to February 1997, he
served as Vice President of Publishing Products and Site Manager of Adobe
Systems Incorporated, a desktop publishing and graphics software company. From
July 1992 to September 1994, he served as General Manager of Graphic Products
of Aldus Corporation, a desktop publishing and graphics software company that
was acquired by Adobe Systems Incorporated. Mr. Peronto holds a B.A. in
Economics from UCLA and an M.B.A. from the University of Washington.
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<PAGE>
Stuart J. Ellman has served as a Director of WatchGuard since April 1998. In
August 1994, Mr. Ellman cofounded RRE Investors, LLC and RRE Investors II, LLC,
both of which are venture capital firms. He serves as managing director of RRE
Investors, LLC and as a general partner of RRE Investors II, LLC. He is also a
director of several privately held companies. Mr. Ellman holds a B.A. in
Economics from Wesleyan University and an M.B.A. from Harvard University.
Andrew W. Verhalen has served as a director of WatchGuard since May 1997.
Since April 1992, Mr. Verhalen has been a partner of Matrix Partners, a venture
capital firm. He currently is a director of Copper Mountain Networks, a
communications equipment company, and Unwired Planet, a wireless communications
software company. He also serves on the board of several private technology
companies. Before Matrix, Mr. Verhalen held senior management positions at 3Com
Corporation and Intel Corporation. He holds a B.S.E.E., an M.E. and an M.B.A.
from Cornell University.
Charles P. Waite, Jr. has served as a Director of WatchGuard since May 1997.
Since December 1987, Mr. Waite has served as a general partner of Olympic
Venture Partners. He is also a director of Cardima, Inc., CellPro Incorporated,
Verity, Inc. and several privately held companies. Mr. Waite holds an A.B. in
History from Kenyon College and an M.B.A. from Harvard University.
David W. Bonn joined WatchGuard in March 1996 and has served WatchGuard as
Chief Technology Officer since March 1999. From May 1997 to March 1999, Mr.
Bonn served as WatchGuard's Vice President of Engineering. From February 1997
to May 1997, he served as WatchGuard's Chief Technology Officer. From March
1996 to February 1997, he served as WatchGuard's Vice President of Security
Products. He cofounded Mazama Software Labs, Inc., a computer software company,
in 1995, and served as its President until the acquisition of Mazama's
technology by WatchGuard in March 1996. From November 1993 to January 1995, he
served as Senior Software Engineer of Legent Corporation. Mr. Bonn holds a B.S.
in Computer Science from the University of Washington.
Randall C. Boroughs joined WatchGuard in October 1997 and has served
WatchGuard as Vice President of LiveSecurity since December 1998. From October
1997 to December 1998, Mr. Boroughs served as WatchGuard's Vice President of
Product Management. From August to October 1997, he served as a consultant with
MarkeTech Consulting. From January 1996 to August 1997, he served as Director
of Marketing of GTE Corporation's network management organization. From August
1995 to January 1996, he served as a Director of Product Management of Computer
Associates International, Inc. From September 1993 to August 1995, he served as
a Director of Product Management of Legent Corporation. Mr. Boroughs holds a
B.S. in Aeronautical Engineering from the University of Washington.
Dennis R. Cloutier joined WatchGuard in March 1997 as Executive Vice
President of Sales. From March 1994 to September 1996, Mr. Cloutier served as
Vice President of Sales of Sierra On-Line, an education and entertainment
computer software publisher. Mr. Cloutier holds a B.S. in Marketing from
Central Connecticut University.
Todd A. Hooper joined WatchGuard in June 1998 and has served WatchGuard as
Vice President of Business Development since February 1999. From June 1998 to
February 1999, Mr. Hooper served as WatchGuard's Director of Market
Development. From March 1996 to May 1998, he served
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<PAGE>
as Manager of Internet and Open Systems of AlphaWest Pty. Ltd., a provider of
information technology-based services. From January 1994 to March 1996, he
served as Chief Executive Officer and Managing Director of Momentum Pty. Ltd.,
a management consulting company. Mr. Hooper holds a B.A. in Information
Processing from Curtin University.
Michael V. Martucci joined WatchGuard in May 1997 as Vice President of
Marketing. From February 1996 to May 1997, Mr. Martucci served as Director of
Sales and Marketing Worldwide of Corbis Corporation, an Internet delivery and
sales company. From August 1994 to February 1996, he served as Director of
Sales and Marketing Worldwide of Knight-Ridder's Presslink, Inc., an Internet
delivery and sales company. From August 1993 to August 1994, he served as Vice
President of Marketing of Telepad Corporation, a wireless and hand-held
computing solutions marketing company. Mr. Martucci holds a B.C.E. in Civil
Engineering and an M.S.I.M. in Marketing and Financial Management from Georgia
Institute of Technology.
Committees of the Board of Directors
The compensation committee of our board of directors consists of Messrs.
Ellman, Verhalen and Waite. The compensation committee
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plan and
. makes recommendations to the board of directors regarding these matters.
The audit committee consists of Messrs. Ellman, Verhalen and Waite. The audit
committee
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
We established these committees in February 1999.
Director Compensation
We do not pay cash compensation to our directors for their services as
directors or members of committees of the board of directors, but we do
reimburse them for reasonable expenses they incur in attending meetings of the
board of directors. Directors of WatchGuard are eligible to participate in our
stock option plan.
Director and Officer Indemnification and Liability
Our certificate of incorporation limits the liability of directors to the
full extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may eliminate or limit the personal
liability of directors for monetary damages for breach of their fiduciary
duties as directors, except for liability for
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
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<PAGE>
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper benefit.
Our bylaws provide that we shall indemnify our directors and officers and may
indemnify our employees and agents to the fullest extent permitted by law. In
addition, we intend to obtain and maintain directors' and officers' liability
insurance, under which our directors and officers may be indemnified against
liability they may incur for serving in their capacities as directors and
officers of WatchGuard.
The Securities and Exchange Commission has advised us that, in its opinion,
any indemnification of our directors and officers for liabilities arising under
the Securities Act of 1933 is against public policy as expressed in the
Securities Act and is therefore unenforceable.
We believe that the limitation of liability provision in our certificate of
incorporation, the indemnification provisions in our bylaws and the liability
insurance will facilitate our ability to continue to attract and retain
qualified individuals to serve as directors and officers of WatchGuard.
Compensation Committee Interlocks and Insider Participation
Our board of directors' compensation committee currently consists of Messrs.
Ellman, Verhalen and Waite. None of these individuals has at any time been an
employee or officer of WatchGuard. Until the compensation committee was formed
in February 1999, the full board of directors made all decisions regarding
executive compensation. No member of our board of directors or of its
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as members of its board of directors or its compensation committee.
Executive Compensation
Summary Compensation Table
The following table provides information concerning the compensation received
for services rendered to WatchGuard in all capacities during the year ended
December 31, 1998, by our chief executive officer and the other executive
officer of WatchGuard whose compensation exceeded $100,000 in fiscal 1998.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------- ------------
Securities
Name and Principal Underlying Other Annual All Other
Position Salary($) Bonus($) Options(#) Compensation($) Compensation($)
- ------------------ ----------- --------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Christopher G. Slatt,
Chief Executive Officer
and President.......... $ 155,000 $ -- 70,000 $ -- $ --
Steven N. Moore,
Executive Vice
President of Finance,
Chief Financial
Officer, Secretary and
Treasurer.............. 155,000 -- 70,000 -- --
</TABLE>
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<PAGE>
Option Grants in Last Fiscal Year
The following table provides certain information regarding stock options we
granted in fiscal 1998 to our chief executive officer and the other executive
officer whose compensation exceeded $100,000 in fiscal 1998. The table includes
the potential realizable value over the 10-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. The
assumed rates of appreciation are prescribed by the Securities and Exchange
Commission for illustrative purposes only and are not intended to forecast or
predict future stock prices. Any actual gains on option exercises will depend
on the future performance of our stock.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------ Value at Assumed
Number of Percent of Fair Market Annual Rates of Stock
Securities Total Options Value Price Appreciation
Underlying Granted to Exercise Per Share for Option Term
Options Employees in Price per on Date Expiration ----------------------
Name Granted(#) Fiscal Year Share of Grant Date 5% 10%
- ---- ---------- ------------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher G. Slatt.... 70,000 5.77% $0.14 $0.13 01/28/03 $ 11,900 $ 14,700
Steven N. Moore......... 70,000 5.77 0.14 0.13 01/28/03 11,900 14,700
</TABLE>
In 1998, we granted options to purchase up to an aggregate of 1,212,500
shares to employees, directors and consultants. We granted all options under
our stock option plan at exercise prices at the fair market value of our common
stock on the date of grant, as determined in good faith by our board of
directors. Approximately 2% of Mr. Slatt's and Mr. Moore's options vest and
become exercisable each month, commencing February 28, 1998.
Fiscal 1998 Year-End Option Values
The following table provides certain information regarding unexercised
options held as of December 31, 1998 by our chief executive officer and the
other executive officer whose compensation exceeded $100,000 in fiscal 1998.
The value of unexercised options is calculated on the basis of an assumed
initial public offering price of $ per share. These individuals did not
exercise any options in fiscal 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Fiscal Year End(#) Fiscal Year-End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Christopher G. Slatt........ 16,040 53,960 $ $
Steven N. Moore............. 16,040 53,960
</TABLE>
Change-of-Control Arrangements
On April 12, 1999, R. Michael Peronto, our chief operating officer, was
granted an option to purchase 219,782 shares of our common stock. A change of
control of WatchGuard will accelerate the vesting of this option. Half of the
unvested shares subject to this option will vest and become exercisable upon a
change of control.
Employee Benefit Plans
1996 Stock Option Plan
Our board of directors and stockholders have adopted our 1996 Stock Option
Plan and reserved an aggregate of 7,734,986 shares of common stock for grants
of stock options under the plan. Employees, directors, officers, consultants,
agents, advisors and independent contractors of WatchGuard are eligible to
receive options under our stock option plan. As of March 1, 1999,
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<PAGE>
884,198 shares had been issued upon the exercise of stock options granted under
our stock option plan and 5,255,814 shares were subject to outstanding options.
Our stock option plan is administered by the compensation committee of our
board of directors. The compensation committee has the authority to select
individuals to receive options under our stock option plan and to specify the
terms and conditions of each option grant (incentive or nonqualified), the
vesting provisions, the option term and the exercise price. In addition, the
compensation committee has the authority to amend, suspend or terminate the
stock option plan, subject to shareholder approval as required by applicable
laws. No such action, however, may affect any share of common stock previously
issued and sold or any option previously granted under the stock option plan
without the consent of the optionee. Unless terminated sooner, the stock option
plan will terminate automatically in 2006.
The term of each option is established by the compensation committee or, if
not so established, is 10 years from the date of grant. The exercise price of
all incentive stock options granted under the stock option plan must be at
least equal to the fair market value of our common stock on the date of grant.
The exercise price of nonstatutory stock options granted under the stock option
plan is determined by the compensation committee. For any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of the incentive stock option must not exceed 5 years. The term of all
other options granted under the stock option plan may not exceed 10 years.
An optionee must exercise options granted under our stock option plan within
three months after the optionee's termination of service to or employment by
WatchGuard for any reason other than death, retirement, early retirement or
disability, or within one year after the optionee's termination by death,
retirement, early retirement or disability, but in no event later than the
expiration of the option term. Retirement, early retirement and disability are
defined in the stock option plan. Unless the compensation committee determines
otherwise and to the extent permitted by Section 422 of the Internal Revenue
Code, options granted under our stock option plan are not transferable by the
optionee, except by will or the laws of descent and distribution, and generally
are exercisable during the optionee's lifetime only by the optionee.
Outstanding options under our stock option plan will automatically accelerate
and become 100% vested and exercisable immediately before an acquisition of a
majority of our outstanding voting securities, certain mergers or
consolidations, the sale of substantially all of our assets or similar
corporate transactions. Acceleration will not occur, however, if our
accountants believe that acceleration would render unavailable "pooling of
interest" accounting for the transaction or if, in connection with the
corporate transaction, options will be assumed by a successor corporation or
its parent. If a successor corporation assumes the options and, within two
years, an optionee terminates his or her employment for good reason or the
successor corporation terminates the optionee without cause, the options will
become 100% vested and exercisable.
401(k) Plan
We maintain a 401(k) plan that covers all our employees who satisfy certain
eligibility requirements relating to minimum age, length of service and hours
worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any such contribution to date and have no current plans to do so. Eligible
employees may make pretax elective contributions of up to 15% of their
compensation, subject to maximum limits on contributions prescribed by law.
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<PAGE>
CERTAIN TRANSACTIONS
Since our inception in February 1996, we have issued shares of preferred
stock in private placement transactions, as the following table summarizes:
<TABLE>
<CAPTION>
Number of Shares of
Preferred Stock
---------------------------
Issuance Price per Series
Purchaser Date Share Series A Series B C
--------- ---------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Christopher G. Slatt...................................... March and $0.05 1,500,002
July 1996
Steven N. Moore........................................... March and 0.05 1,500,002
July 1996
Entities affiliated with Matrix IV Management Co., L.P. .. May 1997 2.59 1,158,333
April 1998 5.16 290,867
Olympic Venture Partners III, L.P. and OVP III
Entrepreneurs Fund....................................... May 1997 2.59 515,458
April 1998 5.16 129,436
Olympic Venture Partners IV, L.P. and OVP IV Entrepreneurs
Fund, L.P. .............................................. May 1997 2.59 642,875
April 1998 5.16 161,431
MLS-I, L.C. .............................................. March 1998 2.59 38,610
Entities affiliated with RRE Investors II, LLC ........... April 1998 5.16 775,644
</TABLE>
Christopher G. Slatt and Steven N. Moore are executive officers and directors
of WatchGuard. Stuart J. Ellman, a director of WatchGuard, is a member of RRE
Investors II, LLC, which is the managing member of RRE Investors, L.P. and the
indirect managing member of RRE Investors Fund, L.P. Andrew W. Verhalen, a
director of WatchGuard, is the general partner of Matrix IV Management Co.,
L.P., which is the general partner of Matrix Partners IV, L.P. and of Matrix IV
Entrepreneurs Fund, L.P. Charles P. Waite, Jr., a director of WatchGuard, is a
general partner of OVMC III, L.P., which is the general partner of Olympic
Venture Partners III, L.P. and of OVP III Entrepreneurs Fund, L.P. Mr. Waite is
also a managing member of OVMC IV, LLC, which is the general partner of Olympic
Venture Partners IV, L.P. and of OVP IV Entrepreneurs Fund, L.P. The holders of
the preferred stock are entitled to certain registration rights with respect to
the common stock to be issued when the preferred stock is converted. All
outstanding shares of preferred stock will convert into an aggregate of
13,425,316 shares of common stock upon the closing of this offering.
Mr. Slatt and Mr. Moore are guarantors of the lease agreement between COM
Realty, Inc. and WatchGuard Technologies Inc., dated as of March 16, 1996. Mr.
Slatt and Mr. Moore were guarantors of our loan with Commerce Bank of
Washington, which we have repaid. Mr. Slatt was a guarantor of the cell phone
service contract between WatchGuard and AT&T Wireless, but is no longer a
guarantor.
57
<PAGE>
On March 9, 1999, we borrowed an aggregate of $1,500,000 from the entities
affiliated with Olympic Venture Partners and an aggregate of $1,500,000 from
the entities affiliated with Matrix IV Management Co., L.P. We issued each
entity a promissory note, which bears interest at 6% per annum and matures on
March 9, 2000, and a warrant to purchase our common stock at an exercise price
of $7.00 per share. The table below states the amount of each loan and the
number of shares for which each warrant is exercisable. If not exercised before
the closing of this offering, all of these warrants will automatically convert
into common stock on a net exercise basis at the closing of this offering.
<TABLE>
<CAPTION>
Number of Shares
Amount of for Which Warrant
Name of Investor Loan Is Exercisable
- ---------------- --------- -----------------
<S> <C> <C>
Olympic Venture Partners III, L.P. ................. $ 647,500 9,244
OVP III Entrepreneurs Fund, L.P..................... 20,000 296
Olympic Venture Partners IV, L.P. .................. 774,225 11,060
OVP IV Entrepreneurs Fund, L.P...................... 58,275 828
Matrix Partners IV, L.P............................. 1,425,000 20,356
Matrix IV Entrepreneurs Fund, L.P. ................. 75,000 1,072
</TABLE>
We believe that we made all of the transactions described above on terms no
less favorable to us than we could have obtained from unaffiliated third
parties. Any future transactions between us and our officers, directors and
principal stockholders will be approved by a majority of our board of
directors, including a majority of the independent and disinterested directors,
and will be on terms no less favorable to us that we could obtain from
unaffiliated third parties.
Dain Rauscher Incorporated, the parent company of our underwriter Dain
Rauscher Wessels, is a limited partner in Olympic Venture Partners III, a
shareholder of WatchGuard.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding the beneficial
ownership of our outstanding common stock as of March 1, 1999, for
. each person or group that we know beneficially owns more than 5% of our
common stock;
. each of our directors;
. our chief executive officer;
. the other executive officer whose compensation exceeded $100,000 in
fiscal 1998; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes shares over which the indicated
beneficial owner exercises voting and/or investment power. Shares of common
stock subject to options that are currently exercisable or will become
exercisable within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the option, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to applicable community property laws. Unless
otherwise indicated, the following beneficial owners can be reached at our
principal offices. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based on information
furnished by those owners, have sole voting and investment power with respect
to the shares.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Before After
Name and Address Beneficially Owned Offering Offering
- ---------------- ------------------ -------- --------
<S> <C> <C> <C>
Entities Affiliated with Matrix IV
Management, Co., L.P.(1)................ 2,919,828 19.62% %
2500 Sand Hill Road
Menlo Park, CA 94025
Olympic Venture Partners III, L.P. and
OVP III Entrepreneurs Fund, L.P.(2)..... 1,299,328 8.73
2420 Carillon Point
Kirkland, WA 98033
Olympic Venture Partners IV, L.P. and OVP
IV Entrepreneurs Fund, L.P.(3).......... 1,620,500 10.89
2420 Carillon Point
Kirkland, WA 98033
Entities Affiliated with RRE Investors
II, LLC(4).............................. 1,551,288 10.42
156 East 56th St., 22nd Floor
New York, NY 10022......................
Christopher G. Slatt(5).................. 3,021,878 20.28
Steven N. Moore(5)....................... 3,021,878 20.28
Stuart J. Ellman(6)...................... 1,551,288 10.42
Andrew W. Verhalen(7).................... 2,919,828 19.62
Charles P. Waite, Jr.(8)................. 2,919,828 19.62
Directors and executive officers as a
group (6 persons)(9).................... 13,434,700 90.01
</TABLE>
59
<PAGE>
- --------
(1) Represents 2,898,400 shares issuable upon conversion of the preferred stock
and 21,428 shares subject to warrants exercisable within 60 days of March
1, 1999, held by entities affiliated with Matrix IV Management Co., L.P.
Matrix IV Management Co., L.P. is the general partner of Matrix Partners
IV, L.P. and of Matrix Entrepreneurs Fund, L.P., and thus is deemed to
beneficially own these shares. Andrew W. Verhalen, a director of
WatchGuard, is a general partner of Matrix IV Management Co., L.P.
(2) Represents 1,289,788 shares issuable upon conversion of the preferred stock
and 9,540 shares subject to warrants exercisable within 60 days of March 1,
1999, held by Olympic Venture Partners III, L.P. and OVP III Entrepreneurs
Fund, L.P. OVMC III, L.P. is the general partner of Olympic Venture
Partners III, L.P. and of OVP III Entrepreneurs Fund, L.P., and thus is
deemed to beneficially own these shares. OVMC III, L.P. disclaims
beneficial ownership of these shares except to the extent of its pecuniary
interests in these shares. Charles P. Waite, Jr., a director of WatchGuard,
is a general partner of OVMC III, L.P.
(3) Represents 1,608,612 shares issuable upon conversion of the preferred stock
and 11,888 shares subject to warrants exercisable within 60 days of March
1, 1999, held by Olympic Venture Partners IV, L.P. and OVP IV Entrepreneurs
Fund, L.P. OVMC IV, LLC is the general partner of Olympic Venture Partners
IV, L.P. and of OVP IV Entrepreneurs Fund, L.P., and thus is deemed to
beneficially own these shares. OVMC IV, LLC disclaims beneficial ownership
of these shares except to the extent of its pecuniary interests in these
shares. Charles P. Waite, Jr., a director of WatchGuard, is a general
partner of OVMC IV, LLC.
(4) Represents 1,551,288 shares issuable upon conversion of the preferred stock
held by entities affiliated with RRE Investors II, LLC. RRE Investors II,
LLC is the managing member of RRE Investors, L.P. and the indirect managing
member of RRE Investors Fund, L.P., and thus is deemed to beneficially own
these shares. Stuart J. Ellman, a director of WatchGuard, is a member of
RRE Investors II, LLC.
(5) Represents 3,000,004 shares issuable upon conversion of the preferred stock
and 21,874 shares subject to an option exercisable within 60 days of March
1, 1999.
(6) Represents 1,551,288 shares issuable upon conversion of the preferred stock
held by entities affiliated with RRE Investors II, LLC. Mr. Ellman is a
member of RRE Investors II, LLC, which is the direct or indirect managing
member of each of the entities affiliated with it. Mr. Ellman disclaims
beneficial ownership of the shares held by the entities affiliated with
RRE Investors II, LLC, except to the extent of his pecuniary interest
arising from his interest in RRE Investors II, LLC.
(7) Represents 2,898,400 shares issuable upon conversion of the preferred stock
and 21,428 shares subject to warrants exercisable within 60 days of March
1, 1999, held by entities affiliated with Matrix IV Management Co., L.P.
Mr. Verhalen is a general partner of Matrix IV Management Co., L.P., which
is the general partner of each of the entities affiliated with it. Mr.
Verhalen disclaims beneficial ownership of the shares held by the entities
affiliated with Matrix IV Management Co., L.P., except to the extent of his
pecuniary interest arising from his interest in Matrix IV Management Co.,
L.P.
(8) Represents 2,898,400 shares issuable upon conversion of the preferred stock
and 21,428 shares subject to warrants exercisable within 60 days of March
1, 1999. Mr. Waite is a general partner of OVMC III, L.P., which is the
general partner of Olympic Venture Partners III, L.P. and of OVP III
Entrepreneurs Fund. Mr. Waite is also a general partner of OVMC IV, LLC,
which is the general partner of Olympic Venture Partners IV, L.P. and of
OVP IV Entrepreneurs Fund,
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<PAGE>
L.P. Mr. Waite disclaims beneficial ownership of the shares held by
Olympic Venture Partners III, L.P., OVP III Entrepreneurs Fund, L.P.,
Olympic Venture Partners IV, L.P. and OVP IV Entrepreneurs Fund, L.P.,
except to the extent of his pecuniary interest arising from his interest in
these entities.
(9) Includes 43,748 shares subject to options exercisable within 60 days of
March 1, 1999 and 42,856 shares subject to warrants exercisable within 60
days of March 1, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 80,000,000 shares of common stock, $0.001
par value per share, and 10,000,000 shares of preferred stock, $0.001 par value
per share. The following summary of certain provisions of our common stock and
preferred stock is not complete and may not contain all the information you
should consider before investing in the common stock. You should carefully read
our certificate of incorporation, which is included as an exhibit to the
registration statement of which this prospectus is a part.
Common Stock
As of March 1, 1999, assuming conversion of all outstanding shares of
preferred stock and the exercise before the closing of this offering of
warrants to purchase 42,856 shares of common stock at an exercise price of
$7.00 per share, there were 14,882,370 shares of common stock outstanding, held
of record by 35 stockholders. Following this offering, there will be
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants). The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Subject to preferences of
any outstanding shares of preferred stock, the holders of common stock are
entitled to receive ratably any dividends the board of directors declares out
of funds legally available for paying dividends. If WatchGuard is liquidated,
dissolved or wound up, the holders of common stock are entitled to share
ratably in all assets remaining after paying liabilities and liquidation
preferences of any outstanding shares of preferred stock. Holders of common
stock have no preemptive rights or rights to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.
Preferred Stock
At the closing of this offering, all outstanding shares of preferred stock
will be converted into 13,425,316 shares of common stock. Thereafter, under our
certificate of incorporation, the board of directors will have the authority,
without further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the price, rights, privileges,
preferences and restrictions of that preferred stock, any or all of which may
be greater than the rights of the common stock. The board of directors, without
stockholder approval, can issue preferred stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock could thus be issued quickly with
terms that could delay or prevent a change of control of WatchGuard or make
removal of management more difficult. Additionally, the issuance of preferred
stock may decrease the market price of the common stock and may adversely
affect the voting and other rights of the holders of common stock. We have no
current plans to issue any preferred stock.
Warrants
As of March 9, 1999, there were outstanding warrants to purchase 287,856
shares of common stock. Two holders hold warrants to purchase an aggregate of
35,000 shares of common stock, which expire on July 24, 2001 and September 24,
2001, respectively, at an exercise price of $0.03 per share. One holder holds a
warrant to purchase 10,000 shares of common stock, which expires on March 23,
2003, at an exercise price of $0.13 per share. One holder holds a warrant to
purchase
62
<PAGE>
200,000 shares of common stock, which expires on June 17, 2003, at an exercise
price of $0.39 per share. Six holders hold warrants to purchase an aggregate of
42,856 shares of common stock at an exercise price of $7.00 per share, which,
if not exercised before the closing of this offering, will convert
automatically into common stock on a net exercise basis at the closing of this
offering.
Antitakeover Effects of Certain Provisions of Certificate of Incorporation,
Bylaws, Delaware Law and Washington Law
Preferred Stock. Our board of directors, without stockholder approval, has
the authority under our certificate of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control of WatchGuard or make removal of
management more difficult.
Election and Removal of Directors. Effective with the first annual meeting of
stockholders following this offering, our bylaws provide for the division of
our board of directors into three classes, as nearly equal in number as
possible. The directors in the first class will serve an initial term of one
year, the directors in the second class an initial term of two years, and the
directors in the third class an initial term of three years. After the initial
term, all classes of directors will serve for a three-year term, and one class
will be elected each year by our stockholders. Directors may be removed only
for cause. Because this system of electing and removing directors generally
makes it more difficult for stockholders to replace a majority of directors, it
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of WatchGuard and may maintain the incumbency of our
board of directors.
Approval for Certain Business Combinations. Our certificate of incorporation
requires that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than two-
thirds of the outstanding shares, unless the business combination has been
approved by a majority of the board of directors, in which case the affirmative
vote required is a majority of the outstanding shares.
Stockholder Meetings. Under our certificate of incorporation and bylaws, our
stockholders may call a special meeting only upon the request of holders of at
least 30% of the outstanding shares. Additionally, the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures for stockholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board of directors.
Washington Law. The laws of Washington, where our principal executive offices
are located, impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an acquiring person, which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition,
63
<PAGE>
unless a majority of the members of the target corporation's board of directors
approves the transaction before the acquisition. Prohibited transactions
include, among others,
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person,
. termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares, or
. allowing the acquiring person to receive any disproportionate benefit as
a stockholder.
After the five-year period, a "significant business transaction" may take
place so long as it complies with certain "fair price" provisions of the
statute or is approved at an annual or special meeting of stockholders. A
target corporation includes a foreign corporation if
. the corporation has a class of voting stock registered under Section 12
or 15 of the Securities Exchange Act of 1934;
. the corporation's principal executive office is located in Washington;
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares of record are owned
by Washington residents or (c) 1,000 or more of its stockholders of
record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in Washington
or the corporation has more than $50 million of tangible assets located
in Washington.
A corporation may not "opt out" of this statute. If WatchGuard meets the
definition of a target corporation, Chapter 23B.19 of the Washington Business
Corporation Act may have the effect of delaying, deferring or preventing a
change of control of WatchGuard.
Delaware Law. WatchGuard is subject to Section 203 of the Delaware General
Corporation Law, which prohibits a publicly held Delaware corporation from
engaging in a business combination with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless
. prior to that date, the board of directors of the corporation approves
either the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock, excluding shares held by
directors, officers and certain employee stock plans; or
. on or after the consummation date, the business combination is approved
by the board of directors and by the affirmative vote at an annual or
special meeting of stockholders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is generally
a person who, together with affiliates and associates of that person, (a) owns
15% or more of the corporation's voting stock or (b) is an affiliate or
associate of
64
<PAGE>
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the prior three years.
These charter provisions and provisions of Washington and Delaware law may
have the effect of delaying, deterring or preventing a change of control of
WatchGuard.
Registration Rights
After this offering, the holders of 13,425,316 shares of common stock will be
entitled to certain rights with respect to the registration of those shares
under the Securities Act, in accordance with the Amended and Restated
Registration Rights Agreement among the holders and WatchGuard, dated as of
April 24, 1998. Under the terms of the Registration Rights Agreement, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, the holders are entitled to notice of the registration and
to include shares of common stock in the registration at our expense.
Additionally, the holders are entitled to certain demand registration rights
under which they may require us to file a registration statement under the
Securities Act at our expense for their shares of common stock. Further, the
holders may require us to file additional registration statements on Form S-3
at our expense. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in the registration and our
right to decline to effect such a registration before the earlier of January 1,
2000 and six months after the closing of the initial public offering.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC.
Nasdaq National Market Listing
We have applied to have the common stock listed on the Nasdaq National Market
under the symbol "WGRD."
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock. A
significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of our common stock in
the public market, or the possibility of such sales occurring, could adversely
affect prevailing market prices for our common stock or our future ability to
raise capital through an offering of equity securities.
After this offering, we will have outstanding shares of common
stock ( shares if the underwriters exercise their over-allotment
option in full). Of these shares, the shares that we expect to sell
in this offering ( shares if the underwriters exercise their over-
allotment option in full) will be freely tradable in the public market without
restriction under the Securities Act, unless the shares are held by
"affiliates" of WatchGuard, as that term is defined in Rule 144 under the
Securities Act.
The remaining 14,882,370 shares of common stock that will be outstanding
after this offering will be restricted shares. We issued and sold the
restricted shares in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or 701 under the Securities Act, which are
summarized below.
By signing "lock-up" agreements, the executive officers, directors and most
stockholders and employees of WatchGuard, who collectively hold an aggregate of
14,624,594 restricted shares, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of their shares for a period
of 180 days from the date of this prospectus. We also have entered into an
agreement with the underwriters that we will not offer, sell or otherwise
dispose of common stock for a period of 180 days from the date of this
prospectus.
Ninety days after the date of this prospectus, 257,776 shares that are not
subject to lock-up agreements will be eligible for sale in the public market in
accordance with Rules 144 and 701. On the date the lock-up agreements expire,
an additional 14,581,738 restricted shares will be eligible for immediate sale,
of which 13,425,316 shares will be subject to certain volume, manner of sale
and other limitations under Rule 144. The remaining 42,856 restricted shares
will be eligible for sale in accordance with Rule 144 when one-year holding
periods expire.
After the lock-up periods expire, certain shares issued upon exercise of
options we granted prior to the date of this prospectus will also be available
for sale in the public market in accordance with Rule 701 under the Securities
Act. Rule 701 permits resales of those shares in reliance on Rule 144 but
without compliance with certain restrictions, including the holding period
requirement, imposed under Rule 144. Under Rule 144, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell within any three-month
period up to the greater of
. 1% of the then-outstanding shares of common stock (approximately
shares immediately after this offering) and
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about
WatchGuard. Under Rule 144(k), a person who is
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<PAGE>
not deemed to have been an affiliate of WatchGuard during the 90 days preceding
a sale and who has beneficially owned the restricted shares for at least two
years may sell them without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately shares of
common stock reserved for issuance under our stock option plan. That
registration statement will become effective automatically upon filing. After
the filing of a registration statement on Form S-8, shares issued under our
stock option plan may be sold in the open market, subject, in the case of
certain holders, to the Rule 144 limitations applicable to affiliates, the
lock-up agreements and vesting restrictions imposed by us.
In addition, following this offering, the holders of an aggregate of
13,425,316 shares of outstanding common stock will, under certain
circumstances, have rights to require us to register their shares for future
sale.
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, Warburg Dillon Read
LLC, a subsidiary of UBS AG, SoundView Technology Group, Inc. and Wit Capital
Corporation (as e-Manager(TM)), have severally agreed, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock listed opposite their names below. The underwriters have
committed to purchase and pay for all such shares if any are purchased, subject
to the conditions stated in the underwriting agreement.
<TABLE>
<CAPTION>
Number of
Name of Underwriter Shares
- ------------------- ---------
<S> <C>
Dain Rauscher Wessels ................................................
Warburg Dillon Read LLC, a subsidiary of UBS AG.......................
SoundView Technology Group, Inc. .....................................
Wit Capital Corporation...............................................
---------
Total...............................................................
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
our shares of common stock to the public at the initial public offering price
stated on the cover page of this prospectus and to certain dealers at that
price less a concession of no more than $ per share, of which $ may
be reallowed to other dealers. After the public offering, the representatives
may reduce the public offering price, concession and reallowance to dealers.
The representatives may not change the offering price and other selling terms
until after the completion of this offering, and no reduction in the offering
price may change the amount of proceeds to be received by WatchGuard stated on
the cover page of this prospectus.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, all dealers purchasing shares from
Wit Capital in this offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of these dealers. Wit Capital,
a member of the National Association of Securities Dealers, Inc., will
participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997.
The underwriting agreement contains covenants of indemnity among the
underwriters and WatchGuard against civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
We have granted to the underwriters an option to purchase up to
additional shares of common stock, which may be exercised at any time up to 30
days after the date of this prospectus. The option entitles the underwriters to
purchase the additional shares of common stock at the same price per share as
the shares being sold in this offering. If the underwriters exercise
the option, each of the underwriters must purchase approximately the same
percentage of additional shares that they purchased from WatchGuard. If
purchased, the underwriters will sell the additional shares on the same terms
as those on which the shares are being sold.
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<PAGE>
The price of the shares of common stock purchased by the underwriters will be
the public offering price stated on the cover page of this prospectus less the
following underwriting discounts and commissions to be paid by us:
<TABLE>
<CAPTION>
Total Without Total With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
By WatchGuard........................... $ $ $
</TABLE>
We will also pay offering expenses estimated to total $1,200,000.
Most of our stockholders and option holders have agreed, for a period of 180
days after the date of this prospectus, not to sell, transfer, grant any third
party the right to purchase, or otherwise dispose of any shares of common stock
or other securities that they own or acquire, without the prior written consent
of the underwriters. This 180-day period is known as the lock-up period. The
representatives may, without notice and in their sole discretion, allow any
stockholder or option holder to dispose of common stock or other securities
before the expiration of the lock-up period. There are, however, no agreements
between the underwriters and any of our stockholders or option holders that
would allow them to do so.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities during
the lock-up period without the prior consent of the underwriters. This
agreement does not include shares of common stock or other securities issued
under our stock option plan or common stock or other securities issued for
options or other securities outstanding on the date of this prospectus.
The underwriters have advised us that in connection with this offering,
certain persons participating in this offering may engage in transactions that
may have the effect of stabilizing or maintaining the market price of the
common stock at a level above that which might otherwise prevail in the open
market. These transactions may include stabilizing bids, syndicate covering
transactions and the imposition of penalty bids. A "stabilizing bid" is a bid
for or the purchase of common stock on behalf of the underwriters for the
purpose of preventing or retarding a decline in the market price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering, if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that such transactions may be
effected on the Nasdaq National Market or other market and, if commenced, may
be discontinued at any time.
Before this offering, there was no public market for our common stock. The
initial public offering price for the common stock will be determined by
negotiation between us and the representatives of the underwriters. Factors to
be considered in determining the initial public offering price include
. prevailing market and economic conditions;
. our revenues and earnings;
. the state of our business operation;
. an assessment of our management;
69
<PAGE>
. market valuation of companies in related businesses; and
. other relevant factors.
The prices at which the common stock will sell in the public market after this
offering, however, may not be equal to or greater than the initial public
offering price.
LEGAL MATTERS
Certain legal matters will be passed on for WatchGuard by Perkins Coie LLP,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California and Kirkland, Washington.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1997 and 1998, for the period from
February 14, 1996 (date of inception) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998, as set forth in their reports.
We have included our financial statements and schedule in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which is part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. References made in this prospectus to
any contract or other document of WatchGuard are not necessarily complete, and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract or document. You may review a copy of the
registration statement, including attached exhibits and schedule, at the SEC's
public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain
copies of these materials from the Public Reference Room of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as WatchGuard, that file
electronically with the SEC.
70
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
WatchGuard Technologies, Inc.
We have audited the accompanying balance sheets of WatchGuard Technologies,
Inc. as of December 31, 1997 and 1998 and the related statements of operations,
stockholders' equity, and cash flows for the period from February 14, 1996
(date of inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998. These financial statements are the responsibility of
WatchGuard's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WatchGuard Technologies, Inc.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from February 14, 1996 (date of inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
Seattle, Washington
March 26, 1999, except as to Note 11,
as to which the date is April , 1999.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 11 to the financial statements.
ERNST & YOUNG LLP
Seattle, Washington
April 19, 1999
F-2
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- December 31,
1997 1998 1998
------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 603 $ 1,712
Trade accounts receivable, net.............. 1,596 3,491
Inventories................................. 218 2,156
Prepaid expenses............................ 162 450
------- --------
Total current assets.................... 2,579 7,809
Equipment and furniture, net.................. 372 1,140
Deposits, intangibles, and other assets....... 352 83
------- --------
Total assets............................ $ 3,303 $ 9,032
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................. $ 500 $ 2,500
Accounts payable............................ 682 2,185
Accrued expenses............................ 426 1,016
Deferred revenue............................ 313 1,773
Current portion of long-term debt........... -- 216
------- --------
Total current liabilities............... 1,921 7,690
Long-term debt, less current portion.......... -- 393
Deferred revenue.............................. -- 68
Commitments...................................
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 10,000,000
Shares issued and outstanding -- 5,316,670
and 6,712,658 at December 31, 1997 and
1998, respectively (none pro forma)......
Liquidation preference -- $13,250......... 6,129 13,204 $ --
Common stock, $0.001 par value:
Authorized shares -- 80,000,000
Shares issued and outstanding -- 532,916
and 1,362,744 at December 31, 1997 and
1998, respectively (14,788,060
pro forma)............................... 55 3,064 16,268
Deferred stock-based compensation........... -- (1,466) (1,466)
Accumulated deficit......................... (4,802) (13,921) (13,921)
------- -------- --------
Total stockholders' equity.............. 1,382 881 $ 881
------- -------- ========
Total liabilities and stockholders'
equity................................. $ 3,303 $ 9,032
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Period from
February 14, 1996 Year Ended
(date of inception) December 31,
to December 31, --------------------
1996 1997 1998
------------------- -------- ----------
<S> <C> <C> <C>
Revenues, net:
Product........................... $ 329 $ 4,975 $ 10,678
Service........................... 2 123 701
----- -------- ----------
Total revenues.................. 331 5,098 11,379
Cost of revenues.................... 104 1,610 3,925
----- -------- ----------
Gross margin........................ 227 3,488 7,454
Operating expenses:
Sales and marketing............... 224 4,369 8,666
Research and development.......... 274 2,192 5,273
General and administrative........ 191 1,323 2,515
----- -------- ----------
Total operating expenses............ 689 7,884 16,454
----- -------- ----------
Operating loss...................... (462) (4,396) (9,000)
Interest income..................... -- 88 84
Interest expense.................... (6) (26) (203)
----- -------- ----------
Net loss............................ $(468) $ (4,334) $ (9,119)
===== ======== ==========
Basic and diluted net loss per
share.............................. N/A $ (17.17) $ (11.34)
===== ======== ==========
Shares used in calculation of basic
and diluted net loss per share..... N/A 252,476 803,878
===== ======== ==========
Pro forma basic and diluted net loss
per share (unaudited).............. $ (0.68)
==========
Shares used in calculation of pro
forma basic and diluted net loss
per share (unaudited).............. 13,374,268
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Deferred
----------------- ---------------- Stock-Based Accumulated
Shares Amount Shares Amount Compensation Deficit Total
--------- ------- --------- ------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Series A
Preferred Stock........ 3,000,004 $ 150 -- -- -- -- $ 150
Net loss................ -- -- -- -- -- $ (468) (468)
--------- ------- --------- ------ ------- -------- -------
Balance, December 31,
1996................... 3,000,004 150 -- -- -- (468) (318)
Sale of Series B
Preferred Stock, net
of issuance costs of
$21.................. 2,316,666 5,979 -- -- -- -- 5,979
Issuance of common
stock in settlement
of royalty payments.. -- -- 400,000 $ 52 -- -- 52
Exercise of common
stock options and
warrants............. -- -- 132,916 3 -- -- 3
Net loss.............. -- -- -- -- -- (4,334) (4,334)
--------- ------- --------- ------ ------- -------- -------
Balance, December 31,
1997................... 5,316,670 6,129 532,916 55 -- (4,802) 1,382
Sales of Series B
Preferred............ 38,610 100 -- -- -- -- 100
Sales of Series C
Preferred, net of
issuance costs of
$25.................. 1,357,378 6,975 -- -- -- -- 6,975
Stock options
exchanged for
services............. -- -- -- 628 -- -- 628
Issuance of stock
warrant to a
customer............. -- -- -- 470 -- -- 470
Deferred stock
compensation......... -- -- -- 1,877 $(1,877) -- --
Amortization of
deferred stock-based
compensation......... -- -- -- -- 411 -- 411
Exercise of common
stock options and
warrants............. -- -- 829,828 34 -- -- 34
Net loss.............. -- -- -- -- -- (9,119) (9,119)
--------- ------- --------- ------ ------- -------- -------
Balance, December 31,
1998................... 6,712,658 $13,204 1,362,744 $3,064 $(1,466) $(13,921) $ 881
========= ======= ========= ====== ======= ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
February 14, 1996 Year Ended
(date of inception) December 31,
to December 31, ----------------
1996 1997 1998
------------------- ------- -------
<S> <C> <C> <C>
Operating activities
Net loss................................ $(468) $(4,334) $(9,119)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 23 207 235
Stock and warrant issued in exchange
for services......................... -- -- 1,509
Changes in operating assets and
liabilities:
Increase in trade accounts
receivable......................... (167) (1,429) (1,895)
Increase in inventories............. -- (214) (1,938)
Increase in prepaid expenses........ (52) (113) (288)
Increase (decrease) in deposits and
other assets....................... (41) (273) 269
Increase in accounts payable and
accrued expenses................... 240 868 2,093
Increase (decrease) in deferred
revenue............................ 334 (22) 1,528
----- ------- -------
Net cash used in operating activities... (131) (5,310) (7,606)
Investing activities
Purchase of equipment and furniture..... (77) (391) (1,003)
Purchase of intangible assets........... (10) (70) --
----- ------- -------
Net cash used in investing activities... (87) (461) (1,003)
Financing activities
Borrowings on line of credit and long-
term debt.............................. 300 700 2,663
Principal repayments on line of credit.. -- (500) (54)
Repayment of note payable............... -- (40) --
Proceeds from sale of preferred stock... 150 5,979 7,075
Proceeds from exercise of common stock
options and warrants................... -- 3 34
----- ------- -------
Net cash provided by financing
activities............................. 450 6,142 9,718
----- ------- -------
Net increase in cash and cash
equivalents............................ 232 371 1,109
Cash and cash equivalents at beginning
of period.............................. -- 232 603
----- ------- -------
Cash and cash equivalents at end of
period................................. $ 232 $ 603 $ 1,712
===== ======= =======
Supplementary disclosure of cash flow
information:
Cash paid for interest................ $ 6 $ 21 $ 179
===== ======= =======
Supplemental schedule of noncash
investing and financing activities:
Issuance of note payable for purchase
of intangible assets................. $ 40 $ -- $ --
===== ======= =======
Issuance of common stock for purchase
of intangible assets................. $ -- $ 52 $ --
===== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Accounting Policies
Description of Business
WatchGuard Technologies, Inc. is in the business of developing and marketing
Internet security solutions which incorporate a security appliance, security
and management software, and an Internet-based broadcast service designed to
keep its products current. WatchGuard was incorporated in the state of
Washington on February 14, 1996 and maintains its headquarters in Seattle,
Washington. In May 1997, WatchGuard reincorporated in the state of Delaware. In
conjunction with the reincorporation, WatchGuard changed its name from Seattle
Software Labs, Inc. to WatchGuard Technologies, Inc. in August 1997.
Basis of Presentation
The accompanying financial statements have been prepared on a going-concern
basis. This basis of accounting contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business operations.
WatchGuard has recorded losses of $9.1 million during the year ended December
31, 1998 and had an accumulated deficit of $13.9 million. WatchGuard has
financed its operations to date through the issuance of equity securities and
debt financing. Further development and establishment of WatchGuard's business
will require additional equity or debt financing. WatchGuard believes that
equity or debt financing can be obtained from existing or new sources.
Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public
Accountants (AICPA) and was amended by Statement of Position 98-4 (SOP 98-4).
In December 1998, the AICPA issued SOP 98-9 which amends SOP 97-2 and 98-4 and
is effective for transactions entered into after March 15, 1999. WatchGuard
adopted SOP 97-2, as amended by SOP 98-9 effective January 1, 1998. Based upon
their interpretation of SOP 97-2 and SOP 98-9, WatchGuard believes its current
revenue recognition policies and practices are consistent with the SOPs.
However, full implementation guidelines for this standard have not yet been
issued. Once available, such implementation guidance could lead to
unanticipated changes in current revenue accounting practices, and such changes
could materially adversely affect the timing of WatchGuard's future revenues
and earnings.
WatchGuard generates revenues through two sources: (1) sales of its Firebox
products including related software licenses and (2) service subscription
revenues. Software license revenues are generated from licensing the rights to
use WatchGuard's products directly to end-users and indirectly through
sublicense fees from resellers, distributors and Internet service providers
(ISPs) and beginning in late 1998, from sales of its products to ISPs who
utilize the product to provide managed security services to the ISPs'
customers.
Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable and the fee is fixed or determinable. Vendor-specific objective
evidence is typically based on the price charged when an element is sold
separately or, in the case of an element not sold separately, revenues are
allocated using the residual method as provided in SOP 98-9. Revenues are
reduced by the amount of estimated returns.
F-7
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Revenues from service subscriptions are recognized ratably over the term of
the contract, typically one year. If a transaction includes both license and
support elements, license fees revenues are recognized on shipment of the
product.
Fair Values of Financial Instruments
At December 31, 1998, WatchGuard has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations and long-term debt. The carrying value
of cash and cash equivalents, accounts receivable, accounts payable, and
accrued liabilities approximates their fair value based on the liquidity of
these financial instruments or based on their short-term nature. The carrying
value of long-term debt approximates fair value based on the market interest
rates available to WatchGuard for debt of similar risk and maturities.
Cash Equivalents
WatchGuard considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at fair market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. WatchGuard outsources all of its hardware manufacturing and assembly to
one manufacturer and one assembler. The inability of the manufacturer and
assembler to supply product in a timely manner or on terms acceptable to
WatchGuard could severely affect WatchGuard's ability to meet customers'
demands.
Equipment and Furniture
Equipment and furniture is stated at cost, less accumulated depreciation.
Equipment and furniture is depreciated using the straight-line method over
estimated useful lives ranging from three to five years.
Research and Development
Research and development costs are expensed as incurred and consist primarily
of software development costs. Financial accounting standards require the
capitalization of certain software development costs after technological
feasibility of the software is established. In the development of WatchGuard's
new products and enhancements to existing products, the technological
feasibility of the software is not established until substantially all product
development is complete, including the development of a working model. Internal
software development costs that were eligible for capitalization were
insignificant and were charged to research and development expense in the
accompanying statements of operations.
Net Loss per Share
Basic and diluted net loss per share is calculated using the average number
of shares of common stock outstanding. Other common stock equivalents,
including preferred stock, stock options and warrants, are excluded from the
computation as their effect is antidilutive. See Note 6.
F-8
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Upon the completion of WatchGuard's proposed initial public offering, all
convertible preferred stock will automatically convert into common stock.
Accordingly, pro forma net loss per share is computed using the weighted
average number of shares of common stock outstanding and the weighted average
convertible preferred stock outstanding as if such shares were converted to
common stock at the time of issuance.
Advertising Costs
WatchGuard expenses advertising costs as incurred. Total expenses were $900,
$199,500, and $60,000 for 1996, 1997, and 1998, respectively.
Concentration of Credit Risk
WatchGuard is subject to concentrations of credit risk primarily from cash
investments. WatchGuard's credit risk is managed by investing its excess cash
in high-quality money market instruments. In addition, substantially all of
WatchGuard's accounts receivable are due from WatchGuard's resellers,
distributors and ISPs located throughout the world. International sales were
$46,000, $2.8 million and $4.0 million for 1996, 1997 and 1998, respectively.
No single customer, foreign country, or geographic area accounted for more than
10% of revenues in the periods presented. WatchGuard does not believe there are
any significant concentrations of credit risk as of December 31, 1998.
Stock Compensation
WatchGuard has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, WatchGuard accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Compensation cost for stock options is measured as
the excess, if any, of the fair value of WatchGuard's common stock at the date
of grant over the stock option exercise price.
Income Taxes
WatchGuard recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. WatchGuard provides a
valuation allowance for deferred tax assets that cannot be currently recognized
due to WatchGuard's losses and the uncertainty of future profitability.
Reclassifications
Certain prior year items have been reclassified to conform to the current
year presentation.
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-9
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement, adopted by
WatchGuard on January 1, 1998, does not affect results of operations or
financial position, as WatchGuard had no items that would have been classified
as other comprehensive income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which 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. Because WatchGuard has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of WatchGuard.
2. Balance Sheet Account Detail
Trade Accounts Receivable
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
(In
thousands)
<S> <C> <C>
Trade accounts receivable.................................... $1,720 $4,555
Reserve for returns.......................................... -- (615)
Allowance for uncollectible accounts......................... (124) (449)
------ ------
$1,596 $3,491
====== ======
</TABLE>
Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December
31,
-----------
1997 1998
---- ------
(In
thousands)
<S> <C> <C>
Finished goods................................................... $218 $1,203
Components....................................................... -- 953
---- ------
$218 $2,156
==== ======
</TABLE>
F-10
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Equipment and Furniture
Equipment and furniture consisted of the following:
<TABLE>
<CAPTION>
December
31,
-----------
1997 1998
---- ------
(In
thousands)
<S> <C> <C>
Computer equipment.............................................. $361 $ 831
Furniture and fixtures.......................................... 57 337
Software........................................................ 50 302
---- ------
468 1,470
Less accumulated depreciation................................... 96 330
---- ------
$372 $1,140
==== ======
</TABLE>
3. Acquisition of Intangibles
In March 1996, WatchGuard acquired certain technology from Mazama Software
Labs, Inc. (Mazama) for $50,000. Additionally, WatchGuard was required to make
royalty payments on the sale of products that utilized the Mazama technology
for a three-year period, with the total royalty payments not to exceed $4
million. In June 1997, WatchGuard and Mazama agreed to a buy-out of royalty
payments due Mazama, by having WatchGuard pay $70,000 in cash and issue 400,000
shares of its common stock valued at $52,000. This amount is included in other
assets, net of accumulated amortization of $157,600, and is being amortized
over its useful life of three years.
4. Debt
At December 31, 1998, WatchGuard had borrowings outstanding under a) a $2.5
million working capital revolving line of credit (increased to $4.5 million on
January 7, 1999); b) a $177,000 equipment term loan; and c) a $432,000
equipment term loan. All three facilities are from a commercial bank.
The revolving line of credit is for operating needs and expires on September
30, 1999. Borrowings under the line of credit bear interest at the bank's prime
interest rate plus 1.5%. The borrowing base for the line is to be monitored on
a monthly basis and is to consist of the sum of up to 75% of eligible domestic
and 50% of eligible foreign accounts receivable. There was $2.5 million
outstanding on this line at December 31, 1998 and no additional amount
available.
The $177,000 term loan bears interest at the banks prime interest rate plus
1.5% and matures in March 2001. The $432,000 term loan bears interest at the
bank's prime interest rate plus 1% and matures in December 2001. The term loans
require monthly principal and interest payments of $6,327 and $11,995,
respectively and are collateralized by equipment.
At December 31, 1998, WatchGuard was not in compliance with certain covenants
related to the line of credit and term loans, but has obtained a waiver for
non-compliance at December 31, 1998. In addition, the bank has deleted these
covenants through the earlier of June 30, 1999 or the completion of an initial
public offering of WatchGuard's stock.
F-11
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Maturities of the term loans are as follows:
<TABLE>
<S> <C>
1999................................................................ $216
2000................................................................ 220
2001................................................................ 173
----
$609
====
</TABLE>
Convertible Note Financing and Warrants
In March 1999, WatchGuard entered into Convertible Note Agreements with its
existing investors for $3,000,000. The notes bear interest at 6%. The notes
will be repaid upon an initial public offering or converted into Series D
preferred stock (new series) if a subsequent private financing is completed.
WatchGuard also issued 42,856 warrants (21,428 to each group of funds), which
are priced at $7.00 per share and are exercisable immediately. These warrants,
if not exercised before the closing of an initial public offering, will
automatically convert into common stock on a net exercise basis upon completion
of an initial public offering. The warrants were valued using an option pricing
model. The fair value of the warrants will be amortized to expense over the
term of the notes.
5. Shareholders' Equity
Reincorporation
WatchGuard was incorporated as Seattle Software Labs, Inc. in the state of
Washington in February 1996. In March 1996, WatchGuard sold 1,000,000 shares of
Series A preferred stock to its two cofounders for $0.05 per share, resulting
in aggregate proceeds of $50,000. In July 1996, WatchGuard sold 350,878 shares
of what was originally characterized as Series B preferred stock to the
cofounders for $0.29 per share, resulting in aggregate proceeds of $100,000. In
March 1997, WatchGuard restated its Articles of Incorporation and increased the
number of authorized shares to 90,000,000 shares, consisting of 80,000,000
shares of common stock and 10,000,000 shares of preferred stock. In connection
with the restated Articles of Incorporation, WatchGuard reclassified the
preferred shares originally characterized as Series B preferred stock into
2,000,004 Series A preferred shares. The financial statements have been
restated to reflect this recapitalization.
Preferred Stock
In May 1997, WatchGuard completed a Series B preferred stock offering by
selling 2,316,666 shares at $2.59 per share, aggregating gross proceeds of $6
million. In March 1998, an additional 38,610 shares of Series B preferred stock
were issued at $2.59 per share. In April 1998, WatchGuard completed a Series C
preferred stock offering by selling 1,357,378 shares at $5.16 per share,
aggregating gross proceeds of approximately $7,000,000.
Holders of Series A, B, and C preferred stock have preferential rights to
dividends when and if declared by the board of directors. Series A, B and C
preferred stockholders have the right to one vote for each share of common
stock into which such Series A, B, and C preferred stock could then be
converted and, with respect to such vote, have full voting rights and powers
equal to those of the holders of common stock.
F-12
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In the event of liquidation, the holders of Series A, B, and C preferred
stock have preferential rights to liquidation payments of $0.05, $2.59, and
$5.16 per share, respectively, plus any declared, but unpaid, dividends. Series
A, B, and C preferred stock is convertible into common stock at a price per
share of $0.05, $2.59, and $5.16 respectively, at the option of the holder, or
automatically upon the vote or written consent of a majority of Series A, B,
and C preferred stockholders, or upon the closing of an initial public offering
of WatchGuard's common stock from which the aggregate proceeds are not less
than $15 million and a price per share is paid by the public of at least
$10.31. Currently, each share of Series A, B, and C preferred stock converts
into one share of common stock.
The following is a summary of terms and conditions for each series of
preferred stock as of December 31, 1998.
<TABLE>
<CAPTION>
Annual
Approximate Dividend
Aggregate Rate --
Shares Shares Stated Liquidation Non-
Designated Outstanding Value Value Cumulative
---------- ----------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Series A................ 3,000,004 3,000,004 $0.05 $ 150,000 $0.01
Series B................ 2,374,581 2,355,276 2.59 6,100,000 0.16
Series C................ 1,357,378 1,357,378 5.16 7,000,000 0.31
</TABLE>
Stock Options
During 1996 WatchGuard adopted the 1996 Stock Option Plan (the Plan), which
provides for the granting of incentive and nonqualified stock options to
employees, officers, directors, agents, consultants, and independent
contractors.WatchGuard has authorized 7,734,986 shares of common stock for
possible grants under the Plan. Options under the Plan generally are granted at
fair market value on the date of grant and expire after ten years. Options
granted under the Plan become vested with respect to 25% of the shares of
common stock covered by the option on the first anniversary of the date of
grant, with the remaining shares vesting at 2.08% every month thereafter, with
all shares becoming fully vested on the fourth anniversary date of the date of
grant. Stock options under the Plan have a term of ten years unless modified by
the plan administrator.
The following table summarizes WatchGuard's stock option activity:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. -- $ -- 1,156,994 $0.03 5,227,580 $0.08
Granted................. 1,156,994 0.03 4,970,526 0.08 1,212,500 0.44
Exercised............... -- -- (12,916) 0.03 (819,828) 0.04
Canceled................ -- -- (887,024) 0.04 (474,984) 0.09
--------- --------- ---------
Balance at end of
period................. 1,156,994 0.03 5,227,580 0.08 5,145,268 0.16
========= ========= =========
Exercisable at end of
period................. -- 389,396 1,618,038
Weighted average fair
value of option granted
during period
Granted at fair
value................ 1,156,994 0.01 4,970,526 0.02 308,000 0.01
Granted at below fair
value................ -- -- -- -- 904,500 2.08
</TABLE>
F-13
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
At December 31, 1998, 1,756,974 shares of common stock were available for
future grant under the Plan.
Information regarding the weighted average remaining contractual life and
weighted average exercise price of options outstanding and options exercisable
at December 31, 1998 for selected exercise price ranges is as follows:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
---------------------------------- ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Prices Shares Life (in years) Price Shares Price
- --------------- --------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.03-0.14................ 4,501,392 8.08 $0.09 1,582,370 $0.08
$0.39-0.55................ 516,876 9.54 0.54 33,481 0.55
$1.13-2.25................ 127,000 9.74 1.29 2,187 1.13
--------- ---------
5,145,268 8.27 $0.16 1,618,038 $0.09
========= =========
</TABLE>
WatchGuard uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying financial
statements because the fair value of the underlying common stock equals or
exceeds the exercise price of the stock options at the date of grant, except
with respect to certain options granted during the year ended December 31,
1998. WatchGuard has recorded deferred stock compensation expense of
$1.9 million relating to options granted during the year ended December 31,
1998. This amount represents the difference between the exercise price and the
deemed fair value for financial reporting purposes of WatchGuard's common stock
during the periods in which such options were granted. Amortization of deferred
stock compensation of $411,000 was recognized during the year ended December
31, 1998.
The following pro forma information regarding stock-based compensation has
been determined as if WatchGuard had accounted for its employee stock options
under the fair market value method of SFAS 123. The fair value of these options
was estimated at the date of grant using a minimum value option pricing model
with the following weighted average assumptions: risk-free interest rates range
from 6.0% to 5.0% in 1996, 1997, and 1998; a dividend yield rate of 0% for all
periods; and an expected life of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. WatchGuard's
pro forma information is as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Net loss -- as reported............................ $(468) $(4,334) $(9,119)
Net loss -- pro forma.............................. (470) (4,368) (9,182)
Net loss per share -- as reported.................. N/A (17.17) (11.34)
Net loss per share -- pro forma.................... N/A (17.30) (11.42)
</TABLE>
Under SFAS 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The initial impact on pro
forma net loss may not be
F-14
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
representative of compensation expense in future years, when the effect of
amortization of multiple awards would be reflected in pro forma earnings.
In December 1997 WatchGuard granted approximately 48,000 options with
exercise prices ranging from $0.05 to $0.26 to a consultant in connection with
a one-year consulting agreement. The options vest at the December 1998
termination date of the consulting agreement. WatchGuard has recorded
compensation expense of approximately $628,000 based on the fair value of the
options at the termination of the consulting agreement.
Common Stock Warrants
During 1996, WatchGuard issued 145,000 common stock warrants at $0.03 per
share to various consultants and vendors for technical and marketing services.
The warrants expire five years from date of issuance beginning in July 2001.
During 1997 and 1998, 100,000 and 10,000, respectively, of these warrants were
exercised.
In January 1997, WatchGuard granted 20,000 warrants at $0.03 per share to a
professional for professional services. In July 1997, the 20,000 warrants were
exercised.
In March 1998, WatchGuard granted 10,000 common stock warrants at $0.13 per
share to a bank in connection with a debt financing.
In June 1998, WatchGuard granted 200,000 common stock warrants at $0.39 to a
strategic partner. The warrants are fully vested and exercisable at the date of
grant. The fair value of the warrants of approximately $470,000 was recorded as
sales and marketing expense.
Common Shares Reserved
At December 31, 1998 common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Conversion of preferred stock................................. 13,425,316
Exercise of common stock options.............................. 6,902,242
Exercise of common stock warrants............................. 245,000
----------
20,572,558
==========
</TABLE>
6. Net Loss per Share
Basic and diluted net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding. Pro forma net
loss per share is computed using the weighted average number of shares used for
basic and diluted per share amounts and the weighted average convertible
redeemable preferred stock outstanding as if such shares were converted to
common stock at the time of issuance.
F-15
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Period from Years Ended
February 14, 1996 December 31,
(date of inception) -------------------
to December 31, 1996 1997 1998
-------------------- ------- ----------
(In thousands except for share data)
<S> <C> <C> <C>
Net loss............................. $(468) $(4,334) $ (9,119)
===== ======= ==========
Basic and diluted net loss per common
share............................... N/A $(17.17) $ (11.34)
===== ======= ==========
Weighted average number of common
shares used for basic and diluted
per share amounts................... N/A 252,476 803,878
===== ======= ==========
Weighted average common shares
issuable upon pro forma conversion
of preferred stock.................. 12,570,390
----------
Weighted average number of shares
used for pro forma per share amounts
(unaudited)......................... 13,374,268
==========
Pro forma basic and diluted net loss
per share (unaudited)............... $ (0.68)
==========
</TABLE>
There were 5,145,268 stock options and 245,000 common stock warrants that
were excluded from the computation of actual and pro forma diluted net loss per
common share as their effect is antidilutive.
7. Income Taxes
At December 31, 1998 WatchGuard had a net operating loss carryforward for
federal tax purposes of approximately $9,875,000. The carryforwards begin to
expire in 2011. Utilization of net operating loss carryforwards may be subject
to certain limitations under Section 382 of the Internal Revenue Code. A
valuation allowance has been established to reflect the uncertainty of future
taxable income to utilize available tax loss carryforwards.
Deferred income taxes reflect the net tax effect 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 WatchGuard's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,423 $ 3,358
Research and development tax credit...................... 92 218
Reserves................................................. 42 518
Accrued expenses......................................... 43 102
------- -------
Total deferred tax assets.................................. 1,600 4,196
Valuation allowance........................................ (1,600) (4,196)
------- -------
Net deferred taxes......................................... $ -- $ --
======= =======
</TABLE>
WatchGuard's valuation allowance increased $159,000, $1,441,000, and
$2,596,000 for 1996, 1997, and 1998, respectively.
F-16
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Retirement 401(k) Plan
WatchGuard sponsors a 401(k) plan that is available to all employees who
satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Eligible employees may elect to contribute up to 15%
of their pre-tax gross earnings, subject to statutory limitations regarding
maximum contributions. WatchGuard may also make a discretionary contribution to
the plan. No such contributions have been made by WatchGuard.
9. Commitments
WatchGuard leases office space and equipment under noncancelable operating
leases. Future minimum payments at December 31, 1998 under these leases are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 489
2000.............................................................. 441
2001.............................................................. 155
2002.............................................................. 23
2003 and thereafter............................................... 14
------
$1,122
======
</TABLE>
Two of the officers of WatchGuard are guarantors of part of the office lease.
Rent expense for 1996, 1997 and 1998 was $67,000, $134,000 and $273,000,
respectively.
10. International Revenues
WatchGuard licenses and markets its products throughout the world, and
operates in a single industry segment. Information regarding revenue in
different geographic regions is as follows:
<TABLE>
<CAPTION>
Revenues
-------------------
1996 1997 1998
---- ------ -------
(In thousands)
<S> <C> <C> <C>
United States............................................ $285 $2,262 $ 7,401
Europe................................................... 42 1,140 2,049
Asia..................................................... 2 1,209 1,106
Other.................................................... 2 487 823
---- ------ -------
Total.................................................... $331 $5,098 $11,379
==== ====== =======
</TABLE>
11 . Subsequent Events
Initial Public Offering
On April 12, 1999, the board of directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
WatchGuard to offer its common stock to the public. If the offering is
consummated under terms presently anticipated, each outstanding share of
convertible preferred stock will convert into two shares of common stock.
Unaudited pro forma stockholders' equity reflects the assumed conversion of the
convertible preferred stock outstanding at December 31, 1998.
F-17
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock Split
On April 12, 1999, the board of directors authorized a 2-for-1 stock split of
WatchGuard's common stock. The stock split was effected on , 1999. The
related common share, preferred share and per share data in the accompanying
financial statements has been retroactively restated to reflect the stock
split, including preferred share data on an assumed converted to common stock
basis.
F-18
<PAGE>
[INSIDE BACK COVER ART WORK]
SELF MANAGED
1 WATCHGUARD LIVESECURITY delivers
software updates, threat responses
and information alerts to security
managers of subscribing businesses.
2 CLIENT SECURITY MANAGER The security Subscribing customers
manager receives the encrypted data Correspondingly numbered circles
and updates the central Firebox. encapsulating drawings representing
the numbered descriptions
3 BUSINESS From the central Firebox,
via the Internet, the security updates
are forwarded to Fireboxes at branch
office locations.
4 FIREBOX Two-way communication between
the central and remote Fireboxes
provides the organization with a secure
Virtual Private Network and the security
manager with complete monitoring and
management authority.
5 BRANCH OFFICES Organization's security
defenses remain current at all times.
ISP MANAGED
1 WATCHGUARD'S LIVESECURITY for MSS software
and policy updates are encrypted and
broadcast to the Network Operation Center
(NOC) of the Internet Service Provider (ISP).
Internet Service Provider
Correspondingly numbered 2 ISP NOC CENTER The security systems and
circles encapsulating management controls reside with the ISP in
the numbered descriptions the NOC.
3 ISP SECURITY MANAGER From the NOC, the ISP
security manager forwards security updates,
via the Internet, to the Fireboxes of
subscribing customers.
4 FIREBOX Two-way communication from the
customer's Fireboxes enable activity logs to
be forwarded to the ISP Security manager for
monitoring and management.
5 SUBSCRIBERS Customer's security defenses
remain current at all times.
<PAGE>
[BACK COVER]
LIVE
WatchGuard Live Security
WatchGuard(R)'s innovative LiveSecurity solution delivers, directly to an
organization or through an Internet service provider, up-to-date Internet
security designed to protect businesses, governments and schools using the
Internet for electronic commerce and communication.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table states the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the common stock being registered by this registration
statement. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 12,788
NASD filing fee................................................ 5,100
Nasdaq National Market listing fee............................. 95,000
Blue Sky fees and expenses..................................... 10,000
Printing and engraving expenses................................ 150,000
Legal fees and expenses........................................ 500,000
Accounting fees and expenses................................... 300,000
Directors and officers insurance............................... 100,000
Transfer Agent and Registrar fees.............................. 10,000
Miscellaneous expenses......................................... 17,112
----------
Total...................................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard
applies in the case of derivative actions, except that indemnification extends
only to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that other indemnification may also be granted by a corporation's charter,
bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
Section 10 of the registrant's restated bylaws (Exhibit 3.2) requires
indemnification to the full extent permitted under Delaware law. Subject to any
restrictions imposed by Delaware law, the registrant's bylaws provide an
unconditional right to indemnification for all expense, liability and loss
(including attorneys' fees, judgment, fines, ERISA excise taxes or penalties
and amounts paid in settlement) actually and reasonably incurred or suffered by
any person in connection with any actual or threatened action, suit or
proceeding, whether civil, criminal, administrative or investigative
(including, to the extent permitted by law, any derivative action) by reason of
the fact that the person is or was serving as a director or officer of the
registrant or that, being or having been a director or officer of the
registrant, the person is or was serving at the registrant's request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefit plan. The bylaws also provide that the
II-1
<PAGE>
registrant may, by action of the registrant's board of directors, provide
indemnification to its employees and agents with the same scope and effect as
the above indemnification of directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article 10 of the registrant's Restated Certificate of Incorporation (Exhibit
3.1) provides that to the full extent that the DGCL permits the limitation or
elimination of the liability of directors, the registrant's directors shall not
be liable to the registrant or its stockholders for monetary damages for breach
of fiduciary duty as a director. Any amendment to or repeal of Article 10 shall
not adversely affect any right or protection of the registrant's directors for
or with respect to any acts or omissions of the directors occurring before the
amendment or repeal.
The registrant intends to obtain and maintain directors' and officers'
liability insurance, under which the registrant's directors and officers may be
indemnified against liability they may incur for serving in their capacities as
directors and officers of the registrant.
Item 15. Recent Sales of Unregistered Securities
Since the registrant's inception in February 1996, the registrant has issued
and sold unregistered securities as follows. The numbers below reflect the 2-
for-1 split of the registrant's common stock, to be effective at the closing of
the offering reflected by this registration statement.
1. On March 11, 1996, the registrant issued 1,000,000 shares of Series A
preferred stock to the registrant's two cofounders for a consideration of $0.05
per share, or an aggregate of $50,000. On July 18, 1996, the registrant issued
an additional 2,000,004 shares of Series A preferred stock to the registrant's
two cofounders, for a consideration of $0.05 per share, or an aggregate of
$100,000. In the aggregate, these 3,000,004 shares of Series A preferred stock
are convertible into 6,000,008 shares of common stock.
2. On May 9, 1997, May 29, 1997 and March 12, 1998, the registrant issued
2,355,276 shares of Series B preferred stock, which are convertible into
4,710,552 shares of common stock, to seven investors for a consideration of
$2.59 per share, or an aggregate of $6,100,165.
3. On June 11, 1997, in accordance with an Asset Purchase Agreement among the
registrant, Mazama Software Labs, Inc. and the shareholders of Mazama, the
registrant issued 400,000 shares of common stock to Mazama in connection with
the registrant's purchase of certain of Mazama's technology.
4. On July 24, 1996, September 24, 1996, September 25, 1996 and January 28,
1997, the registrant issued warrants for the purchase of an aggregate of
165,000 shares of common stock, with an exercise price of $0.025 per share, to
five consultants in exchange for services.
5. On March 23, 1998, the registrant issued a warrant for the purchase of
10,000 shares of common stock, with an exercise price of $0.13 per share, to a
bank in connection with a debt financing.
II-2
<PAGE>
6. On April 24, 1998, the registrant issued 1,357,378 shares of Series C
preferred stock, which are convertible into 2,714,756 shares of common stock,
to eight investors for a consideration of $5.157 per share, or an aggregate of
$6,999,998.
7. On June 17, 1998, the registrant issued a warrant for the purchase of
200,000 shares of common stock, with an exercise price of $0.39 per share, to a
strategic partner in exchange for assistance with product specifications and
design.
8. From March 1, 1996 through March 1, 1999, the registrant granted stock
options to purchase 7,502,020 shares of common stock, with exercise prices
ranging from $0.03 to $7.00 per share, to employees under the registrant's 1996
Stock Option Plan. Of these options, options for 1,362,008 shares have been
canceled without being exercised, options for 884,198 shares have been
exercised and options for 5,255,814 shares remain outstanding.
9. On March 9, 1999, the registrant issued warrants for the purchase of an
aggregate of 42,856 shares of common stock, with an exercise price of $7.00 per
share, to two groups of affiliated investors in connection with a debt
financing.
The sales and issuances of securities described in paragraphs 1, 2, 3, 5, 6,
7 and 9 above were exempt from Securities Act registration under Section 4(2)
of the Securities Act, on the basis that the transactions did not involve a
public offering.
The sales and issuances of securities described in paragraphs 4 and 8 above
were exempt from Securities Act registration under Rule 701 under the
Securities Act, on the basis that these options were offered and sold either in
accordance with a written compensatory benefit plan or in accordance with
written contracts relating to compensation.
No underwriters were used in connection with these sales and issuances.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of the registrant.
3.2* Restated Bylaws of the registrant.
5.1* Opinion of Perkins Coie LLP as to the legality of the shares.
10.1 Lease Agreement, dated as of March 15, 1996, between COM Realty, Inc.
and the registrant.
10.2 Lease Agreement, dated as of October 10, 1997, between Burke-State
Bldg. LLC and the registrant.
10.3 Lease Agreement, dated as of August 17, 1998, between Cederstrand
Rentals and the registrant.
10.4 Amended and Restated Loan and Security Agreement, dated as of March 20,
1998, between Silicon Valley Bank and the registrant.
10.5 Loan Modification Agreement, dated as of September 18, 1998, between
Silicon Valley Bank and the registrant.
10.6 1996 Stock Option Plan.
10.7 Standardized Adoption Agreement Prototype Cash or Deferred Profit-
Sharing Plan and Trust (401(k) plan), effective as of September 1,
1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.8+ Development and Supply Agreement, dated as of March 25, 1998, between
SMART Modular Technologies, Inc. and the registrant.
10.9+ OEM Master License Agreement, dated as of August 14, 1997, between RSA
Data Security, Inc. and the registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors Report on Financial
Statement Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and Exchange
Commission.
(b)Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the registrant or in the related notes to the financial statements.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted against such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that
(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective; and
(2) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 16th day of April, 1999.
WATCHGUARD TECHNOLOGIES, INC.
/s/ Christopher G. Slatt
By: _________________________________
Christopher G. Slatt, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Christopher G. Slatt and Steven N. Moore, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to
the same offering as this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing, ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their
and his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 16th day of April, 1999.
<TABLE>
<C> <S>
/s/ Christopher G. Slatt President, Chief Executive Officer and
________________________________________ Chairman of the Board (Principal Executive
Christopher G. Slatt Officer)
/s/ Steven N. Moore Executive Vice President of Finance and
________________________________________ Operations, Chief Financial Officer,
Steven N. Moore Secretary and Treasurer (Principal
Financial and Accounting Officer)
/s/ Stuart J. Ellman Director
________________________________________
Stuart J. Ellman
/s/ Andrew W. Verhalen Director
________________________________________
Andrew W. Verhalen
/s/ Charles P. Waite, Jr. Director
________________________________________
Charles P. Waite, Jr.
</TABLE>
II-5
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------ ------------ --------------------- ------------ ----------
Additions
---------------------
Charged to Charged to
Balance at Revenue, Other Balance at
Beginning of Costs or Accounts-- Deductions-- End of
Description Period Expenses Describe Describe Period
- ------------------------ ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from February 14,
1996 (inception) to
December 31, 1996
Allowance for
uncollectible
accounts............. $-- $ 8 $-- $ -- $ 8
Sales return reserve.. $-- $ -- $-- $ -- $--
Year ended December 31,
1997
Allowance for
uncollectible
accounts............. $ 8 $ 122 $-- $ 6 $124
Sales return reserve.. $-- $ -- $-- $ -- $--
Year ended December 31,
1998
Allowance for
uncollectible
accounts............. $124 $ 418 $-- $ 93(A) $449
Sales return reserve.. $-- $1,655 $-- $1,040(B) $615
</TABLE>
- --------
(A) Deductions consist of write-offs of uncollectible accounts, net of
recoveries.
(B) Deductions consist of product returns.
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of the registrant.
3.2* Restated Bylaws of the registrant.
5.1* Opinion of Perkins Coie LLP as to the legality of the shares.
10.1 Lease Agreement, dated as of March 15, 1996, between COM Realty, Inc.
and the registrant.
10.2 Lease Agreement, dated as of October 10, 1997, between Burke-State
Bldg. LLC and the registrant.
10.3 Lease Agreement, dated as of August 17, 1998, between Cederstrand
Rentals and the registrant.
10.4 Amended and Restated Loan and Security Agreement, dated as of March 20,
1998, between Silicon Valley Bank and the registrant.
10.5 Loan Modification Agreement, dated as of September 18, 1998, between
Silicon Valley Bank and the registrant.
10.6 1996 Stock Option Plan.
10.7 Standardized Adoption Agreement Prototype Cash or Deferred Profit-
Sharing Plan and Trust (401(k) plan), effective as of September 1,
1998.
10.8+ Development and Supply Agreement, dated as of March 25, 1998, between
SMART Modular Technologies, Inc. and the registrant.
10.9+ OEM Master License Agreement, dated as of August 14, 1997, between
RSA Data Security, Inc. and the registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors Report on Financial
Statement Schedule.
</TABLE>
- --------
*To be filed by amendment.
+Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 10.1
OFFICE LEASE
OCCIDENTAL MALL
MSI
MARTIN SMITH INC
400 BRODERICK BUILDING
615 2ND AVENUE
SEATTLE, WASHINGTON 98104
682-3300 FAX 340-1283
THIS LEASE made this 15th day of March 1996, by and between COM REALTY,
INC., a Delaware corporation, as "Landlord," and SEATTLE SOFTWARE LABS, INC., a
Washington corporation, as "Tenant."
As parties hereto, Landlord and Tenant agree that the following terms as
used herein shall have the meanings provided in Section 1, unless otherwise
specifically modified by provisions of this Lease:
1. LEASE DATA AND EXHIBITS:
a. Building: ("Building"), the Burke Building (316 Occidental Avenue
South, Seattle, Washington) and the State Building (308 Occidental
Avenue South, Seattle, Washington), together known as Occidental Mall,
located in Seattle, Washington, situated on the real property more
particularly described in Section 2 hereof (the "Land").
b. Premises: ("Premises"), consisting of the floor area on the third
(3rd) floor of the Burke Building, as outlined in red on the floor
plan(s) of the Building, attached hereto as Exhibit A.
c. Agreed Areas: As used in this Lease, Landlord and Tenant agree to the
following areas and percentage of the Premises and the Building: Area
of the Building is the total square feet calculated on a full-floor
basis or 111,308 square feet; area of Tenant's Premises is
approximately 3,392 rentable square feet; Tenant's Percentage of the
Building is 3.05 percent.
d. Plan Delivery Date: N/A
e. Lease Commencement Date: April 1, 1996 or such earlier or later date
as provided in Section 3 hereof ("Commencement Date").
<PAGE>
f. Lease Expiration Date: March 31, 2001 ("Expiration Date").
g. Rent: Rent shall be as set forth below, payable on or before the first
day of each month. Rent shall be adjusted from time to time as provided
in Sections 7, 8, and 9 hereof.
<TABLE>
<S> <C> <C>
April 1, 1996 to May 31, 1996 $0.00
June 1, 1996 to March 31, 1997 $4,276.75 per month
April 1, 1997 to March 31, 1998 $4,418.08 per month
April 1, 1998 to March 31, 1999 $4,559.41 per month
April 1, 1999 to March 31, 2000 $4,700.75 per month
April 1, 2000 to March 31, 2001 $4,842.08 per month
</TABLE>
h. Security Deposit: $4,842.08
i. For Notices and Payments:
Landlord: COM Realty, Inc.
c/o Martin Smith Inc, Agent
615 Second Avenue, Suite 400
Seattle, Washington 98104
Tenant: Seattle Software Labs, Inc.
316 Occidental Avenue South, Suite 301
Seattle, Washington 98104
j. Exhibits: The following exhibits or riders are made a
part of this Lease:
Exhibit A-Floor Plan of Premises.
Exhibit B-Guaranty
2. PREMISES: Landlord does not hereby lease to Tenant, and Tenant does hereby
lease from Landlord, upon the terms and conditions herein set forth, those
certain Premises described in Subsection 1.b hereof, located in Seattle,
King County, Washington, more particularly described as:
Lots 1,2,3, and 4, Block 11, Town of Seattle, as laid out by D. S.
Maynard, commonly known as D. S. Maynard's Plat of Seattle, according
to the plat recorded in Volume 1 of Plats, Page 23, in King County,
Washington; EXCEPT the West 9 feet thereof condemned in District Court
Cause No. 7089 for Occidental Avenue, as provided by Ordinance No.
1109 of the City of Seattle; and EXCEPT that portion of said Lot 2
conveyed to Wilbert L. Smith by Deed recorded under recording number
186629 in King County, Washington.
2
<PAGE>
3. COMMENCEMENT AND EXPIRATION DATES:
a. Lease Commencement Date: The Lease Commencement Date shall be:
i. The date specified in Subsection 1.e unless notice is delivered
pursuant to Subsection 3.a.ii or
ii. Such earlier or later date as may be specified in a notice
delivered to Tenant at least five days before such date upon
which the Premises, together with the common facilities for
access and service therein, have been completed.
b. Tenant Termination Rights: In the event a Lease Commencement Date as
provided in Subsection 3.a.ii above does not occur within three months
following the Lease Commencement Date specified in Subsection 1.e,
Tenant may terminate this Lease by written notice to Landlord not
later than ten (10) days following the end of such three-month period.
c. Confirmation of Commencement Date: When a Lease Commencement Date as
provided in Subsections 3.a.ii and iii above has been established as a
later or earlier date than the Lease Commencement Date provided in
Subsection 1.e hereof, Landlord shall confirm the same to Tenant in
writing.
d. Lease Expiration Date: This Lease shall expire on the date specified
in Subsection 1.f.
4. RENT: Tenant shall pay Landlord the monthly rental stated in Subsection
1.g hereof ("Rent") and Additional Rent as provided in Sections 8 and 9 and
any other additional payments due under this Lease, without deduction or
offset, payable in lawful money of the United States in advance on or
before the day specified in Subsection 1.g to Landlord at the address noted
in Subsection 1.i hereof, or to such other party or at such other place as
Landlord may hereafter from time to time designate in writing. Rent for any
partial month at the beginning or ending of the lease term shall be
prorated.
5. SECURITY DEPOSIT: As partial consideration for the execution of this
Lease, Tenant has paid to Landlord the sum specified in Subsection 1.h
hereof, the receipt of which is hereby acknowledged. If Tenant shall
default with respect to any covenant or condition of this Lease, including
but not limited to the payment of rent, Landlord may apply all or any part
of such deposit to the payment of any sum in default or any other sum which
Landlord may be required to spend or incur by reason of Tenant's default;
and in such event, Tenant shall upon demand deposit with Landlord the
amount so applied so that Landlord shall have the full deposit on hand at
all times during the term of this Lease. If Tenant shall have fully
complied with all of the covenants and
3
<PAGE>
conditions of this Lease, but not otherwise, such sum shall be repaid to
Tenant within 30 days after the expiration or sooner termination of this
Lease.
6. USES: The Premises are to be used only for general office purposes (the
"Permitted Uses"), and for no other business or purpose without the written
consent of Landlord. No act shall be done in or about the Premises that is
unlawful or that will increase the existing rate of insurance on the
Building. Tenant shall not commit or allow to be committed any waste upon
the Premises, or any public or private nuisance or other act or thing which
disturbs the quiet enjoyment of any other tenant in the Building. Tenant
shall not, without the written consent of Landlord, use any apparatus,
machinery or device in or about the Premises which will cause any
substantial noise or vibration. If any of Tenant's office machines and
equipment should disturb the quiet enjoyment of any other tenant in the
Building, then Tenant shall provide adequate insulation, or take such other
action as may be necessary to eliminate the disturbance. Tenant shall
comply with all laws relating to its use of the Premises and shall observe
such reasonable rules and regulations as may be adopted and published by
Landlord for the safety, care and cleanliness of the Premises or the
Building, and for the preservation of good order therein.
7. SERVICES AND UTILITIES: As long as Tenant is not in default under any of
the provisions of this Lease, Landlord shall maintain the Premises and the
public and common areas of the Building, such as lobbies, stairs, corridors
and restrooms, in reasonably good order and condition except for damage
occasioned by the act or omission of Tenant, the repair of which damage
shall be paid for by Tenant.
Landlord shall furnish the Premises with electricity for lighting and the
operation of low-power-usage office machines, heat and normal air
conditioning, and elevator service during ordinary business hours. Landlord
shall also provide light replacement service for Landlord-furnished
lighting, toilet room supplies, window washing at reasonable intervals, and
customary building janitorial service.
Landlord shall not be liable to Tenant for any loss or damage caused by or
resulting from any variation, interruption, or failure to such services due
to any cause whatsoever. No temporary interruption or failure of such
services incident to the making of repairs, alterations, or improvements,
or due to accident or strike or conditions or events beyond Landlord's
reasonable control shall be deemed an eviction of Tenant or relieve Tenant
from any of Tenant's obligations hereunder.
Before installing any equipment in the Premises that generates more than a
minimum amount of heat, Tenant shall obtain the written permission of
Landlord, and Landlord may refuse to grant such permission if the amount of
heat generated would place an undue burden on the air conditioning system
of the Building.
If Tenant uses any high-power-usage equipment in the Premises, Tenant shall
in advance, on the first day of each month during the least term, pay
Landlord as
4
<PAGE>
Additional Rent the reasonable amount estimated by Landlord as the cost of
furnishing electricity for the operation of such equipment. The monthly
Rent stated in Subsection 1.g hereof does not include any amount to cover
the cost of furnishing electricity for such purpose unless so stated
herein.
Tenant shall pay prior to delinquency all personal property taxes payable
with respect to all property of Tenant located on the Premises or the
Building and shall provide promptly, upon request of Landlord, written
proof of such payment.
8. COST OF SERVICES AND UTILITIES:
a. Definition of Terms: In addition to the Rent provided in Subsection
1.g of this Lease, Tenant shall pay to Landlord increases under this
Section as "Additional Rent." The increases shall be made as provided
herein, utilizing the following definitions:
i. "Operating Costs " shall include Costs of Utilities and Other
Operating Costs.
(1) "Costs of Utilities" shall mean all expenses paid or incurred
by Landlord for electricity, including any surcharges
imposed, water, gas, sewers, and similar utilities services.
(2) "Other Operating Costs" shall mean all other expenses paid or
incurred by Landlord for maintaining, operating and repairing
the Building and the personal property used in conjunction
therewith, including, without limitation, the costs of refuse
collection, supplies, janitorial and cleaning services, window
washing, landscape maintenance, services of independent
contractors, compensation (including employment taxes and
fringe benefits) of all persons who perform duties in
connection with the operation, maintenance and repair of the
Building, its equipment and the Land upon which it is
situated, insurance premiums, licenses, permits and inspection
fees, customary management fees, legal and accounting expenses
and any other expense or charge whether or not hereinabove
described which in accordance with generally accepted
accounting and management practices would be considered an
expense of maintaining, operating or repairing the Building,
excluding:
(a) Costs of any special services rendered to individual
tenants (including Tenant) for which a special charge
is made;
(b) Real Property Taxes (as defined in this Lease); and
5
<PAGE>
(c) Depreciation or amortization of costs required to be
capitalized in accordance with generally accepted
accounting practices (except Operating Costs shall
include amortization of capital improvements made
subsequent to the initial development of the Building
which are designed with a reasonable probability of
improving the operating efficiency of the Building,
provided that such amortization costs shall not exceed
expected savings in operating costs resulting from such
capital improvements).
ii. "Lease Year" shall mean the twelve-month period commencing
January 1 and ending December 31.
iii. "Base Services Year" shall mean the Lease Year in which the
Lease Commencement Date occurs.
iv. "Actual Costs" shall mean the actual expenses paid or incurred by
Landlord for Operating Costs during any Lease Year of the term
hereof.
v. "Actual Costs Allocable to the Premises" shall mean the Tenant's
share of the Actual Costs determined by Tenant's Percentage of
the Building described in Subsection 1.c.
vi. "Estimated Costs Allocable to the Premises" shall mean Landlord's
estimate of Actual Costs Allocable to the Premises for the
following Lease Year to be given by Landlord to Tenant pursuant
to Subsection 8.c below.
b. Base Amount: Actual Costs Allocable to the Premises for the Base
Services Year shall be deemed the "Base Amount" for purposes of this
Section; provided, however, that for purposes of determining any
Additional Rent for Operating Costs, Landlord shall estimate, to the
extent required, the Base Amount in connection with the statement
furnished in accordance with Subsection 8.c below; provided, however,
that payments shall be further adjusted as appropriate at the time the
Actual Costs are determined in accordance with Subsection 8.d below.
c. Additional Rent for Estimated Increases in Costs: Prior to the
commencement of each Lease Year (except the Base Services Year) during
the term hereof, Landlord shall furnish Tenant a written statement of
the Estimated Costs Allocable to the Premises for such Lease Year, and
a calculation of the Additional Rent as follows: One-twelfth (1/12) of
the amount, if any, by which such Estimated Costs Allocable to the
Premises for such Lease Year exceed
6
<PAGE>
the Base Amount shall be Additional Rent payable by Tenant as provided
in Section 4, "Rent," for each month during such Lease Year. If at any
time or times during such Lease Year it appears to Landlord that the
Actual Costs Allocable to the Premises for such Lease Year will vary
from Landlord's estimate by more than 5 percent on an annualized basis,
Landlord may, by written notice to Tenant, revise its estimate for such
Lease Year and Additional Rent payments by Tenant for such Lease Year
shall be based on such revised estimate.
d. Actual Costs: Within 90 days after the close of each Lease Year during
the term hereof, or as soon thereafter as practicable, Landlord shall
deliver to Tenant a written statement setting forth the Actual Costs
Allocable to the Premises during the preceding Lease Year. If such
costs for any Lease Year exceed Estimated Costs Allocable to the
Premises paid by Tenant to Landlord pursuant to the preceding
Subsection c, Tenant shall pay the amount of such excess to Landlord as
added Additional Rent within 30 days after receipt of such statement by
Tenant. If such statement shows such costs to be less than the amount
paid by Tenant to Landlord pursuant to the preceding Subsection c, then
the amount of such overpayment by Tenant shall be credited by Landlord
to the next immediate Rent payable by Tenant.
e. Determination: The determination of Actual Costs and Estimated Costs
Allocable to the Premises shall be made by Landlord.
f. End of Term: If this Lease shall terminate on a day other than the
last day of a Lease Year, the amount of any adjustment between
Estimated and Actual Costs Allocable to the Premises with respect to
the Lease Year in which termination occurs shall be prorated on the
basis which the number of days from the commencement of such Lease Year
to and including such termination date bears to 365; and any amount
payable by Landlord to Tenant or Tenant to Landlord with respect to
such adjustment shall be payable within 30 days after delivery by
Landlord to Tenant of the statement of Actual Costs Allocable to the
Premises with respect to such Lease Year.
g. Further Adjustment: In the event the average occupancy level of the
Building for the Base Services Year and/or any subsequent Lease Year
was not 90 percent or more of full occupancy, then the Actual Costs
for such year shall be proportionately adjusted by Landlord to reflect
those costs which would have occurred had the Building been 90 percent
occupied during such year.
h. Base Rent: Notwithstanding anything to the contrary in this Section 8
or in Section 9, the Rent payable by Tenant shall in no event be less
than the Rent specified in Subsection 1.g of this Lease.
7
<PAGE>
i. Nonpayment of Additional Rent: In the event of nonpayment of the
Additional Rent hereunder, Landlord shall have the same rights with
respect to such nonpayment as it has with respect to any other
nonpayment of Rent hereunder.
9. REAL PROPERTY TAXES:
a. Definition of Terms: In addition to the Rent provided in Subsection
1.g of this Lease, Tenant shall pay to Landlord increases under this
Section 9. The increases shall be made as provided herein, utilizing
the following definitions:
i. "Real Property Taxes" shall mean taxes on real property and
personal property, including all tenant improvements which are
paid for by Landlord and not reimbursed by tenants of the
Building, and taxes on Property of Tenant, as defined in
Subsection 9.a.iv, which have not been paid by Tenant directly to
the taxing authority; charges and assessments levied with respect
to the Land, the Building, any improvements, fixtures, and
equipment and all other property of Landlord, real or personal,
used directly in the operation of the Building; and any taxes
levied or assessed in addition to or in lieu of, in whole or in
part, such real property taxes, or any other tax upon leasing of
the Building or rents collected, but not including any federal or
state income tax or franchise tax.
ii. "Lease Year" shall mean the period defined in Section 8.a.ii.
iii. "Base Tax Year" shall mean the Lease Year in which the Lease
Commencement Date occurs.
iv. "Tenant's Share of Real Property Taxes" shall mean the amount of
Real Property Taxes payable during any Lease Year by Landlord
multiplied by Tenant's Percentage of the Building described in
Section 1.c, plus any Real Property Taxes attributable to
Property of Tenant, if any. As used herein, "Property of Tenant"
shall include improvements which are paid for by Tenant and not
reimbursed by Landlord and improvements originally paid for by
Landlord, the costs of which are reimbursed by Tenant.
b. Additional Rent for Estimated Increases in Tenant's Share of Real
Property Taxes: Prior to the commencement of each Lease Year (except
the Base Tax Year) Landlord shall furnish Tenant with a written
statement setting forth the estimated Tenant's Share of Real Property
Taxes for such Lease Year. One-twelfth (1/12) of the amount, if any, by
which such estimated Tenant's Share of Real Property
8
<PAGE>
Taxes exceeds the Tenant's Share of Real Property Taxes for the Base
Tax Year shall be Additional Rent payable by Tenant as provided in
Section 4, "Rent," herein for each month during such Lease Year.
c. Actual Real Property Taxes Within 90 days after the close of each Lease
Year during the term hereof, or as soon thereafter as practicable,
Landlord shall deliver to Tenant a written statement setting forth the
Tenant's Share of Real Property Taxes during the preceding Lease Year.
If such amount for any Lease Year exceeds the amount paid pursuant to
Section 9.b above as Additional Rent for such Lease Year, Tenant shall
pay the amount of such excess to Landlord as added Additional Rent
within 30 days after receipt of such statement by Tenant. If such
statement shows such amount to be less than the amount paid by Tenant
to Landlord pursuant to Section 9.b above, then the amount of such
overpayment shall be credited by Landlord to the next immediate Rent
payable by Tenant within 30 days following the date of such statement.
d. Personal Property Taxes: Tenant shall pay, prior to delinquency, all
Personal Property Taxes payable with respect to all Property of Tenant
located on the Premises or the Building and shall provide promptly,
upon request of Landlord, written proof of such payment.
e. Determinations: The determination of Tenant's Share of Real Property
Taxes and estimates thereof shall be made by Landlord.
f. End of Term: If this Lease shall terminate on a day other than the
last day of a Lease Year, the amount of any adjustment between Tenant's
Share of Real Property Taxes and estimates thereof with respect to the
Lease Year in which such termination occurs shall be prorated on the
basis which the number of days from the commencement of such Lease Year
to and including such termination date bears to 365; and any amount
payable by Landlord to Tenant or Tenant to Landlord with respect to
such adjustment shall be payable within 30 days after delivery by
Landlord to Tenant of the statement of Tenant's Share of Real Property
Taxes with respect to such Lease Year.
g. Nonpayment of Additional Rent. In the event of Nonpayment of
Additional Rent payable by Tenant hereunder, Landlord shall have the
same rights with respect to such nonpayment as it has with respect to
any other nonpayment of Rent hereunder.
h. Historic Designation: Due to the Historic Designation of the
Occidental Mall Building, the Building qualifies for a special tax
valuation designation pursuant to the Special Valuation of Property
Act, Chapter 84-26RCW. This designation was a material economic
element necessary to induce the Landlord to undertake and finance the
rehabilitation of the Occidental Mall. As a result
9
<PAGE>
of this Special Valuation of Property Act, the Occidental Mall
qualifies for a special tax valuation, and, as a result, the Real
Property Taxes have been reduced below the amount that would be due and
owing if the Building did not qualify for the special tax valuation.
For purposes of this Section 9 "Real Property Taxes," the Base Year
Real Property Taxes and subsequent Lease Year Real Property Taxes shall
be calculated based on full assessed value multiplied by the applicable
mileage rate then in effect.
10. IMPROVEMENTS: Upon expiration or sooner termination of this Lease, all
improvements and additions to the Premises shall become the property of
Landlord.
11. CARE OF PREMISES: Tenant shall take good care of the Premises.
Tenant shall, at the expiration or termination of this Lease, surrender and
deliver the Premises to Landlord in as good condition as when received by
Tenant from Landlord or as thereafter improved, reasonable use and wear and
damage by fire or other casualty excepted.
Tenant shall not make any alterations, additions or improvements in or to
the Premises, or make changes to locks on doors, or add, disturb or in any
way change any plumbing or wiring without first obtaining the written
consent of Landlord and, where appropriate, in accordance with plans and
specifications approved by Landlord. All damage or injury done to the
Premises or the Building by Tenant or by any persons who may be in or upon
the Premises or the Building with the consent of Tenant, including the
cracking or breaking of glass of any windows and doors, shall be paid for
by Tenant, and Tenant shall pay for all damage to the Building or the
Building caused by Tenant's misuse of the Premises or the appurtenances
thereto. Tenant shall not put any curtains, draperies or other hangings on
or beside the windows in the Premises without first obtaining Landlord's
consent. All normal repairs necessary to maintain the Premises in a
tenantable condition shall be done by or under the direction of Landlord
and at Landlord's expense except as otherwise provided herein. Landlord
shall be the sole judge as to what repairs are necessary.
12. ACCEPTANCE OF PREMISES: If this Lease shall be entered into prior to the
completion of Tenant Improvements in the Premises to be occupied by Tenant,
the acceptance of the Premises by Tenant shall be deferred until the giving
of written notice by Landlord to Tenant of the completion of such
construction; thereupon Tenant shall, within five days after the giving of
such notice, make such inspection of the Premises as Tenant deems
appropriate, and, except as otherwise notified by Tenant in writing to
Landlord within such period, Tenant shall be deemed to have accepted the
Premises in their then condition. If as a result of such inspection Tenant
discovers minor deviations or variations from the plans and specifications
for Tenant's Improvements of a nature commonly found on a "punch list" (as
that term is used in
10
<PAGE>
the construction industry), Landlord shall promptly correct such deviations
and variations upon receipt of such notice from Tenant. The existence of
such punch list items shall not postpone the effective date of this Lease.
13. SPECIAL IMPROVEMENTS: Tenant shall reimburse Landlord for Landlord's costs
of making all special improvements requested by Tenant, including but not
limited to counters, partitioning, electrical and telephone outlets and
plumbing connections, other than as shown on an exhibit or other attachment
hereto as being furnished by Landlord; provided, however, Tenant shall not
be obligated to pay for the cost of any such special improvements made
without a written request therefor by Tenant to Landlord.
14. ACCESS: Tenant will permit Landlord and its agents to enter into and upon
the Premises at all reasonable times for the purpose of inspecting the same
or for the purpose of cleaning, repairing, altering or improving the
Premises or the Building. Nothing contained in this Section shall be deemed
to impose any obligation upon Landlord not expressly stated elsewhere in
this Lease. When reasonably necessary, Landlord may temporarily close
entrances, doors, corridors, elevators or other facilities without
liability to Tenant by reason of such closure and without such action by
Landlord being construed as an eviction of Tenant or as relieving Tenant
from the duty of observing and performing any of the provisions of this
Lease. Landlord shall have the right to enter the Premises for the purpose
of showing the Premises to prospective tenants within the period of 180
days prior to the expiration or sooner termination of the lease term.
15. DAMAGE OR DESTRUCTION: If the Premises shall be destroyed or rendered
untenantable, either wholly or in part, by fire or other unavoidable
casualty, Landlord may, at its option, restore the Premises to its previous
condition, and in the meantime the Rent shall be abated in the same
proportion as the untenantable portion of the Premises bears to the whole
thereof; but unless Landlord within 30 days after the happening of any such
casualty shall notify Tenant of its election to so restore the Premises,
this Lease shall thereupon terminate and end. In the event Landlord elects
to restore the Premises and does not complete such restoration within 180
days following its notification to Tenant, then Tenant may terminate this
Lease.
If the Building shall be destroyed or damaged by fire or other casualty
insured against under Landlord's fire and extended coverage insurance
policy to the extent that more than 50 percent thereof is rendered
untenantable, or in the event the Building shall be materially destroyed or
damaged by any other casualty other than those covered by such insurance
policy, notwithstanding that the Premises may be unaffected directly by
such destruction or damage, Landlord may, at its election, by prior written
consent of any first mortgage, terminate this Lease by notice in writing to
Tenant within 60 days after such destruction or damage. Such notice shall
be effective 30 days after receipt thereof by Tenant.
11
<PAGE>
16. WAIVER OF SUBROGATION: Whether the loss or damage is due to the negligence
of either Landlord or Tenant, their agents or employees, or any other
cause, Landlord and Tenant do each hereby release and relieve the other,
their agents or employees, from responsibility for, and waive their entire
claim of recovery for (i) any loss or damage to the real or personal
property of either located anywhere in the Building, including the Building
itself, arising out of or incident to the occurrence of any of the perils
which are covered by their respective fire insurance policies, with
extended coverage endorsements, and (ii) any loss resulting from business
interruption at the Premises or loss of rental income from the Building,
arising out of or incident to the occurrence of any of the perils which may
be covered by the business interruption insurance policy and by the loss of
rental income insurance policy held by Landlord or Tenant. Each party
shall use its best efforts to cause its insurance carriers to consent to
the foregoing waiver of rights of subrogation against the other party.
Notwithstanding the foregoing, no such release shall be effective unless
the aforesaid insurance policy or policies shall expressly permit such a
release or contain a waiver of the carrier's right to be subrogated.
17. INDEMNIFICATION: Tenant shall defend and indemnify Landlord and save it
harmless from and against any and all liability, damages, costs, or
expenses, including attorneys' fees, arising from any act, omission, or
negligence of Tenant or its officers, contractors, licensees, agents,
servants, employees, guests, invitees, or visitors in or about the Building
or Premises, or arising from any injury or damage to any person or
property, occurring in or about the Building or Premises as a result of any
act, omission or negligence of Tenant, or its officers, contractors,
licensees, agents, employees, guests, or visitors, or arising from any
breach or default under this Lease by Tenant. Tenant shall, at its own
expense, keep and maintain in full force and effect during the term of this
Lease, a policy of commercial general liability insurance insuring Tenant's
activities with respect to the Premises or the Building against loss,
damage or liability for personal injury or death or loss or damage to
property with a limit of not less than $1,000,000.00 combined single limit.
Insurance required under this Section shall be with companies rated A-XV or
better in Best's Insurance Guide. No insurance policy shall be canceled or
reduced in coverage and each such policy shall provide that it is not
subject to cancellation or a reduction in coverage except after 30 days'
prior written notice to Landlord. Tenant shall deliver to Landlord upon
the Commencement Date and from time to time thereafter copies of policies
of such insurance or certificates evidencing the existence and amounts of
same and also evidencing Landlord as an additional insured on such
liability policies. In no event shall the limits of such policies be
considered as limiting the liability of Tenant under this Lease. The
foregoing provisions shall not be construed to make Tenant responsible for
loss, damage, liability or expense resulting form injuries to third parties
caused by the gross negligence or willful misconduct of Landlord, or its
officers, contractors, licensees, agents, employees, or invitees; provided,
however, that in no event shall Landlord be liable to Tenant for any damage
to the Premises or for any loss, damage or injury to any property therein
or thereon resulting from acts by other
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<PAGE>
third parties or occasioned by bursting, rupture, leakage or overflow of
any plumbing or other pipes (including, without limitation, water, steam
and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or
washstands or other similar cause in, above, upon or about the Premises or
the Building.
Landlord shall not be liable for any loss or damage to person or property
sustained by Tenant or other persons, which may be caused by theft, or by
any act or neglect of any tenant or occupant of the Building or any other
third parties.
18. ASSIGNMENT AND SUBLETTING: Tenant shall not assign this Lease nor sublet
the whole or any part of the Premises without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld. In
determining whether to approve a proposed assignment or sublease, Landlord
may consider without limitation the proposed transferee's reputation and
creditworthiness, the character of the business to be conducted by the
proposed transferee at the Premises and the effect of such assignment or
subletting on the tenant mix in the Building. In addition, Landlord shall
have the right to approve the specific form of any assignment or sublease
agreement. In no event shall Landlord be obligated to consent to any
assignment or subletting which materially increases (i) the Operating Costs
of the Building, (ii) the burden on the Building services, or (iii) the
foot traffic, elevator usage or security concerns in the Building or
creates an increased probability of the comfort and/or safety of the
Landlord and other tenants in the Building being unreasonably compromised
or reduced. (For example, but not exclusively, Landlord may deny consent
to an assignment or subletting where the space would be used for a school
or training facility, an entertainment, sports or recreation facility,
retail sales to the public, a personnel or employment agency, or an embassy
or consulate or similar office. Landlord shall not be obligated to approve
an assignment or subletting to (a) a current tenant of the Building or (b)
a prospective tenant of the Building with whom Landlord is then
negotiating. No such assignment or subletting shall relieve Tenant of any
liability under this Lease. Consent to any such assignment or subletting
shall not operate as a waiver of the necessity for a consent to any
subsequent assignment or subletting, and the terms of such consent shall be
binding upon any person holding by, under or through Tenant.
If Tenant is a corporation, then any transfer of this Lease by merger,
consolidation or liquidation, or any change in the ownership of, or power
to vote the majority of its outstanding voting stock, shall constitute an
assignment for the purpose of this Section.
19. ADVERTISING: Tenant shall not inscribe any inscription or post, place, or
in any manner display any sign, notice, picture, placard or poster, or any
advertising matter whatsoever, anywhere in or about the Premises or the
Building at places visible (either directly or indirectly as an outline or
shadow on a glass pane) from anywhere outside the Premises without first
obtaining Landlord's written consent thereto. Any such
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<PAGE>
consent by Landlord shall be upon the understanding and condition that
Tenant will remove the same at the expiration or sooner termination of this
Lease and Tenant shall repair any damage to the Premises or the Building
caused thereby.
20. LIENS AND INSOLVENCY: Tenant shall keep the premises and the Building free
from any liens arising out of any work performed, materials ordered, or
obligations incurred by Tenant. If Tenant becomes insolvent, voluntarily
or involuntarily bankrupt, or if a receiver or assignee or other
liquidating officer is appointed for the business of Tenant, then Landlord
may terminate Tenant's rights of possession under this Lease at Landlord's
option.
21. DEFAULTS: Time is of the essence hereof, and in the event Tenant shall
violate or breach or fail to keep or perform any covenant, agreement, term
or condition of this Lease, and if such default or violation shall continue
or shall not be remedied within three days (or, if no default in the
payment of rent or additional rent is involved, within 30 days, except
Tenant shall make immediate efforts to remedy such default) after notice in
writing thereof is given by Landlord to Tenant specifying the matter
claimed to be in default, Landlord at its option may immediately declare
Tenant's rights under this Lease terminated and reenter the Premises using
such force as may be necessary, and repossess itself thereof, as of its
former estate, and remove all persons and property from the Premises.
Notwithstanding any such reentry, the liability of Tenant for the full
rental provided for herein shall not be extinguished for the balance of
this Lease, and Tenant shall make good to Landlord any deficiency arising
from a reletting of the Premises at a lesser rental, plus the costs and
expenses of renovating or altering the Premises incurred by Landlord.
Tenant shall pay any such deficiency each month as the amount thereof is
ascertained by Landlord.
22. SUBORDINATION: This Lease is and shall be prior to any mortgage recorded
after the date of this Lease affecting the Building. If, however, a lender
requires that this Lease be subordinate to any mortgage, this Lease shall
be subordinate to that mortgage if Landlord first obtains from the lender a
written agreement that provides substantially the following:
*Notwithstanding the foregoing, Tenant and Landlord agree that
Tenant's name shall be painted on the front entrance glass similar to
the existing names. The cost and liability for said signage shall be
borne by Tenant.
*As long as Tenant performs its obligations under this Lease, no
foreclosure of, deed given in lieu of foreclosure of, or sale under
the mortgage, and no steps or procedures taken under the mortgage,
shall affect Tenant's rights under this Lease.
Tenant shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure.
Tenant shall execute the
14
<PAGE>
written agreement and any other documents required by the lender to
accomplish the purposes of this Section.
If requested by the holder of any mortgage or deed of trust, Tenant shall
enter into a new lease with the holder of such mortgage or deed of trust
for the balance of the term of this Lease upon the same terms and
conditions set forth herein, or shall attorn to such party provided such
party agrees to recognize this Lease as long as Tenant shall not be in
default hereunder beyond the period for curing the same.
23. REMOVAL OF PROPERTY: If Tenant shall fail to remove any of its property of
any nature whatsoever from the Premises or the Building at the termination
of this Lease, or when Landlord has the right of reentry, Landlord may, at
its option, remove and store said property without liability for loss
thereof or damage thereto, such storage to be for the account and at the
expense of Tenant. If Tenant shall not pay the cost of storing any such
property after it has been stored for a period of 30 days or more, Landlord
may, at its option, sell or permit to be sold, any or all of such property
at public or private sale, in such manner and at such times and places as
Landlord in its sole discretion may deem proper, without notice to Tenant,
and shall apply the proceeds of such sale: first, to the cost and expense
of such sale, including reasonable attorney's fees actually incurred;
second, to the payment of the costs or charges for storing any such
property; third, to the payment of any other sums of money which may then
be or thereafter become due Landlord from Tenant under any of the terms
hereof; and fourth, the balance, if any, to Tenant.
24. NONWAIVER: Waiver by either Landlord or Tenant of any breach of any term,
covenant, or condition herein contained shall not be deemed to be a waiver
of such term, covenant, or condition; or of any subsequent breach of the
same or any other term, covenant, or condition herein contained. The
subsequent acceptance of Rent hereunder by Landlord shall not be deemed to
be a waiver of any preceding breach by Tenant of any term, covenant, or
condition of this Lease, other than the failure of Tenant to pay the
particular rental so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent.
25. SURRENDER OF POSSESSION: Upon expiration of the term of this Lease,
whether by lapse of time or otherwise, Tenant shall promptly and peacefully
surrender the Premises to Landlord.
26. HOLDOVER: In the event Tenant shall holdover after the expiration of the
term of this Lease without the written consent of Landlord, such tenancy
shall be for a month-to-month tenancy, which tenancy may be terminated as
provided by the laws of the State of Washington. During such tenancy
Tenant agrees to pay to Landlord 200 percent (200%) of the rate of rental
payable by Tenant during the last month of the lease term as set forth
herein.
15
<PAGE>
27. CONDEMNATION: If all the Premises or such portions of the Building as may
be required for the reasonable use of the Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date Tenant is
required to vacate the Premises and all rentals shall be paid to that date.
In the event of a taking of a part of the Premises, or a portion of the
Building not required for the reasonable use of the Premises, then this
Lease shall continue in full force and effect and the rental shall be
equitably reduced based on the proportion by which the floor area of the
Premises is reduced, such rent reduction to be effective as of the date
possession of such portion is delivered to the condemning authority.
Landlord reserves all rights to damages to the Premises for any taking by
eminent domain, and Tenant hereby assigns to Landlord any right Tenant may
have to such damages or award, and Tenant shall make no claim against
Landlord for damages for termination of the leasehold interest or
interference with Tenant's business. Tenant shall have the right, however,
to claim and recover from the condemning authority compensation for any
loss to which Tenant may be put for Tenant's moving expenses and for the
interruption of or damage to Tenant's business; provided, however, that
such damages may be claimed only if they are award separately in the
eminent domain proceeding and not as part of the damages recoverable by
Landlord.
28. HAZARDOUS WASTE AND MATERIALS: Tenant shall not dispose of or otherwise
allow the release of any hazardous waste or materials in, on or under the
Leased Premises, or any adjacent property, or in any improvements placed on
the Leased Premises. Tenant represents and warrants to Landlord that
Tenant's intended use of the Premises does not involve the use, production,
disposal or bringing on to the Leased Premises of any hazardous waste or
materials. As used herein, the term "hazardous waste or materials"
includes any substance, waste or material defined or designated as
hazardous, toxic or dangerous (or any similar term) by any federal, state
or local statute, regulation, rule or ordinance now or hereafter in effect.
Tenant shall promptly comply with all statutes, regulations and ordinances,
and with all orders, decrees or judgments of governmental authorities or
courts having jurisdiction, relating to the use, collection, treatment,
disposal, storage, control, removal or cleanup of hazardous waste or
materials in, on or under the Leased Premises or any adjacent property, or
incorporated in any improvements, at Tenant's expense. Tenant shall notify
Landlord immediately of any release of any hazardous waste or materials on
the Leased Premises.
Tenant agrees to indemnify and hold Landlord harmless against any and all
losses, liabilities, suits, obligations, fines, damages, judgments,
penalties, claims, charges, cleanup costs, remedial actions, costs and
expenses (including, without limitations, attorneys' fees and
disbursements) which may be imposed on, incurred or paid by, or asserted
against Landlord or the Premises by reason of, or in connection with (i)
any misrepresentation, breach of warranty or other default by Tenant under
this Lease, or (ii) the acts or omissions of Tenant, or any subtenant or
other person or entity acting
16
<PAGE>
through or on account of Tenant, resulting in the release of any hazardous
waste or materials.
To the best of Landlord's knowledge the Premises do not contain any
hazardous waste. Tenant further acknowledges that Landlord has not made
any warranty or representation covering the presence or absence of any
hazardous waste or materials in, on, under, or about the Building or the
Leased Premises, any adjacent property, or in any improvements placed in
the Building or the Leased Premises. If Landlord is required by any
statute, regulation, order, decree, judgment, or other law to take any
action to remove or abate any hazardous waste or materials, or if Landlord
deems it necessary to conduct special maintenance or testing procedures
with regard to any hazardous waste or materials, or to remove or abate such
hazardous waste or materials, Landlord may take such action or conduct such
procedures at times and in a manner that Landlord deems appropriate under
the circumstances, and Tenant shall permit the same.
29. NOTICES: All notices under this Lease shall be in writing and delivered in
person or sent by registered or certified mail to Landlord and to Tenant at
the addresses provided in Subsection 1.i, and to the holder of any first
mortgage or deed of trust at such place as such holder shall specify to
Tenant in writing; or such other addresses as may from time to time be
designated by such party in writing. Notices mailed as aforesaid shall be
deemed given on the date of such mailing.
30. COSTS AND ATTORNEYS' FEES: If Tenant or Landlord shall bring any action
for any relief against the other, declaratory or otherwise, arising out of
this Lease, including any suit by Landlord for the recovery of rent or
possession of the Premises, the losing party shall pay the successful party
a reasonable sum for attorneys' fees in such suit, and such attorneys' fees
shall be deemed to have accrued on the commencement of such action.
31. LANDLORD'S LIABILITY: Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the
part of Landlord are made and intended not as personal covenants,
undertakings and agreements or for the purpose of binding Landlord
personally or the assets of Landlord except Landlord's interest in the
Premises and the Building, but are made and intended for the purpose of
binding only Landlord's interest in the Premises and the Building. No
personal liability or personal responsibility is assumed by, nor shall at
any time be asserted or enforceable against Landlord or its partners and
their respective heirs, legal representatives, successors, and assigns on
account of the Lease or on account of any covenant, undertaking or
agreement of Landlord in this Lease contained.
32. LANDLORD'S CONSENT: Whenever Landlord's consent is required under the
terms hereof, such consent shall not be unreasonably withheld.
17
<PAGE>
33. ESTOPPEL CERTIFICATES: Tenant shall, from time to time, upon written
request of Landlord, execute, acknowledge and deliver to Landlord a written
statement in a form approved by Landlord certifying that this Lease is
unmodified and in full force and effect (or that the same is in full force
and effect, as modified, listing the instruments of modification), that the
Rent and other charges have not been paid more than one month in advance
(or if so paid, the dates to which paid) and whether or not to the best of
Tenant's knowledge Landlord is in default hereunder (and if so, specifying
the nature of the default), it being intended that any such statement
delivered pursuant to this Section may be relied upon by a prospective
purchaser of Landlord's interest, or a mortgagee of Landlord's interest, or
assignee of any mortgage upon Landlord's interest in the Building. If
Tenant shall fail to respond within ten days of receipt by Tenant of a
written request by Landlord as herein provided, Tenant shall be deemed to
have given such certificates as above provided without modification.
34. TENANT IMPROVEMENTS: As further consideration for the execution of this
Lease, Landlord, at Landlord's sole cost and expense, shall provide the
following items of improvement, alteration, and repair to the Premises:
a. Remove all carpeting throughout the Premises and the wood flooring in
Suite 301.
b. Remove the existing walls located on the north and south sides of
Office #6 identified on the plans prepared by Tenant dated March 13,
1996 (the "Plan") and construct a new wall on the east side of Office
#6.
c. Remove all existing wood and glass partitions located in Area #9 on
the Plan.
d. Paint the walls throughout the Premises using Building-standard paint
in one light color to be selected by Tenant, subject to Landlord's
prior approval. The doors, relites and trim may be a separate color
at Tenant's option, also subject to Landlord's prior approval. Tenant
acknowledges that the interior window trim of the exterior windows in
the Premises will not be repainted and shall remain "AS IS."
e. Install new Building-standard carpet throughout the Premises in a
color to be selected by Tenant, subject to Landlord's prior approval.
f. Install Building-standard window blinds as necessary in the exterior
windows of the Premises.
All other improvements, alterations and repairs to the Premises shall be
made by Tenant at Tenant's sole cost and expense subject to the provisions
of this Lease.
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35. GENERAL:
a. The titles to sections of this Lease are not a part of this Lease and
shall have no effect upon the construction or interpretation of any
part hereof. This Lease shall be construed and governed by the laws
of the State of Washington.
b. All of the covenants, agreements, terms, and conditions contained in
this Lease shall apply to and be binding upon Landlord and Tenant and
their respective heirs, executors, administrators, successors and
assigns.
c. Tenant represents and warrants to Landlord that Tenant has not engaged
any broker (other than Leibsohn & Company), finder or other person who
would be entitled to any commission or fees from Landlord with respect
to the negotiation, execution or delivery of this Lease and shall
indemnify Landlord against any loss, cost, liability or expense
incurred by Landlord as a result of any claim asserted by any such
broker, finder or other person on the basis of any arrangements or
agreements made or alleged to have been made by or on behalf of
Tenant.
d. This Lease contains all covenants and agreements between Landlord and
Tenant relating in any manner to the rental, use, and occupancy of the
Premises and Tenant's use of the Building and other matters set forth
in this Lease. No prior agreement or understanding pertaining to the
same shall be valid or of any force or effect, and the covenants and
agreements of this Lease shall not be altered, modified, or added to
except in writing signed by Landlord and Tenant. If any provision of
this Lease shall prove to be invalid, void or illegal, it shall in no
way affect, impair or invalidate any other provision hereof, and the
remaining provisions hereof shall nevertheless remain in full force
and effect.
e. Any Rent, Additional Rent, or other sums payable by Tenant to Landlord
shall not be paid upon the due date thereof shall bear interest at the
highest rate permitted by the laws of the State of Washington, but not
to exceed 18 percent per annum, calculated from the date of
delinquency to the date of payment.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
above written.
LANDLORD: TENANT:
COM REALTY, INC., a SEATTLE SOFTWARE LABS, INC.,
Delaware Corporation a Washington Corporation
[signature illegible] By: Steven N. Moore
------------------------ -------------------------
/s/ Steven N. Moore
-------------------------
Title: President Title: Vice President & CFO
------------------ ----------------------
By:
------------------------
------------------------
Title:
------------------------
PLEASE TYPE OR PRINT NAME UNDER
EACH SIGNATURE LINE
20
<PAGE>
STATE OF ILLINOIS )
) ss. OWNER/CORPORATE
COUNTY OF COOK ) ---------------
On this 4th day of April, 1996, personally appeared before me, a Notary Public
in and for the State of Illinois, duly commissioned and sworn, Loren Klug, known
to me to be the President of COM Realty, Inc., a Delaware corporation, which
executed the within and foregoing instrument and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation, for
the uses and purposes therein stated, and on oath stated that he is authorized
to execute said instrument.
Witness my hand and official seal hereto affixed the day and year first above
written.
/s/ Diana C. Moreno
----------------------------------------------
Notary Public in and for the State of Illinois
Residing at 105A S. Evergreen, IL
---------------------------------
My Commission Expires: 9/29/97
------------------------
----------------------------------------------
Print Notary Public Name
STATE OF WASHINGTON )
) ss. TENANT/CORPORATE
COUNTY OF KING ) ----------------
On this 2nd day of April, 1996, personally appeared before me, a Notary Public
in and for the State of Washington, duly commissioned and sworn, Steven N.
Moore, and known to me to be the Vice President and CFO of Seattle Software
Labs, a Washington corporation, which executed the within and foregoing
instrument and acknowledged the said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein stated, and on
oath stated that they are authorized to execute said instrument.
Witness my hand and official seal hereto affixed the day and year first above
written.
/s/ Connie Hornbaker
------------------------------------------------
Notary Public in and for the State of Washington
Residing at Kirkland
------------------------------------
My Commission Expires: 3/19/97
-------------------------
------------------------------------------------
Print Notary Public Name
21
<PAGE>
LEASE AMENDMENT NO. 1
THIS LEASE AMENDMENT NO. 1 dated this 10th day of June 1996 amends that certain
Lease dated the 15th day of March 1996 by and between COM REALTY, INC., a
Delaware corporation, as Landlord, and SEATTLE SOFTWARE LABS, INC., a Washington
corporation, as Tenant ("the Lease"), covering approximately 3,392 rentable
square feet on the third floor of the Burke Building in the Occidental Mall.
For good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Landlord and Tenant agree to amend the Lease in order to
revise the term of the Lease and to revise the schedule for the payment of rent
during the Lease term.
Effective May 1, 1996, the Lease is hereby amended as follows:
1. Section 1(e) "Lease Commencement Date" is amended to read:
May 1, 1996 ("Commencement Date").
2. Section 1(f) "Lease Expiration Date" is amended to read:
April 30, 2001 ("Expiration Date").
3. Section 1(g) "Rent" to read:
Rent shall be as set forth above, payable on or before the first day of
each month. Rent shall be adjusted from time to time as provided in Sections 7,
8, and 9 hereof.
<TABLE>
<S> <C> <C>
May 1, 1996 to June 30, 1996 $0.00 per month
July 1, 1996 to April 30, 1997 $4,276.76 per month
May 1, 1997 to April 30, 1998 $4,418.08 per month
May 1, 1998 to April 30, 1999 $4,559.41 per month
May 1, 1999 to April 30, 2000 $4,700.75 per month
May 1, 2000 to April 30, 2001 $4,842.08 per month
</TABLE>
4. Section 3 "COMMENCEMENT AND EXPIRATION DATES" is amended to read:
a. Lease Commencement Date: The Lease Commencement Date shall be May 1,
1996.
b. Lease Expiration date: This Lease shall expire on April 30, 2001.
Except as set forth in this Lease Amendment No. 1, all the provisions of the
Lease shall remain unchanged and in full force and effect.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Amendment No. 1
on the dates set forth below.
Landlord: Tenant:
COM Realty, Inc., a Delaware Seattle Software Labs, Inc., a Washington
corporation corporation
By: [signature illegible] By: /s/ Steve N. Moore
------------------------- -------------------------------
Date: 7/15/96 Its: Chief Financial Officer
---------------------- -------------------------------
Date: 7/10/96
------------------------------
By: Christopher G. Slatt
-------------------------------
Its: President
------------------------------
Date: 7/10/96
-----------------------------
<PAGE>
LEASE AMENDMENT NO. 2
THIS LEASE AMENDMENT NO. 2, dated this 6th day of November 1996, amends that
certain Lease dated the 15th day of March 1996 and Lease Amendment No. 1 dated
June 10, 1996 (the "Lease") by and between COM REALTY, INC., a Delaware
corporation, predecessor in interest to BURKE-STATE BLDG., L.L.C., a Washington
limited liability company ("Landlord"), and SEATTLE SOFTWARE LABS, INC., a
Washington corporation ("Tenant"), covering approximately 3,392 rentable square
feet on the third floor of the Burke Building in the Occidental Mall designated
Suite 301. For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Landlord and Tenant agree to further amend the
Lease in order to increase the square footage of the Premises, to adjust
Tenant's Percentage of the Building, to adjust the Rent, to revise the provision
pertaining to assignment and subletting, to add the Building Rules and
Regulations, and to specify the improvements to be made to the Premises by
Landlord.
Effective November 15, 1996, the Lease shall be amended as follows:
1. Section 1.c "Agreed Areas" shall be amended to read:
c. Agreed Areas: As used in this Lease, Landlord and Tenant agree to the
following areas and percentage of the Premises and the Building: Area of the
Building is the total square feet calculated on a full-floor basis or 111,308
square feet; area of Tenant's Premises is approximately 7,517 rentable square
feet; Tenant's Percentage of the Building is 6.75%. Notwithstanding the
foregoing, if one or more of the facilities, services and utilities the costs of
which is included within the definition of Operating Costs is not furnished to
one or more tenants or to particular types of tenants, then in connection with
the calculation of Tenant's Share of each of such costs the Building Area shall
be reduced by the number of rentable square feet of space occupied by such
tenants and Tenant's Share shall be separately computed as to each of such
costs.
2. Section 1.g "Rent" of the Lease shall be amended to read:
g. Rent: The rent shall be as set forth below, payable on or before the
first day of each month. Rent shall be adjusted from time to time as provided in
Sections 7, 8, and 9 hereof.
<PAGE>
<TABLE>
<S> <C> <C>
May 1, 1996 to June 30, 1996 $0.00
July 1, 1996 to December 14, 1996 $4,276.75 per month
December 15, 1996 to April 30, 1997 $9,298.94 per month
May 1, 1997 to April 30, 1998 $9,612.14 per month
May 1, 1998 to April 30, 1999 $9,925.35 per month
May 1, 1999 to April 30, 2000 $10,238.56 per month
May 1, 2000 to April 30, 2001 $10,551.77 per month
</TABLE>
3. The last sentence of Section 6 "Uses" shall be deleted in its entirety and
replaced with the following:
Tenant and its authorized representatives shall comply with the Rules and
Regulations set forth on Exhibit C attached hereto. Landlord shall have the
right to amend the Rules and Regulations from time to time. In the event of a
conflict between this Lease and the Rules and Regulations, as amended, this
Lease shall control. Landlord shall have the right to enforce the Rules and
Regulations and shall make commercially reasonable efforts to enforce the same
in a nondiscriminatory manner. Landlord shall have no liability or
responsibility whatsoever with respect to the noncompliance by other tenants or
their authorized representatives with any of such Rules and Regulations.
4. Section 18 "ASSIGNMENT AND SUBLETTING" shall be deleted in its entirety and
replaced with the following:
18. ASSIGNMENT AND SUBLETTING:
a) Landlord's Consent; Definitions. Tenant acknowledges that the
Building is a multi-tenant office building, occupied by tenants specifically
selected by Landlord, and that Landlord has a legitimate interest in the type
and quality of such tenants, the location of tenants in the Building and in
controlling the leasing of space in the Building so that Landlord can better
meet the particular needs of its tenants and protect and enhance the relative
image, position and value of the Building in the office building market. Tenant
further acknowledges that the rental value of the Premises may fluctuate during
the term in accordance with market conditions, and, as a result, the Rent paid
by Tenant under the Lease at any particular time may be higher or lower than the
then market rental value of the Premises. Landlord and Tenant agree, and the
provisions of this Section are intended to so provide, that, if Tenant
voluntarily assigns its interest in this Lease or in the Premises or subleases
any part or all of the Premises, a portion of the profits from any increase in
the market rental value of the Premises shall belong solely to Landlord. Tenant
acknowledges that, if Tenant voluntarily assigns this Lease or subleases any
part or all of the Premises, Tenant's investment in the subject portion of the
Premises (specifically including, but not
2
<PAGE>
limited to, tenant improvements, good will or other assets) may be lost or
reduced as a result of such action.
b) Consent Required. Tenant shall not voluntarily assign or encumber
its interest in this Lease or in the Premises, or sublease any part or all of
the Premises, without Landlord's prior consent, which consent shall not be
unreasonably withheld. Any assignment, encumbrance or sublease without
Landlord's consent shall be voidable and, at Landlord's election, shall
constitute a default by Tenant under this Lease. In determining whether to
approve a proposed assignment or sublease, Landlord shall place primary emphasis
on the proposed transferee's reputation and creditworthiness, the character of
the business to be conducted by the proposed transferee at the Premises and the
affect of such assignment or subletting on the tenant mix in the Building. In
addition, Landlord shall have the right to approve the specific form of any
assignment or sublease agreement. In no event shall Landlord be obligated to
consent to any assignment or subletting which increases (i) the Operating Costs,
(ii) the burden on the Building services, or (iii) the foot traffic, elevator
usage or security concerns in the Building, or creates an increased probability
of the comfort and/or safety of the Landlord and other tenants in the Building
being unreasonably compromised or reduced (for example, but not exclusively,
Landlord may deny consent to an assignment or subletting where the space will be
used for a school or training facility, an entertainment, sports or recreation
facility, retail sales to the public (unless Tenant's permitted use is retail
sales), a personnel or employment agency, a medical office, or an embassy or
consulate or similar ounce. Landlord shall not be obligated to approve an
assignment or subletting to (x) a current tenant of the Building unless no
comparable space is available in the Building or (y) a prospective tenant of the
Building with whom Landlord is then negotiating. Landlord's foregoing rights
and options shall continue throughout the entire term of this Lease. No consent
to any assignment, encumbrance or sublease shall constitute a waiver of the
provisions of this Section and no other or subsequent assignment, encumbrance or
sublease shall be made without Landlord's prior consent. Neither an assignment
or subletting nor the collection of Rent by Landlord from any person other than
Tenant, nor the application of any such Rent as provided in this Section shall
be deemed a waiver of any of the provisions of this Section or release Tenant
from its obligation to comply with the terms and provisions of this Lease and
Tenant shall remain fully and primarily liable for all of Tenant's obligations
under this Lease, including the obligation to pay Rent under this Lease. Any
personal guarantee(s) of Tenant's obligations under this Lease shall remain in
full force and effect following any such assignment or subletting. Landlord may
condition approval of an assignment or subletting hereunder on an increase in
the amount of the Security Deposit or on receipt of personal guarantees of the
assignee's or sublessee's obligations under this Lease. If Landlord approves of
an assignment or subletting hereunder and this Lease contains any renewal
options,
3
<PAGE>
expansion options, rights of first refusal, rights of first negotiation or any
other rights or options pertaining to additional space in the Building, such
rights and/or options shall not run to the assignee or subtenant, it being
agreed by the parties hereto that any such rights and options are personal to
Tenant named herein and may not be transferred.
c) Conditions to Assignment or Sublease. Tenant agrees that any
instrument by which Tenant assigns or sublets all or any portion of the Premises
shall expressly provide that the assignee or subtenant may not further assign or
sublet the assigned or sublet space without Landlords prior consent (which
consent shall not, subject to Landlord's rights under Section 25(b), be
unreasonably withheld or delayed), and that the assignee or subtenant will
comply with all of the provisions of this Lease and that Landlord may enforce
the Lease provisions directly against such assignee or subtenant. If this Lease
is assigned, whether or not in violation of the terms and provisions of this
Lease, Landlord may collect Rent from the assignee. If the Premises, or any
part thereof, is sublet, Landlord may, upon a default under this Lease, collect
rent from the subtenant. In either event, Landlord may apply the amount
collected from the assignee or subtenant to Tenant's obligation to pay Rent
under this Lease.
d) Events Constituting an Assignment or Sublease. For purposes of this
Section, the following events shall be deemed an assignment or sublease, as
appropriate: (i) the issuance of equity interests (whether stock, partnership
interests or otherwise) in Tenant, or any assignee or subtenant, if applicable,
or any entity controlling any of them, to any person or group of related
persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant, or any assignee or subtenant, if
applicable; or (ii) a transfer of Control of Tenant, or any assignee or
subtenant, if applicable, or any entity controlling any of them, in a single
transaction or a series of related or unrelated transactions (including, without
limitation, by consolidation, merger, acquisition or reorganization), except
that the transfer of outstanding capital stock or other listed equity interests
by persons or parties other than "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, through the "over-the-counter" market or any
recognized national or international securities exchange, shall not be included
in determining whether Control has been transferred. "Control" shall mean
direct or indirect ownership of fifty percent (50%) or more of all the legal and
equitable interest in any business entity. The restrictions set forth in this
subsection shall not apply to an initial public offering of equity interests in
Tenant or when Tenant is raising Equity Capital and the Guarantors listed in
Exhibit B are actively managing Tenant's business.
4
<PAGE>
e) Processing Expenses. Tenant shall pay to Landlord the amount of
Landlord's cost of processing each proposed assignment or subletting, including,
without limitation, attorneys' and other professional fees, and the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all direct and indirect expense incurred
by Landlord arising from the assignee or sublessee taking occupancy of the
subject space, including, without limitation, costs of freight elevator
operation for moving of furnishings and trade fixtures, security service,
janitorial and cleaning service, rubbish removal service, costs of changing
signage, and costs of changing locks and making new keys (collectively,
"Occupancy Costs"). Notwithstanding anything to the contrary herein, Landlord
shall not be required to process any request for Landlords consent to an
assignment or subletting until Tenant has paid to Landlord the amount of
Landlord's estimate of the Processing Costs and the Occupancy Costs; provided,
however, such costs shall reflect the actual expenses incurred ant shall not
exceed $2,000.00 per assignment or subletting.
f) Consideration to Landlord. In the event of any assignment or
sublease, whether or not requiring Landlord's consent, Landlord shall be
entitled to receive, as Additional Rent, one-half (1/2) of any consideration,
including, without limitation, payment for leasehold improvements owned by
Landlord, paid by the assignee or subtenant for the assignment or sublease and,
in the case of sublease, the excess of the amount of rent paid for the sublet
space by the subtenant over the total amount of Minimum Monthly Rent under
Section 5 and Additional Rent under Sections 7 and 9. Upon Landlord's request,
Tenant shall assign to Landlord all amounts to be paid to Tenant by the assignee
or subtenant and shall direct such assignee or subtenant to pay the same
directly to Landlord. If there is more than one sublease under this Lease, the
amounts (if any) to be paid by Tenant to Landlord pursuant to the preceding
sentence shall be separately calculated for each sublease and amounts due
Landlord with regard to any one sublease may not be offset against rental and
other consideration pertaining due under any other sublease.
With regard to an approved assignment or subletting, Tenant acknowledges
that Landlord's agreement to deal directly with the assignee or subtenant with
regard to such party's occupancy of the Premises and the administration of the
Lease, without requiring Tenant to monitor or become directly involved in such
matters, constitutes appropriate and acceptable consideration for the capture by
Landlord of any rent or consideration paid by the assignee or subtenant in
excess of that required to be paid by Tenant under the Lease.
g) Procedures. If Tenant desires to assign this Lease or any interest
therein or sublet all or part of the Premises, Tenant shall give Landlord
written notice
5
<PAGE>
thereof designating the space proposed to be sublet and the terms proposed.
Landlord shall have the prior right and option (to be exercised by written
notice to Tenant given within fifteen (15) days after receipt of Tenant's
notice) (i) to sublet from Tenant any portion of the Premises proposed by Tenant
to be sublet, for the term for which such portion is proposed to be sublet, but
at the same Rent (including Additional Rent as provided for in Sections 7 and 9)
as Tenant is required to pay to Landlord under this Lease for the same space,
computed on a pro rata square footage basis, and during the term of such
sublease Tenant shall be released of its obligations under the Lease with regard
to the subject space, (ii) if the term of the sublease (including any renewal
terms) will expire during the final eighteen (18) months of the term (or if
Tenant has exercised a renewal option, if any, then during the final eighteen
(18) months of the subject renewal period), to terminate this Lease as it
pertains to the portion of the Premises so proposed by Tenant to be sublet, or
(iii) to approve Tenant's proposal to sublet conditional upon Landlord's
subsequent written approval of the specific sublease obtained by Tenant and the
specific subtenant named therein. If Landlord exercises its option in (i) above,
then Landlord may, at Landlord's sole cost, construct improvements in the
subject space and, so long as the improvements are suitable for general office
purposes, Landlord shall have no obligation to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, Tenant shall submit to Landlord
for Landlord's written approval Tenant's proposed sublease agreement (in which
the proposed subtenant shall be named) together with a current reviewed or
audited financial statement prepared by a certified public accountant for such
proposed subtenant and a credit report on such proposed subtenant prepared by a
recognized credit reporting agency. If Landlord fails to exercise any aforesaid
option to sublet or to terminate, this shall not be construed as or constitute a
waiver of any of the provisions of this Section. If Landlord exercises any such
option to sublet or to terminate, Landlord shall not have any liability for any
real estate brokerage commission(s) or with respect to any of the costs and
expenses that Tenant may have incurred in connection with its proposed
subletting, and Tenant agrees to hold Landlord harmless from and against any and
all claims (including, without limitation, claims for commissions) arising from
such proposed subletting. Landlord's foregoing rights and options shall continue
throughout the term. For purposes of this Section, a proposed assignment of this
Lease in whole or in part shall be deemed a proposed subletting of such space.
h) Documentation. No permitted subletting by Tenant shall be effective
until there has been delivered to Landlord a counterpart of the sublease in
which the subtenant agrees to be and remain jointly and severally liable with
Tenant for the payment of Rent pertaining to the sublet space and for the
performance of all of the terms and provisions of this Lease; provided, however,
that the subtenant shall be
6
<PAGE>
liable to Landlord for rent only in the amount set forth in the sublease. No
permitted assignment shall be effective unless and until there has been
delivered to Landlord a counterpart of the assignment in which the assignee
assumes all of Tenant's obligations under this Lease arising on or after the
date of the assignment. The failure or refusal of a subtenant or assignee to
execute any such instrument shall not release or discharge the subtenant or
assignee from its liability as set forth above.
i) No Merger. Without limiting any of the provisions of this Section, if
Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
5. Improvements. Tenant accepts the Premises in "AS IS" condition, subject to
the following items of improvement, alterations, and repair to be made to the
Premises by Landlord at Landlord's sole cost and expense:
a) Demolish the wall highlighted in yellow on the attached Exhibit A:
b) Construct two walls in the areas highlighted in blue on the attached
Exhibit A;
c) Install two (2) three-inch pipe-lined openings above the brick
passageway between the existing Premises and the expansion space at a location
mutually agreeable to both parties;
d) In the area marked "LAN Room" on the attached Exhibit A, Landlord shall
disconnect the water line, remove the stub wall, remove cabinets;
e) Install approximately 14 feet of Building-standard GWB wall with
Building-standard base to include one Building-standard electrical duplex outlet
on each side of the wall highlighted in green on the attached Exhibit A;
f) Patch and paint the newly constructed walls and areas affected by
construction;
g) Patch in carpeting in the areas affected by construction to match the
existing as closely as reasonably possible; and
h) Tenant shall install signage on the wall opposite elevator entrance on
the third floor similar to that of other tenant's in the Building, at Tenant's
sole cost and upon review and approval by Landlord.
7
<PAGE>
6. Exhibit A "Floor Plan" is hereby deleted in its entirety and replaced with
the amended Exhibit A attached hereto and by this reference made a part of the
Lease.
7. Exhibit B "Guaranty" shall be cancelled in its entirety and superseded by
the amended Guaranty attached hereto as Exhibit B on the following condition:
The amended Guaranty attached hereto will cancel and supersede that certain
Guaranty dated April 2, 1996 executed by the Guarantors named therein,
Christopher Slatt and Jeannine K. Slatt, husband and wife, and Steven N. Moore
and Sheila E. Moore, husband and wife, contingent upon execution of said amended
Guaranty by said Guarantors.
8. The Building "Rules and Regulations" are attached hereto as Exhibit C and by
this reference made a part of the Lease.
Except as set forth in this Lease Amendment No. 2, all the provisions of the
Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first above written.
Landlord: Tenant:
BURKE-STATE BLDG., L.L.C., a Washington Seattle Software Labs, Inc.,
limited liability company a Washington corporation
As amended 4d) & 5h)
By: [signature illegible] By: /s/ Christopher G. Slatt
------------------------------------ --------------------------------
Its: Managing Member Its: President
----------------------------------- --------------------------------
By:
--------------------------------
Its:
-------------------------------
5.h) Tenant shall install signage on wall opposite elevator entrance on the
third floor similar to that of other tenant's in building at Tenant's sole
cost and upon review and approval by Landlord.
8
<PAGE>
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
On this 17th day of December 1996, before me, a Notary Public, personally
appeared H. Martin Smith, III personally known to me or proved to me on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
Witness my hand and official seal.
Melaney Wade
------------------------------------------------
Name (printed): Melaney Wade
---------------------------------
Notary Public in and for the State of Washington,
residing at Bellevue
------------------------------------
My Commission expires: 5/19/96
-------------------------
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<PAGE>
EXHIBIT B
GUARANTY
THIS GUARANTY is made and given by the individuals set forth on the
signature page hereof ("Guarantor") to COM Realty, Inc., a Delaware corporation
("Landlord").
RECITALS: Seattle Software Labs, Inc., a Washington corporation
("Tenant"), has requested that Landlord enter into a lease with Tenant, and
Landlord is unwilling to enter into such a lease unless Guarantor gives Landlord
an unconditional guarantee of the full, prompt and complete payment by Tenant as
and when due of:
A. all installments of rent and other monetary obligations payable under
the Lease for all periods during which Tenant is in actual occupancy of the
Premises;
B. all installments of rent and other monetary obligations payable under
the Lease for the twelve (12) month period following any default by Tenant;
C. the unamortized balance as of the date Tenant relinquishes possession
of the Premises of (i) the total cost of improvements, alterations and repairs
("Tenant Improvements") provided by Landlord under the Lease, which is
$17,992.58, and (ii) the leasing fees due to Martin Smith Inc and Leibsohn &
Company, which are $15,866.76; such costs and fees shall be amortized, without
interest, over the Term; and
D. the unamortized balance as of the date Tenant relinquishes possession
of the Premises of the additional leasing fee due to Leibsohn & Company for
additional square footage leased under the Amendment to the Lease, which is
estimated to be $14,437.50; such fee shall be amortized without interest over
fifty-three (53) months of the Term (December 1, 1996 through April 30, 2001).
NOW, THEREFORE, in order to induce Landlord to enter into a lease with
Tenant, Guarantor agrees as follows:
1. Guaranty. Guarantor, as a material inducement to and in consideration
of Landlord entering into a written lease with Tenant, dated the same date as
this Lease Guaranty (the "Lease"), pursuant to which Landlord has leased or will
lease to Tenant, and Tenant has leased or will lease from Landlord, the premises
located in the City of Seattle, County of King, State of Washington, in the
building located at 316 Occidental Avenue South, Seattle, Washington,
unconditionally guarantees and promises to and for the benefit of Landlord the
full, prompt and complete payment by Tenant as and when due of (a) all
installments of rent and other monetary obligations payable under the Lease for
all periods during which Tenant is in actual occupancy of the Premises, (b) all
installments of rent and other monetary obligations payable under the Lease for
the twelve (12) month period following any default by Tenant, and (c) the
unamortized balance as of the date Tenant relinquishes possession of the
Premises of (i) the total cost of the Tenant Improvements provided by Landlord
under the Lease, which
<PAGE>
is $17,992.58, and (ii) the leasing fees paid to Martin Smith Inc and Leibsohn &
Company, which are $15,866.76; and (d) the unamortized balance as of the date
Tenant relinquishes possession of the Premises of the leasing fee due to
Leibsohn & Company for additional square footage leased under the Amendment to
the Lease, which is estimated to be $14,437.50. The cost and fees described
herein shall be amortized, without interest over the Term pursuant to paragraphs
C and D above. If, for example, Tenant defaults under the Lease at the end of
the thirtieth month of the Lease Term, Guarantor shall be obligated to pay (1)
the unamortized portion of the Tenant Improvements and leasing fees which equal
$16,929.74; (2) the unamortized portion of the leasing fee paid to Leibsohn &
Company, which equals $8,172.07 (calculated over twenty-three months; and (3)
all installments of rent and other monetary obligations payable under the Lease
for the twelve-month period following default by Tenant (months 31 through 42).
Guarantor acknowledges and agrees that this Guaranty is an absolute guarantee of
payment.
2. Attorneys' Fees. Guarantor agrees to pay all expenses, including,
without limitation, actual attorneys' fees and costs, paid or incurred by
Landlord in endeavoring to collect or secure performance of the Obligations, or
any part thereof, or in enforcing this Guaranty.
3. Joint and Several Liability. If Guarantor is more than one person,
Guarantor's Obligations are joint and several and are independent of Tenant's
Obligations. A separate action may be brought or prosecuted against any
Guarantor whether this action is brought or prosecuted against any other
Guarantor or Tenant, or all, or whether any other Guarantor or Tenant, or all,
are joined in the action.
4. Primary Liability. Guarantor's liability under this Guaranty is
primary, direct and immediate. Guarantor waives the right to require Landlord
to:
(a) Proceed against Tenant or any other person;
(b) Proceed against or exhaust any security or collateral that
Landlord holds from Tenant; or
(c) Pursue any other remedy in Landlord's power.
5. Waiver of Statute of Limitations. Guarantor waives the benefit of any
statute of limitations affecting Guarantor's liability under this Guaranty.
6. Bankruptcy or Reorganization of Tenant. In the event of any proceeding
by or against Tenant, a composition, extension or reorganization under any
provision of the Bankruptcy Code, or any other bankruptcy, insolvency,
receivership, reorganization or similar proceeding, Guarantor expressly waives
the extension of the Obligations of this Guaranty under any provision of the
Bankruptcy Code or any law or rule applicable to such proceedings and hereby
agrees that Landlord may proceed immediately to collect any amount due under the
terms of this Guaranty and to otherwise enforce this Guaranty.
2
<PAGE>
7. Rights and Remedies Cumulative. All of Landlord's rights and remedies
herein specified are intended to be cumulative and not in substitution for any
right or remedy otherwise available to Landlord.
8. Enforcement. If Tenant defaults under the Lease, Landlord can proceed
immediately against Guarantor or Tenant, or both, or Landlord can enforce
against Guarantor or Tenant, or both, any rights that it has under the Lease,
this Guaranty, or both, or pursuant to applicable laws. If the Lease terminates
and Landlord has any rights it can enforce against Tenant after termination,
Landlord may enforce these rights against Guarantor without giving previous
notice to Tenant or Guarantor and without making any demand on either of them.
9. Waiver of Defenses. Guarantor waives any defense arising by reason of
any disability of Tenant, or by reason of the cessation from any cause
whatsoever of the liability of Tenant. Guarantor shall be liable and remain
liable for the payment of the Obligations to the extent provided herein
notwithstanding.
(a) Any previous discharge (partial or total) of Tenant from any
further liability;
(b) Any bar (temporary, partial or total) to the pursuit by Guarantor
of any right or claim for indemnification from Tenant;
(c) Any right or claim by Guarantor to be subrogated to the rights or
claims of Landlord against Tenant or in and to the Premises;
(d) Any action or inaction or delay in acting by Landlord; or
(e) Landlord's failure to enforce, or delay in enforcing, any of its
rights under the Lease, or otherwise.
10. Amendments to Lease; Assignment of Lease. Guarantor authorizes
Landlord, without notice or demand and without affecting Guarantor's liability
hereunder, from time to time to:
(a) Amend or change the provisions of the Lease by agreement between
Landlord and Tenant at any time, or by course of conduct, or by operation of
law, or otherwise, without the consent of, and without notice to, Guarantor;
(b) Permit or suffer an assignment of the Lease or any subletting
under the Lease, whether or not consented to by Landlord; or
(c) Take and hold security for the performance and payment of the
Obligations and apply, enforce, exchange, waive and release any such security.
3
<PAGE>
11. Waiver of Subrogation. Until all of the Obligations have been
performed or paid in full, Guarantor shall have no right of subrogation against
Tenant. Guarantor waives its right to enforce any remedies that Landlord now
has, or may later have, against Tenant. Guarantor waives any right to
participate in any security now or hereafter held by Landlord.
12. Waiver of Acceptance, Presentments and Notices. Guarantor waives
notice of acceptance of this Guaranty and all presentments, demands for
performance, notices of nonperformance, protests, notices of protest, notices of
dishonor and notices of acceptance of this Guaranty, and waives all notices of
the creation, existence, or incurring of new or additional Obligations.
13. Miscellaneous Provisions.
(a) This Guaranty sets forth the entire agreement of the parties as
to the subject matter hereof and supersedes all prior discussions and
understandings between them. This Guaranty may not be amended or rescinded in
any manner except by an instrument in writing signed by a duly authorized
officer or representative of each party hereto.
(b) This Guaranty shall be governed by, and construed and enforced in
accordance with, the laws of the State of Washington.
(c) Should any of the provisions of this Guaranty be found to be
invalid, illegal or unenforceable by any court of competent jurisdiction, such
provision shall be stricken and the remainder of this Guaranty shall nonetheless
remain in full force and effect unless striking such provision shall materially
alter the intention of the parties.
(d) In the event any action is brought to enforce this Guaranty, the
parties agree to be subject to exclusive in personam jurisdiction in the
Superior Court for the State of Washington or in the United States District
Court for the Western District of Washington and agree that in any such action
venue shall lie exclusively at Seattle, Washington.
(e) No waiver of any right under this Guaranty shall be effective
unless contained in a writing signed by a duly authorized officer or
representative of the party sought to be charged with the waiver and no waiver
of any right arising from any breach or failure to perform shall be deemed to be
a waiver of any future right or of any other right arising under this Guaranty.
(f) Paragraph headings contained in this Guaranty are included for
convenience only and form no part of the agreement between the parties.
(g) All notices or requests required or permitted under this Guaranty
shall be in writing; shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid; shall be deemed given when so
delivered or mailed, irrespective of whether such notice or request is actually
received by the addressee; and shall be sent to the parties at the following
addresses:
4
<PAGE>
If to Landlord: Occidental Mall
c/o Martin Smith Inc
615 Second Avenue, Suite 400
Seattle, WA 98104
If to Guarantor: Steven N. Moore
Christopher Slatt
Seattle Software Labs, Inc.
316 Occidental Avenue South, Suite 301
Seattle, WA 98104
Either party may change the address to which notices shall be sent by notice to
the other party.
(h) This Guaranty shall be binding upon, and inure to the benefit of,
the parties hereto and their respective heirs, devisees, legatees, executors,
administrators, personal representatives, successors and assigns. If Landlord
disposes of its interest in the Lease, the term "Landlord" as used in this
Guaranty shall mean Landlord's successors.
(i) As used in this Guaranty, the masculine shall include the
feminine and neuter, the feminine shall include the masculine and neuter, the
neuter shall include the masculine and feminine, the singular shall include the
plural and plural shall include the singular, as the context may require.
Dated this 17 day of December 1996.
GUARANTOR:
/s/ Steven N. Moore /s/ Christopher Slatt
- ------------------------------------- -----------------------------------
Steven N. Moore and Christopher Slatt and
/s/ Sheila E. Moore /s/ Jeanine K. Slatt
- ------------------------------------- -----------------------------------
Sheila E. Moore, husband and wife Jeanine K. Slatt, husband and wife
5
<PAGE>
STATE OF WASHINGTON )
) ss. INDIVIDUAL
COUNTY OF KING ) ----------
On this _______ day of __________, 19___, before me, a Notary Public, personally
appeared _____________________________________________________________________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged the said instrument to be his/hers (their) free and voluntary act
and deed for the uses and purposes therein mentioned.
Witness my hand and official seal.
------------------------------------------------
Notary Public in and for the State of Washington
Residing at
------------------------------------
My Commission Expires:
--------------------------
------------------------------------------------
Print Notary Public Name
STATE OF WASHINGTON )
) ss. INDIVIDUAL
COUNTY OF KING ) ----------
On this _______ day of __________, 19___, before me, a Notary Public, personally
appeared ____________________________________________________________________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged the said instrument to be his/hers (their) free and voluntary act
and deed for the uses and purposes therein mentioned.
Witness my hand and official seal.
------------------------------------------------
Notary Public in and for the State of Washington
Residing at
-------------------------------------
My Commission Expires:
--------------------------
------------------------------------------------
Print Notary Public Name
6
<PAGE>
LEASE AMENDMENT NO. 3
This Lease Amendment No. 3 is made and entered into this 28th day of
October 1998 by and between BURKE-STATE BLDG., L.L.C., a Washington limited
liability company ("Landlord"), and WatchGuard, Inc., a Washington corporation
("Tenant").
Recitals: Landlord and Tenant's predecessor in interest Seattle Software Labs,
Inc., a Washington corporation ("Seattle Software") entered into a written Lease
dated March 15, 1996, Lease Amendment No. 1 dated June 10, 1996, and Lease
Amendment No. 2 dated November 6, 1996 (the "Lease"), whereby Seattle Software
leased from Landlord certain Premises consisting of approximately 7,517 rentable
square feet of space located in the Burke Building in the Occidental Mall,
Seattle, Washington, designated as Suite 301. Landlord and Tenant desire to
further amend the Lease to increase the square footage of the Premises by adding
Suite 315, to adjust Tenant's Percentage of the Building, to revise the Rent,
and to establish the base year for Suite 315.
NOW THEREFORE, Landlord and Tenant agree to amend the Lease as follows:
1. The following paragraph shall be added to and become a part of Section 1(b):
From and after November 1, 1998, "Premises" means that certain space
outlined in red on the attached Exhibit B located on the third floor of the
Burke Building (Suites 301 and Suite 315).
2. Sections 1(c), 8(a)(iii) and 9(a)(iii) are supplemented as follows:
From and after November 1, 1998, Tenant's Percentage of the Building shall
continue to mean 6.75% for purposes of Suite 301 (approximately 7,517 rentable
square feet), but Tenant's Percentage of the Building shall also mean an
additional one and twenty-two/100ths percent (1.22%) for purposes of Suite 315
(approximately 1,362 rentable square feet). Moreover, while the "Base Services
Year" and the "Base Tax Year" shall continue to be calendar year 1996 for Suite
301, the "Base Services Year" and the "Base Tax Year" for Suite 315 shall be
calendar year 1998. In other words, Tenant's share of increases in Real
Property Taxes and Operating Costs shall be calculated separately for Suite 315,
using a 1998 base year.
3. Section 1(f) is amended to read:
Lease Expiration Date: April 30, 2001 ("Expiration Date")
1
<PAGE>
4. The following paragraph shall be added to and become a part of Section 1(g):
From and after November 1, 1998, the Rent shall be the following amounts as
to the following periods during the term:
<TABLE>
<CAPTION>
Period Monthly Amount
- --------------------------------------------- ------------------------
<S> <C> <C>
November 1, 1998 to April 30, 1999 $12,195.35 Per month
May 1, 1999 to April 30, 2000 $12,622.06 Per month
May 1, 2000 to April 30, 2001 $13,048.77 Per month
</TABLE>
5. Exhibit B is deleted in its entirety and replaced with the Exhibit B
attached hereto and made a part hereof.
6. Improvements. Tenant hereby accepts the Premises in "AS IS" condition,
subject to the following:
Landlord, at Landlord's sole cost, shall (i) demolish a portion of the
demising wall; and (ii) install a finished passageway, to be mutually agreed
upon by Landlord and Tenant, between Suite 301 and Suite 315; and (iii) patch in
carpeting in the area affected by construction to match the existing carpeting
as closely as reasonably possible. The provisions of the Work Letter (Exhibit C
to the Lease) have been completed and shall no longer apply; Landlord shall not
be required to make additional improvements to the Premises, except as set forth
above. Tenant acknowledges that some or all of the foregoing work may be
performed during Tenant's business hours and may cause some disturbance to
occur, including noise and odors, and agrees to a reasonable degree of such
disturbance while the work is in progress, provided Landlord makes commercially
reasonable efforts to minimize any such disturbance.
7. Agency Disclosure. Martin Smith Inc hereby discloses that it represents the
Landlord in this transaction.
Except as set forth in this Lease Amendment No. 3, all the provisions of the
Lease shall remain unchanged and in full force and effect.
2
<PAGE>
Dated the date first above written.
<TABLE>
<CAPTION>
Landlord: Tenant:
<S> <C>
BURKE-STATE BLDG., L.L.C., a Washington WatchGuard, Inc.,
limited liability company a Washington corporation
By: [signature illegible] By: /s/ Steven N. Moore
Managing Partner Its: Chief Financial Officer
By: ________________________________
Its: ________________________________
</TABLE>
3
<PAGE>
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that H. Martin Smith, III is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument, and acknowledged it as the (title) managing member of (entity) Burke
State Bldg., L.L.C., a Washington limited liability company to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Witness my hand and official seal this 30th day of November 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Danette A. Brandt
- ----------------------------------------- ------------------------------------
Notary Public
(Print Name) Danette A. Brandt
NOTARY SEAL Residing at Edmonds, WA
My Commission Expires: 3/8/2001
- -------------------------------------------------------------------------------
</TABLE>
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Steven N. Moore is the
person who appeared before me, and said person acknowledged that he/she signed
this instrument, on oath stated that he/she was authorized to execute the
instrument, and acknowledged it as the (title) CFO of (entity) Watchguard
Technologies, Inc., a Delaware corporation, to be the free and voluntary act of
such party for the uses and purposes mentioned in the instrument.
Witness my hand and official seal this 6th day of November 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Deborra L. Nelson
- ----------------------------------------- ------------------------------------
Notary Public
(Print Name) Deborra L. Nelson
NOTARY SEAL Residing at King County
My Commission Expires: 10/25/99
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
EXHIBIT B
GUARANTY
THIS GUARANTY is made and given by the individuals set forth on the
signature page hereof ("Guarantor") to COM Realty, Inc., a Delaware corporation
("Landlord").
RECITALS: Seattle Software Labs, Inc., a Washington corporation
("Tenant"), has requested that Landlord enter into a lease with Tenant, and
Landlord is unwilling to enter into such lease unless Guarantor gives Landlord
an unconditional guarantee of the full, prompt and complete payment by Tenant as
and when due of (a) all installments of rent and other monetary obligations
payable under the Lease for all periods during which Tenant is in actual
occupancy of the Premises, (b) all installments of rent and other monetary
obligations payable under the Lease for the twelve (12) month period following
any default by Tenant, and (c) the unamortized balance as of the date Tenant
relinquishes possession of the Premises of (i) the total cost of improvements,
alterations and repairs ("Tenant Improvements") provided by Landlord under the
Lease, which is estimated to be $17,992.58, and (ii) the leasing fees due to
Martin Smith Inc and Leibsohn & Company, which are estimated to be $15,866.76.
Such costs and fees shall be amortized, without interest, over the Term.
NOW, THEREFORE, in order to induce Landlord to enter into a lease with
Tenant, Guarantor agrees as follows:
1. Guaranty. Guarantor, as a material inducement to and in consideration
of Landlord's entering into a written lease with Tenant, dated the same date as
this Lease Guaranty (the "Lease"), pursuant to which Landlord has leased or will
lease to Tenant, and Tenant has leased or will lease from Landlord, the premises
located in the City of Seattle, County of King, State of Washington, in the
building located at 316 Occidental Avenue South, Seattle, Washington,
unconditionally guarantees and promises to and for the benefit of Landlord the
full, prompt and complete payment by Tenant as and when due of (a) all
installments of rent and other monetary obligations payable under the Lease for
all periods during which Tenant is in actual occupancy of the Premises, (b) all
installments of rent and other monetary obligations payable under the Lease for
the twelve (12) month period following any default by Tenant, and (c) the
unamortized balance as of the date Tenant relinquishes possession of the
Premises of (i) the total cost of the Tenant Improvements provided by Landlord
under the Lease, which is estimated to be $17,992.58, and (ii) the leasing fees
due to Martin Smith Inc and Leibsohn & Company, which are estimated to be
$15,866.76. The cost and fees described in clauses (c)(i) and (c)(ii) of the
preceding sentence shall be amortized, without interest over the Term. If, for
example, Tenant defaults under the Lease at the end of the thirtieth month of
the Lease Term, Guarantor shall be obligated to pay the unamortized portion of
the Tenant Improvements and leasing fees which equal $16,929.74, plus all
installments of rent and other monetary obligations payable under the Lease for
the twelve-month period following default by Tenant (months 31 through 42).
Guarantor acknowledges and agrees that this Guaranty is an absolute guarantee of
payment.
<PAGE>
2. Attorneys' Fees. Guarantor agrees to pay all expenses, including,
without limitation, actual attorneys' fees and costs, paid or incurred by
Landlord in endeavoring to collect or secure performance of the Obligations, or
any part thereof, or in enforcing this Guaranty.
3. Joint and Several Liability. If Guarantor is more than one person,
Guarantor's Obligations are joint and several and are independent of Tenant's
Obligations. A separate action may be brought or prosecuted against any
Guarantor whether this action is brought or prosecuted against any other
Guarantor or Tenant, or all, or whether any other Guarantor or Tenant, or all,
are joined in the action.
4. Primary Liability. Guarantor's liability under this Guaranty is
primary, direct and immediate. Guarantor waives the right to require Landlord
to:
(a) Proceed against Tenant or any other person;
(b) Proceed against or exhaust any security or collateral that
Landlord holds from Tenant; or
(c) Pursue any other remedy in Landlord's power.
5. Waiver of Statute of Limitations. Guarantor waives the benefit of any
statute of limitations affecting Guarantor's liability under this Guaranty.
6. Bankruptcy or Reorganization of Tenant. In the event of any proceeding
by or against Tenant, a composition, extension or reorganization under any
provision of the Bankruptcy Code, or any other bankruptcy, insolvency,
receivership, reorganization or similar proceeding, Guarantor expressly waives
the extension of the Obligations of this Guaranty under any provision of the
Bankruptcy Code or any law or rule applicable to such proceedings and hereby
agrees that Landlord may proceed immediately to collect any amount due under the
terms of this Guaranty and to otherwise enforce this Guaranty.
7. Rights and Remedies Cumulative. All of Landlord's rights and remedies
herein specified are intended to be cumulative and not in substitution for any
right or remedy otherwise available to Landlord.
8. Enforcement. If Tenant defaults under the Lease, Landlord can proceed
immediately against Guarantor or Tenant, or both, or Landlord can enforce
against Guarantor or Tenant, or both, any rights that it has under the Lease,
this Guaranty, or both, or pursuant to applicable laws. If the Lease terminates
and Landlord has any rights it can enforce against Tenant after termination,
Landlord may enforce these rights against Guarantor without giving previous
notice to Tenant or Guarantor and without making any demand on either of them.
9. Waiver of Defenses. Guarantor waives any defense arising by reason of
any disability of Tenant, or by reason of the cessation from any cause
whatsoever of the liability of
-2-
<PAGE>
Tenant. Guarantor shall be liable and remain liable for the payment of the
Obligations to the extent provided herein notwithstanding.
(a) Any previous discharge (partial or total) of Tenant from any
further liability;
(b) Any bar (temporary, partial or total) to the pursuit by Guarantor
of any right or claim for indemnification from Tenant;
(c) Any right or claim by Guarantor to be subrogated to the rights or
claims of Landlord against Tenant or in and to the Premises;
(d) Any action or inaction or delay in acting by Landlord; or
(e) Landlord's failure to enforce, or delay in enforcing, any of its
rights under the Lease, or otherwise.
10. Amendments to Lease; Assignment of Lease. Guarantor authorizes
Landlord, without notice or demand and without affecting Guarantor's liability
hereunder, from time to time to:
(a) Amend or change the provisions of the Lease by agreement between
Landlord and Tenant at any time, or by course of conduct, or by operation of
law, or otherwise, without the consent of, and without notice to, Guarantor;
(b) Permit or suffer an assignment of the Lease or any subletting
under the Lease, whether or not consented to by Landlord; or
(c) Take and hold security for the performance and payment of the
Obligations and apply, enforce, exchange, waive and release any such security.
11. Waiver of Subrogation. Until all of the Obligations have been
performed or paid in full, Guarantor shall have no right of subrogation against
Tenant. Guarantor waives its right to enforce any remedies that Landlord now
has, or may later have, against Tenant. Guarantor waives any right to
participate in any security now or hereafter held by Landlord.
12. Waiver of Acceptance, Presentments and Notices. Guarantor waives
notice of acceptance of this Guaranty and all presentments, demands for
performance, notices of nonperformance, protests, notices of protest, notices of
dishonor and notices of acceptance of this Guaranty, and waives all notices of
the creation, existence, or incurring of new or additional Obligations.
13. Miscellaneous Provisions.
(a) This Guaranty sets forth the entire agreement of the parties as to
the subject matter hereof and supersedes all prior discussions and
understandings between them.
-3-
<PAGE>
This Guaranty may not be amended or rescinded in any manner except by an
instrument in writing signed by a duly authorized officer or representative of
each party hereto.
(b) This Guaranty shall be governed by, and construed and enforced in
accordance with, the laws of the State of Washington.
(c) Should any of the provisions of this Guaranty be found to be
invalid, illegal or unenforceable by any court of competent jurisdiction, such
provision shall be stricken and the remainder of this Guaranty shall nonetheless
remain in full force and effect unless striking such provision shall materially
alter the intention of the parties.
(d) In the event any action is brought to enforce this Guaranty, the
parties agree to be subject to exclusive in personam jurisdiction in the
Superior Court for the State of Washington or in the United States District
Court for the Western District of Washington and agree that in any such action
venue shall be exclusively at Seattle, Washington.
(e) No waiver of any right under this Guaranty shall be effective
unless contained in a writing signed by a duly authorized officer or
representative of the party sought to be charged with the waiver and no waiver
of any right arising from any breach or failure to perform shall be deemed to be
a waiver of any future right or of any other right arising under this Guaranty.
(f) Paragraph headings contained in this Guaranty are included for
convenience only and form no part of the agreement between the parties.
(g) All notices or requests required or permitted under this Guaranty
shall be in writing; shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid; shall be deemed given when so
delivered or mailed, irrespective of whether such notice or request is actually
received by the addressee; and shall be sent to the parties at the following
addresses:
If to Landlord: Occidental Mall
c/o Martin Smith Inc
615 Second Avenue, Suite 400
Seattle, WA 98104
If to Guarantor: Steven N. Moore
Christopher Slatt
Seattle Software Labs, Inc.
316 Occidental Avenue South, Suite 301
Seattle, WA 98104
Either party may change the address to which notices shall be sent by notice to
the other party.
-4-
<PAGE>
(h) This Guaranty shall be binding upon, and inure to the benefit of,
the parties hereto and their respective heirs, devisees, legatees, executors,
administrators, personal representatives, successors and assigns. If Landlord
disposes of its interest in the Lease, the term "Landlord" as used in this
Guaranty shall mean Landlord's successors.
(i) As used in this Guaranty, the masculine shall include the feminine
and neuter, the feminine shall include the masculine and neuter, the neuter
shall include the masculine and feminine, the singular shall include the plural
and plural shall include the singular, as the context may require.
Dated this 17th day of December, 1996.
GUARANTOR:
/s/ Steven N. Moore and /s/ Christopher Slatt and
-------------------------- ----------------------------
Steven N. Moore Christopher Slatt
/s/ Sheila Moore, husband and wife /s/ Jeanine Slatt, husband and wife
------------------------------------- --------------------------------------
Sheila Moore Jeanine Slatt
-5-
<PAGE>
STATE OF WASHINGTON )
) ss. INDIVIDUAL
COUNTY OF KING )
On this _______ day of __________, 19___, personally appeared before me, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
_______________________ and ________________________, known to me to be the
individual(s) described in and who executed the within and foregoing instrument
and acknowledged the said instrument to be his (their) free and voluntary act
and deed.
Witness my hand and official seal hereto affixed the day and year first above
written.
------------------------------------------------
Notary Public in and for the State of Washington
Residing at
------------------------------------
My Commission Expires:
--------------------------
------------------------------------------------
Print Notary Public Name
-6-
<PAGE>
STATE OF WASHINGTON )
) ss. INDIVIDUAL
COUNTY OF KING )
On this _______ day of __________, 19___, personally appeared before me, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
____________________ and _____________________________, known to me to be the
individual(s) described in and who executed the within and foregoing instrument
and acknowledged the said instrument to be his (their) free and voluntary act
and deed.
Witness my hand and official seal hereto affixed the day and year first above
written.
------------------------------------------------
Notary Public in and for the State of Washington
Residing at
-------------------------------------
My Commission Expires:
--------------------------
------------------------------------------------
Print Notary Public Name
-7-
<PAGE>
EXHIBIT 10.2
OFFICE LEASE
OCCIDENTAL MALL
Martin Smith Inc
500 Watermark Tower
1109 First Avenue
Seattle, WA 98101-2988
Tel: 682-3300 Fax: 340-1283
This Lease is made this 10th day of October 1997 by and between BURKE STATE
BLDG., L.L.C., a Washington limited liability company ("Landlord"), and
WatchGuard, Inc., a Washington corporation ("Tenant"), who agree as follows:
1. Fundamental Terms. As used in this Lease, the following capitalized terms
shall have the following meanings:
(a) "Land" means the land on which the Building is located, situated in the
City of Seattle, County of King, State of Washington, which is described on
Exhibit A.
(b) "Building" means the Burke Building, the street address of which is 316
Occidental Avenue South, Seattle, Washington 98104, and the State Building, the
street address of which is 308 Occidental Avenue South, Seattle, Washington
98104, together known as "the Occidental Mall." The Premises are located in the
Burke Building.
(c) "Premises" means that certain space outlined in red in Exhibit B and
located on the second floor of the Burke Building designated as Suite 200.
(d) "Agreed Areas" means the agreed amount of rentable square feet of space
in the Building and the Premises. Landlord and Tenant stipulate and agree for
all purposes under this Lease that the Building contains approximately 111,308
rentable square feet of space (the "Building Area") and that the Premises
contain approximately 12,296 rentable square feet of space (the "Premises
Area"). Landlord and Tenant further agree that the Building Area may exclude
portions of the Building which are used for other than office purposes, such as
areas used for retail purposes or for storage purposes.
(e) "Tenant's Share" means the Premises Area divided by the Building Area,
expressed as a percentage, which is 11.05 percent). Notwithstanding the
foregoing, if one or more of the facilities, services and utilities the costs of
which are included
<PAGE>
within the definition of Operating Costs is not furnished to one or more tenants
or to particular types of tenants, then in connection with the calculation of
Tenant's Share of each of such costs the Building Area shall be reduced by the
number of rentable square feet of space occupied by such tenants and Tenant's
Share shall be separately computed as to each of such costs.
If a portion of the Building is damaged or condemned, or any other event
occurs which alters the number of rentable square feet of space in the Premises
or the Building, then Landlord shall adjust Tenant's Share to equal the number
of rentable square feet of space then existing in the Premises (as altered by
such event) divided by the number of rentable square feet of space then existing
in the Building (as altered by such event).
(f) "Commencement Date" means December 15, 1997.
(g) "Expiration Date" means April 30, 2001.
(h) "Term" means the period of time commencing on the Commencement Date
and ending on the Expiration Date, unless sooner terminated pursuant to this
Lease.
(i) "Minimum Monthly Rent" means the following amounts as to the following
periods during the Term of this Lease:
Period Monthly Amount
----------------------------------- --------------------
December 15, 1997 to April 30, 2001 $18,444.00 per month
(j) "Permitted Use" means general administrative office use.
(k) "Base Year" means the calendar year 1997.
(l) "Prepaid Rent" means Eighteen Thousand Four Hundred and Forty-Four
Dollars and 00/100 ($18,444.00).
(m) "Security Deposit" means Eighteen Thousand Four Hundred and Forty-Four
Dollars and 00/100 ($18,444.00).
(n) "Landlord's Address for Notice" means Occidental Mall, c/o Martin
Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
(o) "Landlord's Address for Payment of Rent" means Occidental Mall, c/o
Martin Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
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<PAGE>
(p) "Tenant's Address for Notice" means WatchGuard Inc., 316 Occidental
Avenue South, Suite 200, Seattle, Washington 98104.
(q) "Landlord's Agent" means Martin Smith Inc or such other agent as
Landlord may appoint from time to time.
(r) "Broker(s)" means Martin Smith Inc representing Landlord and Eric
Olmstead of Leibsohn & Co. representing Tenant in this transaction.
(s) "Exhibits" means the following Exhibits to this Lease:
Exhibit A - Legal Description of the Property
Exhibit B - Outline Drawing of the Premises
Exhibit C - Work Letter
Exhibit D - Rules and Regulations
(t) "Rider" means the following Rider which is attached hereto: Rider
dated the 10th day of October 1997 by and between Burke-State Bldg., LLC, a
Washington limited liability company ("Landlord") and WatchGuard, a Washington
corporation ("Tenant").
(u) "Definitions" means the words and phrases defined in Section 41
captioned "Definitions".
2. Premises. Landlord leases to Tenant and Tenant leases from Landlord the
Premises for the Term.
3. Appurtenances. Tenant, and its authorized representatives, shall have the
right to use, in common with others and subject to the Rules and Regulations,
the Common Areas of the Building. Landlord shall have the right, in Landlord's
sole discretion, from time to time to (i) make changes to the Building interior
and exterior and Common Areas, including, without limitation, changes in the
location, size, shape, number and appearance thereof, (ii) to close temporarily
any of the Common Areas for maintenance purposes so long as reasonable access to
the Premises remains available, and (iii) to use the Common Areas while engaged
in making additional improvements, repairs or alterations to the Building. All
of the windows and exterior walls of the Premises and any space in the Premises
used for shafts, stacks, pipes, conduits, ducts, electrical equipment or other
utilities or Building facilities are reserved solely to Landlord and Landlord
shall have rights of access through the Premises for the purpose of operating,
maintaining and repairing the same, provided, however, that such changes shall
not materially affect Tenant's access to, or use and occupancy of, the Premises.
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<PAGE>
4. Term.
(a) Commencement Date. The Term shall commence on the Commencement Date
and expire on the Expiration Date, unless sooner terminated pursuant to this
Lease. The Commencement Date shall be:
(i) The date specified in Section 1.
(ii) If Tenant shall occupy the Premises for the Permitted Use prior
to the Commencement Date specified in Section 1, then the date of such early
occupancy.
(b) Tenant Termination Rights. If Landlord is unable to deliver
possession of the Premises to Tenant on the Commencement Date as a result of
causes beyond its reasonable control, Landlord shall not be liable for any
damage caused by failing to deliver possession and this Lease shall not be void
or voidable. Tenant shall not be liable for Rent until Landlord delivers
possession of the Premises to Tenant. No delay in delivery of possession of the
Premises to Tenant shall change the Expiration Date or operate to extend the
Term. If Landlord does not deliver possession of the Premises to Tenant within
six (6) months of the Commencement Date, then Tenant may elect to terminate this
Lease by giving notice to Landlord within thirty (30) days following the end of
such six (6) month period.
(c) Confirmation of Commencement Date. When the Commencement Date has
been established as a later date than the Commencement Date specified in Section
1, Landlord shall confirm the Commencement Date by notice to Tenant.
5. Minimum Monthly Rent; Late Charge.
(a) Minimum Monthly Rent. Tenant shall pay to Landlord the Minimum
Monthly Rent without deduction, offset, prior notice or demand, in advance on
the first day of each month during the Term. Minimum Monthly Rent for any
partial month shall be prorated at the rate of 1/30th of the Minimum Monthly
Rent per day. Minimum Monthly Rent is exclusive of any sales, franchise,
business or occupation or other tax based on rents (other than Landlord's
general income taxes) and should such taxes apply during the Term, the Minimum
Monthly Rent shall be increased by the amount of such taxes. All Rent shall be
paid to Landlord at Landlord's Address for Payment of Rent or at such other
address as Landlord may specify by notice to Tenant.
(b) Late Charge. Tenant acknowledges that the late payment by Tenant of
any Rent will cause Landlord to incur administrative, collection, processing and
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<PAGE>
accounting costs and expenses not contemplated under this Lease, the exact
amount of which are extremely difficult or impracticable to fix. Therefore, if
any Rent is not received by Landlord from Tenant by the fifth (5th) calendar day
after such Rent is due, Tenant shall immediately pay to Landlord a late charge
equal to Seventy-five and No/100 Dollars ($75.00). Landlord and Tenant agree
that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for its loss caused by Tenant's
nonpayment. Should Tenant pay said late charge but fail to pay
contemporaneously therewith all unpaid amounts of Rent, Landlord's acceptance of
this late charge shall not constitute a waiver of Tenant's default with respect
to Tenant's nonpayment nor prevent Landlord from exercising all other rights and
remedies available to Landlord under this Lease or under law.
(c) Amortization of Tenant Improvements. Notwithstanding the foregoing,
and in addition to the Minimum Rent discussed in Sections 1.(l) and Section 5
(a) and (b), the Tenant shall pay monthly in advance on the first day of each
month during the Term the amortized cost of the Tenant Improvements. It has
been agreed that Landlord's contribution for the Tenant Improvements shall not
exceed $40,000.00. Landlord's contribution towards the Tenant Improvement shall
be amortized over thirty-eight (38) months at a 10% interest rate per annum. It
is further understood that should the total Tenant Improvement costs not exceed
$40,000.00 Tenant shall pay only the amortized costs of the allowance used. For
example, should Tenant elect to take the entire Forty Thousand and No/100
Dollars and No Cent ($40,000.00) allowance, the monthly payment for these
Improvements would be $1,232.42 in addition to the Minimum Monthly Rent
described in Section 1(1) and Section 5(a).
6. Prepaid Rent and Security Deposit. On execution of this Lease, Tenant shall
deposit with Landlord the Prepaid Rent, as monthly rent for the first full month
of the Term for which Rent is payable, and the Security Deposit, as a Security
Deposit for the performance by Tenant of the provisions of this Lease. If
Tenant is in default, Landlord may use the Security Deposit, or any portion of
it, to cure the default, including, without limitation, paying for the cost of
any work necessary to restore the Premises, the Tenant Improvements and any
alterations to good condition or to compensate Landlord for all damage sustained
by Landlord resulting from Tenant's default. Tenant shall within five (5) days
of demand pay to Landlord a sum equal to the portion of the Security Deposit
expended or applied by Landlord as provided in this Section so as to maintain
the Security Deposit in the sum initially deposited with Landlord. If Tenant is
not in default as of the expiration or termination of the Term, including,
without limitation, in default in payment of the Rent for the last month of the
Term, then Landlord shall return the Security Deposit, without interest, to
Tenant within thirty (30) days after the expiration or termination of the Term.
Landlord's
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<PAGE>
obligations with respect to the Security Deposit are those of a debtor and not a
trustee. Landlord may commingle the Security Deposit with Landlord's general and
other funds.
7. Real Property Taxes.
(a) Payment of Tenant's Share of Increases in Real Property Taxes. Tenant
shall pay to Landlord, as Additional Rent, monthly, in advance on the first day
of each month during the Term, an amount equal to one-twelfth (1/12th) of
Tenant's Share of all increases in Real Property Taxes that are or will be
levied or assessed against the Property during each calendar year during the
Term over and above the Real Property Taxes that are levied or assessed against
the Property during the Base Year as reasonably estimated by Landlord. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Real Property Taxes for the preceding
calendar year and Tenant's Share of the increase in Real Property Taxes. If
Tenant's Share of the increase in such Real Property Taxes for that calendar
year over such Real Property Taxes for the Base Year exceeds the monthly
payments made by Tenant, then Tenant shall pay Landlord the deficiency within
thirty (30) days after receipt of the statement. If Tenant's payments made
during that calendar year exceed Tenant's Share of the increase in such Real
Property Taxes for that calendar year over such Real Property Taxes for the Base
Year, then, at Landlord's option, either Landlord shall pay Tenant the excess at
the time Landlord furnishes the statement to Tenant, or Tenant shall be endued
to offset the excess against the next installment(s) of Minimum Monthly Rent and
Additional Rent, provided, however, that at the end of the Term Landlord shall
pay Tenant the excess at the time Landlord furnishes the statement to Tenant.
(b) General and Special Assessments. With respect to any general or
special assessments which may be levied against or upon the Property, or which
under the laws then in force may be evidenced by improvement or other bonds or
may be paid in annual installments, only the amount of such annual installment,
and interest due thereon, shall be included in the computation of Real Property
Taxes.
(c) Proration. Tenant's Share of Real Property Taxes shall be prorated on
the basis of a 360-day year to account for any fractional portion of a tax year
included in the Term at its commencement and expiration.
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(d) No Effect on Minimum Monthly Rent. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
(e) Historic Designation. Due to the Historic Designation of the
Occidental Mall, the Building qualifies for a special tax valuation designation
pursuant to the Special Valuation of Property Act, Chapter 84.26 RCW. This
designation was a material economic element necessary to induce Landlord to
undertake and finance the rehabilitation of the Building. As a result of this
Special Valuation of Property Act, the Building qualifies for a special tax
valuation, and, as a result, the real property taxes have been reduced below the
amount that would be due and owing if the Building did not qualify for the
special tax valuation. For purposes of this Section, Real Property Taxes shall
be calculated based on full assessed value multiplied by the applicable millage
rate then in effect.
8. Personal Property Taxes. Tenant shall pay prior to delinquency all
personal property taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Premises or elsewhere. If possible, Tenant shall cause such trade fixtures,
furnishings, equipment and all other personal property of Tenant to be assessed
and billed separately from the Property.
9. Operating Costs.
(a) Payment of Tenant's Share of Increases in Operating Costs. Tenant
shall pay to Landlord, as Additional Rent, monthly, in advance on the first day
of each month during the Term, an amount equal to one-twelfth (1/12th) of
Tenant's Share of the increase in the Operating Costs of the Property for each
calendar year during the Term over the Operating Costs for the Base Year as
reasonably estimated by Landlord. Landlord shall reasonably estimate the
Operating Costs for the Base Year and for each calendar year during the Term
based on the Operating Costs that would have been incurred if the Building had
been 95% occupied during the Base Year or each such calendar year, as the case
may be, taking into account historical operating costs for the Building. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Operating Costs for the preceding calendar
year and Tenant's Share of the increase in the Operating Costs. If Tenant's
Share of the increase in the Operating Costs for that calendar year over the
Operating Costs for the Base Year exceeds the monthly payments made by Tenant,
then Tenant shall pay Landlord the deficiency within thirty (30) days after
receipt of the statement. If
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Tenant's payments made during that calendar year exceed Tenant's Share of the
increase in the Operating Costs for that calendar year over the Operating Costs
for the Base Year, then, at Landlord's option, either Landlord shall pay Tenant
the excess at the time Landlord furnishes the statement to Tenant, or Tenant
shall be entitled to offset the excess against the next installment(s) of
Minimum Monthly Rent and Additional Rent, provided, however, that at the end of
the Term Landlord shall pay Tenant the excess at the time Landlord furnishes the
statement to Tenant.
(b) Proration. Tenant's Share of Operating Costs shall be prorated on the
basis of a-360 day year to account for any fractional portion of a year included
in the Term at its commencement and expiration.
(c) No Effect on Minimum Monthly Rent. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
10. Use. Tenant shall use the Premises for the Permitted Use and for no other
use without Landlord's prior consent. Tenant agrees that it has determined to
its satisfaction that the Premises can be used for the Permitted Use. Tenant
waives any right to terminate this Lease if the Premises cannot be used for the
Permitted Use during the Term unless the prohibition on use is the result of
actions taken by Landlord. Tenant's use of the Premises shall be in accordance
with the following:
(a) Insurance. Tenant shall not do, bring, or keep anything in or about
the Premises or the Property that will cause a cancellation of any insurance
covering the Property. If the rate of any insurance carried by Landlord on the
Property as published by the Washington Survey and Rating Bureau, or any
successor rating bureau or agency, is increased as a result of Tenant's use,
then Tenant shall pay to Landlord not less than ten (10) days before the date
Landlord is obligated to pay a premium on the insurance, a sum equal to the
difference between the original premium and the increased premium,
(b) Compliance With Laws. Tenant shall comply with all Laws concerning
the Premises and Tenant's use of the Premises.
(c) Waste, Nuisance and Improper Use. Tenant shall not use the Premises
in any manner that will constitute waste, nuisance or unreasonable annoyance to
other tenants in the Building, including, without limitation, (i) the use of
loudspeakers or sound or light apparatus that can be heard or seen outside the
Premises, (ii) for cooking or other activities that cause odors that can be
detected outside the Premises, or (iii) for lodging or sleeping rooms.
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(d) Damage to Property. Tenant shall not do anything in, on or about the
Premises that will cause damage to the Property.
(e) Rules and Regulations. Tenant and its authorized representatives
shall comply with the Rules and Regulations set forth on Exhibit D attached
hereto. Landlord shall have the right to amend the Rules and Regulations from
time to time. In the event of a conflict between this Lease and the Rules and
Regulations, as amended, this Lease shall control. Landlord shall have the right
to enforce the Rules and Regulations. Landlord shall have no liability or
responsibility whatsoever with respect to the noncompliance by other tenants or
their authorized representatives with any of such Rules and Regulations.
11. Hazardous Substances. Tenant shall not dispose of or otherwise allow the
release of any Hazardous Substances in, on or under the Premises, or the
Property, or in any Tenant Improvements or alterations placed on the Premises by
Tenant. Tenant represents and warrants to Landlord that Tenant's intended use
of the Premises does not involve the use, production, disposal or bringing on to
the Premises of any Hazardous Substances, except for products normally used in
general business offices which constitute Hazardous Substances, provided that
such products are used, stored and disposed of in accordance with applicable
laws and manufacturer's and supplier's guidelines. Tenant shall promptly comply
with all laws and with all orders, decrees or judgments of governmental
authorities or courts having jurisdiction, relating to the use, collection,
treatment, disposal, storage, control, removal or cleanup of Hazardous
Substances, on or under the Premises or the Property, or incorporated in any
Tenant Improvements or alterations, at Tenant's expense.
(a) Compliance; Notification. After notice to Tenant and a reasonable
opportunity for Tenant to effect such compliance, Landlord may, but is not
obligated to, enter upon the Premises and take such actions and incur such costs
and expenses to effect such compliance as it deems advisable to protect its
interest in the Premises and the Property, provided, however that Landlord shall
not be obligated to give Tenant notice and an opportunity to effect such
compliance if (i) such delay might result in material adverse harm to the
Premises, or the Property, or (ii) an emergency exists. Tenant shall reimburse
Landlord for the full amount of all costs and expenses incurred by Landlord in
connection with such compliance activities, and such obligation shall continue
even after expiration or termination of the Term. Tenant shall notify Landlord
immediately of any release of any Hazardous Substances on the Premises or the
Property.
(b) Indemnity by Tenant. Tenant agrees to hold Landlord harmless from and
against any and all damages, charges, cleanup costs, remedial actions, costs and
expenses, which may be imposed on, incurred or paid by, or asserted against
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Landlord, the Premises or the Property by reason of, or in connection with (i)
any misrepresentation, breach of warranty or other default by Tenant under this
Lease, or (ii) the acts or omissions of Tenant, its authorized representatives,
or any subtenant or other person for whom Tenant would otherwise be liable,
resulting in the release of any Hazardous Substances on the Premises or the
Property.
(c) Acknowledgment as to Hazardous Substances. Tenant acknowledges that
the Premises may contain Hazardous Substances, and Tenant accepts the Premises
and the Building notwithstanding such Hazardous Substances. If Landlord is
required by any law to take any action to remove or abate any Hazardous
Substances, or if Landlord deems it necessary to conduct special maintenance or
testing procedures with regard to any Hazardous Substances, or to remove or
abate any Hazardous Substances, Landlord may take such action or conduct such
procedures at times and in a manner that Landlord deems appropriate under the
circumstances, and Tenant shall permit the same.
(d) Survival. The provisions of this Section shall survive the expiration
or sooner termination of the Term. No subsequent modification or termination of
this Lease by agreement of the parties or otherwise shall be construed to waive
or to modify any provisions of this Section unless the termination or
modification agreement or other document expressly so states in writing.
12. Landlord's Maintenance; Inclusion in Operating Costs.
(a) Landlord's Maintenance. Except as provided in Section 13 captioned
"Tenant's Maintenance; Remedies," Section 23 captioned "Destruction" and Section
24 captioned "Condemnation" and except for damage caused by any negligent or
intentional act or omission of Tenant or its authorized representatives,
Landlord shall maintain in good condition and repair the following: (i) the
structural parts of the Building, which structural parts include only the
foundations, bearing and exterior walls (excluding glass and doors), subflooring
and roof, (ii) the building standard lighting fixtures, window coverings and
ceiling tiles and the unexposed electrical, plumbing and sewage systems,
including, without limitation, those portions lying outside the Premises, (iii)
the heating, ventilating and air-conditioning system, if any, servicing the
Building, (iv) the lobbies, corridors, elevators, public or common restrooms and
other common areas of the Building, and (v) the sidewalks, grounds, landscaping,
parking and loading areas, if any, and other common areas of the Property.
(b) Inclusion in Operating Costs. The cost of maintaining, repairing,
replacing or servicing the portions of the Building that Landlord is required to
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maintain pursuant to this Section shall be included in Operating Costs to the
extent provided in Section 9 captioned "Operating Costs."
13. Tenant's Maintenance; Remedies.
(a) Tenant's Maintenance. Except as provided in Section 12 captioned
"Landlord's Maintenance; Inclusion in Operating Costs," Section 23 captioned
"Destruction" and Section 24 captioned "Condemnation" and except for damage
caused by any negligent or intentional act or omission of Landlord or its
authorized representatives, Tenant, at its cost, shall maintain in good
condition and repair the Premises, including, without limitation, all of the
Tenant Improvements (except for latent defects), Tenant's alterations, Tenant's
trade fixtures, Tenant's personal property, signs, walls, interior partitions,
wall coverings, windows, non-building standard window coverings, glass, doors,
carpeting and resilient flooring, non-building standard ceiling tiles, plumbing
fixtures and non-building standard lighting fixtures. Tenant shall be liable
for any damage to the Premises and the Building resulting from the acts or
omissions of Tenant or its authorized representatives.
(b) Landlord's Remedies. If Tenant fails to maintain the Premises in good
condition and repair as required by Subsection 13(a) and if such failure is not
cured within thirty (30) days after notice of such failure is given by Landlord
to Tenant, then Landlord may, at its option, cause the Premises to be maintained
in good condition and repair and Tenant shall promptly reimburse Landlord for
all costs incurred by Landlord in performance of Tenant's obligation to maintain
the Premises.
14. Tenant Improvements and Alterations; Trade Fixtures.
(a) Landlord and Tenant shall install and pay for the improvements and
alterations as set forth in the Work Letter attached hereto as Exhibit C.
Tenant shall not make any other improvements or alterations to the Premises
without Landlord's prior consent. Any improvements and alterations made by
either party shall remain on and be surrendered with the Premises on expiration
or termination of the Term. Any improvements and alterations that remain on the
Premises on expiration or termination of the Term shall automatically become the
property of Landlord and title to such improvements and alterations shall
automatically pass to Landlord at such time without any payment therefor by
Landlord to Tenant. If Tenant or its authorized representatives make any
improvements or alterations to the Premises as provided in this Section, then
such improvements and alterations (i) shall be made in a first-class manner in
conformity with then building standard improvements, (ii) shall be made
utilizing then building standard materials, (iii) shall be made in compliance
with the Rules and Regulations and the reasonable directions of Landlord, (iv)
shall be made pursuant to a valid building permit to be obtained by Tenant, at
its cost, (v) shall be
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made in conformity with then applicable Laws, including without limitation,
building codes, and (vi) shall not be commenced until five (5) days after
Landlord has received notice from Tenant stating the date the installation of
such improvements and alterations is to commence so that Landlord can post and
record an appropriate notice of nonresponsibility.
(b) Trade Fixtures. Tenant shall not install any trade fixtures in or on
the Premises without Landlord's prior consent, which consent shall not be
unreasonably withheld.
15. Mechanics' Liens. Tenant shall pay, or cause to be paid, all costs of
labor, services and/or materials supplied in connection with any Work. Tenant
shall keep the Property free and clear of all mechanics' liens and other liens
resulting from any Work. Prior to the commencement of any Work or the supply or
furnishing of any labor, services and/or materials in connection with any Work,
Tenant shall provide Landlord with a labor and material payment bond in an
amount equal to one hundred percent (100%) of the aggregate price of all
contracts therefor, with release of the bond conditioned on Tenant's payment in
full of all claims of lien claimants for such labor, services and/or materials
supplied in the prosecution of the Work. Said payment bond shall name Landlord
as a primary obligee, shall be given by a surety which is satisfactory to
Landlord, and shall be in such form as Landlord shall approve in its sole
discretion. Tenant shall have the right to contest the correctness or validity
of any such lien if, immediately on demand by Landlord, it procures and records
a lien release bond issued by a responsible corporate surety in an amount
sufficient to satisfy statutory requirements therefor in the State of
Washington. Tenant shall promptly pay or cause to be paid any sums awarded to
the claimant on its suit, and, in any event, before any execution is issued with
respect to any judgment obtained by the claimant in its suit or before such
judgment becomes a lien on the Premises, whichever is earlier. If Tenant shall
be in default under this Section, by failing to provide security for or
satisfaction of any mechanic's or other liens, then Landlord may (but shall not
be obligated to), in addition to any other rights or remedies it may have,
discharge said lien by (i) paying the claimant an amount sufficient to settle
and discharge the claim, (ii) procuring and recording a lien release bond, or
(iii) taking such other action as Landlord shall deem necessary or advisable,
and, in any such event, Tenant shall pay as Additional Rent, on Landlord's
demand, all costs (including reasonable attorney's fees) incurred by Landlord in
settling and discharging such lien together with interest thereon in accordance
with Section 39 captioned "Interest on Unpaid Rent" from the date of Landlords
payment of said costs. Landlord's payment of such costs shall not waive any
default of Tenant under this Section.
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16. Utilities and Services.
(a) Utilities and Services Furnished by Landlord. Landlord shall furnish
the Premises with:
(i) Electricity for lighting and power suitable for the use of the
Premises for ordinary general office purposes; provided, however, that Tenant
shall not at any time have a connected electrical load for lighting purposes in
excess of the wattage per square foot of Premises Area required for budding
standard amounts of lighting, or a connected load for all other power
requirements in excess of four (4) watts per square foot of Premises Area as
determined by Landlord, and the electricity so provided for lighting and power
shall not exceed such limits, subject to any lower limits set by any
governmental authority with respect thereto;
(ii) Subject to the reasonable limitations of the existing building
systems, heating, ventilating and air-conditioning, if the Building has an air-
conditioning system, to maintain a temperature range in the Premises which is
customary for similar office space in the Seattle, Washington area (but in
compliance with any applicable governmental regulations with respect thereto).
Tenant agrees to keep closed, when necessary, blinds, draperies and windows
which must be closed to provide for the efficient operation of the heating and
air-conditioning systems, if any, and Tenant agrees to cooperate with Landlord
and to abide by the regulations and requirements which Landlord may prescribe
for the proper functioning and protection of the heating, ventilating and air-
conditioning system, if any. If Tenant requires heating, ventilating and air
conditioning to the Premises other than during normal business hours from 7:30
A.M. to 6:00 P.M. daily, except Saturdays, Sundays and those legal holidays
generally observed in the State of Washington, Landlord shall, upon Tenant's
request made not less than 24 hours before the time Tenant requires the after-
hour service, and not later than noon on the Friday before any Saturday or
Sunday on which Tenant requires such service, and not later than noon of the day
before any holiday on which Tenant requires such service (except as otherwise
provided in the Rules and Regulations), furnish such heating, ventilating and
air conditioning. If Tenant receives such services, then Tenant shall pay, upon
demand, an amount equal to Tenant's proportionate share of the actual direct
cost to Landlord in providing the heating, ventilating and air conditioning
outside of normal business hours;
(iii) Water for restroom and drinking purposes and access to restroom
facilities;
(iv) Elevator service for general office pedestrian usage if the Building
is serviced by elevators;
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(v) Relamping of building-standard light fixtures;
(vi) Washing of interior and exterior surfaces of exterior windows with
reasonable frequency; and
(vii) Janitorial service five (5) times per week, except holidays.
(b) Payment for Excess Utilities and Services. All services and utilities
for the Premises not required to be furnished by Landlord pursuant to Section
16(a) shall be paid for by Tenant. If Tenant requires, on a regular basis,
water, heat, air conditioning, electric current, elevator or janitorial service
in excess of that provided for in Section 16(a), then Tenant shall first obtain
the consent of Landlord which consent may be withheld in Landlord's sole
discretion. If Landlord consents to such excess use, Landlord may install an
electric current or water meter (including, without limitation, any additional
wiring, conduit or panel required therefor) to measure the excess electric
current or water consumed by Tenant or may cause the excess usage to be measured
by other reasonable methods (e.g. by temporary "check" meters or by survey).
Tenant shall pay to Landlord upon demand (i) the cost of any and all water,
heat, air conditioning, electric current, janitorial, elevator or other services
or utilities required to be furnished to Tenant in excess of the services and
utilities required to be furnished by Landlord as provided in Section 16(a);
(ii) the cost of installation, maintenance and repair of any meter installed in
the Premises; (iii) the cost of all electricity and water consumed by Tenant in
connection with any dedicated heating, ventilating and/or air conditioning,
computer power and/or air conditioning, telecommunications or other special
systems of Tenant, including any power usage other than through existing
standard 110-volt AC outlets; and (iv) any cost incurred by Landlord in keeping
account of or determining such excess utilities or services furnished to Tenant.
Landlord's failure to bill Tenant for any such excess utilities or services
shall not waive Landlord's right to bill Tenant for the excess at a later time.
(c) Temperature Balance. Landlord makes no representation to Tenant
regarding the adequacy or fitness of the heating, ventilating and air-
conditioning systems, if any, in the Building to maintain temperatures that may
be required for, or because of, any of Tenant's equipment which uses other than
the fractional horsepower normally required for office equipment, and Landlord
shall have no liability for loss or damage suffered by Tenant or others in
connection therewith. If the temperature otherwise maintained in any portion of
the Premises by the heating, air conditioning or ventilation system is affected
as a result of (i) any lights, machines or equipment (including without
limitation electronic data processing machines) used by Tenant in the Premises,
(ii) the occupancy of the Premises by more than one person per two hundred (200)
square feet of rentable area therein, (iii) an electrical load for lighting or
power in excess of the limits per square foot of rentable area of the
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Premises specified in Section 16(a), or (iv) any rearrangement of partitioning
or other improvements, Landlord may install any equipment, or modify any
existing equipment (including the standard air conditioning equipment) Landlord
deems necessary to restore the temperature balance. The cost of any such
equipment, including without limitation, the cost of design and installation
thereof, and the cost of operating, metering, maintaining or repairing the same,
shall be paid by Tenant to Landlord upon demand. Tenant shall not install or
operate window-mounted heating or air-conditioning units.
(d) Special Electrical or Water Connections; Electricity Use. Tenant will
not, without the prior consent of Landlord, which Landlord in its sole
discretion may refuse, connect or use any apparatus or device in the Premises
(i) using current in excess of 110 volts or (ii) which will cause the amount of
electricity, water, heating, air conditioning or ventilation furnished to the
Premises to exceed the amount required for use of the Premises for ordinary
general once purposes, as determined by Landlord, during normal business hours
or (iii) which would cause Tenant's connected load to exceed any limits
established in Section 16(a). Tenant shall not connect with electric current
except through existing outlets in the Premises and shall not connect with water
pipes except through existing plumbing fixtures in the Premises. In no event
shall Tenant's use of electricity exceed the capacity of existing feeders to the
Building or the risers or wiring installation, and Landlord may prohibit the use
of any electrical equipment which in Landlord's opinion will overload such
wiring or interfere with the use thereof by other tenants the Building. If
Landlord consents to the use of equipment requiring such changes, Tenant shall
pay the cost of installing any additional risers, panels or other facilities
that may be necessary to furnish energy to the Premises.
Landlord will not permit additional coring of the floor of the Premises in
order to install new electric outlets in the Premises unless Tenant furnishes
Landlord with X-ray scans of the floor area where the Tenant wishes to place
additional electrical outlets and Landlord, in its absolute discretion, is
satisfied, on the basis of such X-ray scans and other information obtained by
Landlord, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
(e) Landlord's Duties. Landlord shall not be in default under this Lease
or liable for any damages resulting from, or incidental to, any of the
following, nor shall any of the following be an actual or constructive eviction
of Tenant, nor shall the Rent be abated by reason of: (i) failure to furnish or
delay in furnishing any of the services described in this Section when such
failure or delay is caused by accident or any condition beyond the reasonable
control of Landlord, including the making of necessary repairs or improvements
to the Premises or to the Building, (ii) any
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electrical surges or spikes, or (iii) failure to make any repair or to perform
any maintenance, unless such failure shall persist for an unreasonable time
after notice of the need for such repair or maintenance is given to Landlord by
Tenant. Landlord shall use reasonable efforts to remedy any interruption in the
furnishing of such services.
(f) Governmental Regulations. Any other provisions of this Section
notwithstanding, if any governmental authority or utility supplier imposes any
laws, controls, conditions, or other restrictions upon Landlord, Tenant, or the
Building, relating to the use or conservation of energy or utilities, mandated
changes in temperatures to be maintained in the Premises or the Building or the
reduction of automobile or other emissions (collectively, the "Controls"), or in
the event Landlord is required or elects to make alterations to the Building in
order to comply with the Controls, Landlord may, in its sole discretion, comply
and may require Tenant to comply with the Controls or make such alterations to
the Building in order to comply with the Controls. Such compliance and the
making of such alterations shall not constitute an actual or constructive
eviction of Tenant, impose on Landlord any liability whatsoever, or entitle
Tenant to any abatement of Rent.
17. Indemnity.
(a) Generally. Tenant shall hold Landlord harmless from and against any
and all damages arising out of any damage to any persons or property occurring
in, on or about the Premises or the Property resulting from the acts or
omissions of Tenant or its authorized representatives. Landlord shall hold
Tenant harmless from and against any and all damages arising out of any damage
to any persons or property occurring in, on or about the Premises or the
Property resulting from the acts or omissions of Landlord or its authorized
representatives. A party's obligation under this Section to indemnify and hold
the other party harmless shall be limited to the sum that exceeds the amount of
insurance proceeds, if any, received by the party being indemnified.
(b) Concurrent Negligence of Landlord and Tenant. Notwithstanding Section
17(a) above, in the event of concurrent negligence of Tenant, or its authorized
representatives, on the one hand, and that of Landlord, or its authorized
representatives, on the other hand, which concurrent negligence results in
damage to any persons or property occurring in, on or about The Premises or the
Property, either party's obligation to indemnify the other party as set forth in
Section 17(a) shall be limited to the extent of the negligence of the
indemnifying party, or its authorized representatives, including the
indemnifying party's proportional share of costs and attorneys' fees incurred in
connection with any claims, actions or proceedings brought with respect to such
damage.
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(c) Waiver of Worker's Compensation Immunity. The indemnification
obligations contained in this Section shall not be limited by any worker's
compensation, benefit or disability laws, and each indemnifying party hereby
waives (solely for the benefit of the indemnified party) any immunity that said
indemnifying party may have under the Industrial Insurance Act, Title 51 RCW and
similar worker's compensation, benefit or disability laws.
(d) Provisions Specifically Negotiated. LANDLORD AND TENANT ACKNOWLEDGE
BY THEIR EXECUTION OF THIS LEASE THAT EACH OF THE INDEMNIFICATION PROVISIONS OF
THIS LEASE (SPECIFICALLY INCLUDING BUT NOT LIMITED TO THOSE RELATING TO WORKER'S
COMPENSATION BENEFITS AND LAWS) WERE SPECIFICALLY NEGOTIATED AND AGREED TO BY
LANDLORD AND TENANT.
18. Exemption of Landlord From Liability. Landlord and Landlord's Agent shall
not be liable for injury to Tenant's business or loss of income therefrom or for
damage which may be sustained by the person, goods, wares, merchandise or
property of Tenant, its authorized representatives, or any other person in or
about the Premises, caused by or resulting from fire, steam, electricity, gas,
water or rain, which may leak or flow from or into any part of the Premises, or
from the breakage, leakage, obstruction or other defects of the pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures
of the same, whether the said damage or injury resulting from conditions arising
upon the Premises or upon other portions of the Building or the Property unless
such injury or damage is caused by the gross negligence or willful misconduct of
Landlord or its authorized representatives.
19. Commercial General Liability and Property Damage Insurance. Tenant, at its
cost, shall maintain commercial general liability insurance (including
contractual liability and products and completed operations liability) with
liability limits of not less than $1,000,000 per occurrence and $2,000,000
annual aggregate, insuring against all liability of Tenant and its authorized
representatives arising out of or in connection with Tenant's use and occupancy
of the Premises and property damage insurance with liability limits of not less
than $500,000. All such commercial general liability and property damage
insurance shall insure performance by Tenant of the indemnity provisions of
Section 17 captioned "Indemnity". Landlord and Landlord's Agent shall be
additional named insureds on such insurance policy.
20. Tenant's Fire Insurance. Tenant, at its cost, shall maintain on all of
Tenant's Alterations, Trade Fixtures and Personal Property in, on or about the
Premises, a policy of standard All Risk fire insurance, in an amount equal to at
least their full replacement cost. The proceeds of any such policy shall be
used by Tenant for the restoration of Tenant's Alterations and Trade Fixtures
and the replacement of its
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Personal Property. Any portion of such proceeds not used for such restoration
shall belong to Tenant.
21. Waiver of Subrogation. Landlord and Tenant release each other, and their
respective authorized representatives, from any claims for damage to any person
or to the Premises and the Building and to Tenant's Alterations, Trade Fixtures
and Personal Property that are caused by or result from risks insured against
under any insurance policies carried by the parties, in force at the time of any
such damage and collectible. Landlord and Tenant shall cause each insurance
policy obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by any insurance policy. Neither party shall be liable to the
other for any damage caused by fire or any of the risks insured against under
any insurance policy required by this Lease.
22. Other Insurance Matters. All insurance required to be carried by Tenant
under this Lease shall (i) be issued by insurance companies authorized to do
business in the State of Washington with a rating of A/VI or better as rated in
the most recent edition of Best's Insurance Reports (ii) be issued as a primary
policy; and (iii) contain an endorsement requiring thirty (30) days' prior
written notice from the insurance company to both parties, to Landlord's Agent,
and, if requested by Landlord, to Landlord's lender, before cancellation or
change in the coverage, scope, or amount of any policy. Each policy or a
certificate of the policy, together with evidence of payment of premiums, shall
be deposited with Landlord on or before the Commencement Date, and on renewal of
the policy not less than ten (10) days before expiration of the term of the
policy.
23. Destruction.
(a) Insured Damage. If during the Term the Premises or the Building are
partially or totally destroyed by any casualty that is covered by any insurance
carried by Landlord covering the Building, rendering the Premises partially or
totally inaccessible or unusable, Landlord shall restore the Premises or the
Building to substantially the same condition as they were in immediately before
such destruction, if (i) the insurance proceeds available to Landlord equal or
exceed the cost of such restoration, (ii) in the opinion of a registered
architect or engineer appointed by Landlord such restoration can be completed
within one hundred eighty (180) days after the date on which Landlord obtains
all permits necessary for such restoration, and (iii) such restoration is
permitted under then existing laws to be done in such a manner as to return the
Premises, or the Building, as the case may be, to substantially the same
condition as they were in immediately before such destruction. To the extent
that the insurance proceeds must be paid to a mortgagee under, or must be
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applied to reduce any debt secured by, a mortgage covering the Property, the
insurance proceeds shall be deemed not to be available to Landlord unless such
mortgagee permits Landlord to use the insurance proceeds for such restoration.
Such destruction shall not terminate this Lease.
(b) Major or Uninsured Damage. If during the Term the Premises or the
Building are partially or totally destroyed by any casualty and Landlord is not
obligated under Section 23(a) captioned "Insured Damage" to restore the Premises
or the Building, as the case may be, then Landlord may, at its election, either
(i) restore the Premises or the Building to substantially the same condition as
they were in immediately before such destruction, or (ii) terminate this Lease
effective as of the date of such destruction. If Landlord does not give Tenant
notice within sixty (60) days after the date of such destruction of its election
to restore the Premises or the Building, as the case may be, Landlord shall be
deemed to have elected to terminate this Lease. If Landlord elects to restore
the Premises or the Building, as the case may be, Landlord shall use
commercially reasonable efforts to complete such restoration within one hundred
eighty (180) days after the date on which Landlord obtains all permits necessary
for such restoration, provided, however, that such one hundred eighty (180) day
period shall be extended by a period equal to any delays caused by Force
Majeure, and such destruction shall not terminate this Lease.
(c) Damage to the Building. If during the Term the Building is partially
destroyed by any casualty and if in the opinion of Landlord the Building should
be restored in such a way as to materially alter the Premises, then Landlord
may, at Landlord's election, terminate this Lease by giving notice to Tenant of
Landlord's election to do so within sixty (60) days after the date of such
destruction.
(d) Extent of Landlord's Obligation to Restore. If Landlord is required
or elects to restore the Premises as provided in this Section, Landlord shall
not be required to restore alterations made by Tenant, Tenant's trade fixtures
and Tenant's personal property, such excluded items being the sole
responsibility of Tenant to restore.
(e) Abatement or Reduction of Rent. In case of damage to, or destruction
of, the Premises or the Building the Minimum Monthly Rent shall be abated or
reduced, between the date of destruction and the date of completion of
restoration, by an amount that is in the same ratio to the Minimum Monthly Rent
as the total number of square feet of the Premises that are so damaged or
destroyed bears to the total number of square feet in the Premises.
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24. Condemnation. If during the term there is any taking of part or all of the
Premises or the Building by condemnation, then the rights and obligations of the
parties shall be as follows:
(a) Minor Taking. If there is a taking of less than ten percent (10%) of
the Premises, this Lease shall remain in full force and effect.
(b) Major Taking. If there is a taking of ten percent (10%) or more of
the Premises and if the remaining portion of the Premises is of such she or
configuration that Tenant is unable to conduct its business in the Premises,
then the Term shall terminate as of the date of taking.
(c) Taking of Part of the Building. If there is a taking of a part of the
Building other than the Premises and if in the opinion of Landlord the Building
should be restored in such a way as to materially alter the Premises, then
Landlord may terminate the Term by giving notice to such effect to Tenant within
sixty (60) days after the date of vesting of tide in the condemnor and the Term
shall terminate as of the date specified in such notice, which date shall not be
less than sixty (60) days after the giving of such notice.
(d) Award. The entire award for the Premises, the Building and the
Property, shall belong to and be paid to Landlord, Tenant hereby assigning to
Landlord Tenant's interest therein, if any, provided, however, that Tenant shall
have the right to claim and recover from the condemnor compensation for the loss
of any alterations made by Tenant, Tenant's trade fixtures, Tenant's personal
property, moving expenses and business interruption.
(e) Abatement of Rent. If any part of the Premises is taken by
condemnation and this Lease remains in full force and effect, on the date of
taking the Minimum Monthly Rent shall be reduced by an amount that is in the
same ratio to the Minimum Monthly Rent as the total number of square feet in the
Premises taken bears to the total number of square feet in the Premises
immediately before the date of taking.
25. Assignment and Subletting.
(a) Landlord's Consent; Definitions. Tenant acknowledges that the
Building is a multi-tenant office building, occupied by tenants specifically
selected by Landlord, and that Landlord has a legitimate interest in the type
and quality of such tenants, the location of tenants in the Building and in
controlling the leasing of space in the Building so that Landlord can better
meet the particular needs of its tenants and protect and enhance the relative
image, position and value of the Building in the office
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building market. Tenant further acknowledges that the rental value of the
Premises may fluctuate during the term in accordance with market conditions,
and, as a result, the Rent paid by Tenant under the Lease at any particular time
may be higher or lower than the then market rental value of the Premises.
Landlord and Tenant agree, and the provisions of this Section are intended to so
provide, that, if Tenant voluntarily assigns its interest in this Lease or in
the Premises or subleases any pan or all of the Premises, a portion of the
profits from any increase in the market rental value of the Premises shall
belong solely to Landlord. Tenant acknowledges that, if Tenant voluntarily
assigns this Lease or subleases any part or all of the Premises, Tenant's
investment in the subject portion of the Premises (specifically including, but
not limited to, tenant improvements, good will or other assets) may be lost or
reduced as a result of such action.
(b) Consent Required. Tenant shall not voluntarily assign or encumber its
interest in this Lease or in the Premises, or sublease any part or all of the
Premises, without Landlord's prior consent, which consent shall not be
unreasonably withheld. Any assignment, encumbrance or sublease without
Landlord's consent shall be voidable and, at Landlord's election, shall
constitute a default by Tenant under this Lease. In determining whether to
approve a proposed assignment or sublease, Landlord shall place primary emphasis
on the proposed transferee's reputation and creditworthiness, the character of
the business to be conduced by the proposed transferee at the Premises and the
affect of such assignment or subletting on the tenant mix in the Building. In
addition, Landlord shall have the right to approve the specific form of any
assignment or sublease agreement. In no event shall Landlord be obligated to
consent to any assignment or subletting which increases (i) the Operating Costs,
(ii) the burden on the Building services, or (iii) the foot traffic, elevator
usage or security concerns in the Building, or creates an increased probability
of the comfort and/or safety of the Landlord and other tenants in the Building
being unreasonably compromised or reduced (for example, but not exclusively,
Landlord may deny consent to an assignment or subletting where the space will be
used for a school or training facility, an entertainment, sports or recreation
facility, retail sales to the public (unless Tenant's permitted use is retail
sales), a personnel or employment agency, a medical office, or an embassy or
consulate or similar office. Landlord shall not be obligated to approve an
assignment or subletting to (x) a current tenant of the Building unless no
comparable space is available in the Building or (y) a prospective tenant of the
Building with whom Landlord is then negotiating. Landlord's foregoing rights and
options shall continue throughout the entire term of this Lease. No consent to
any assignment, encumbrance or sublease shall constitute a waiver of the
provisions of this Section and no other or subsequent assignment, encumbrance or
sublease shall be made without Landlord's prior consent. Neither an assignment
or subletting nor the collection of Rent by Landlord from any person other than
Tenant, nor the application
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of any such Rent as provided in this Section shall be deemed a waiver of any of
the provisions of this Section or release Tenant from its obligation to comply
with the terms and provisions of this Lease and Tenant shall remain fully and
primarily liable for all of Tenant's obligations under this Lease, including the
obligation to pay Rent under this Lease. Any personal guarantee(s) of Tenant's
obligations under this Lease shall remain in full force and effect following any
such assignment or subletting. Landlord may condition approval of an assignment
or subletting hereunder on an increase in the amount of the Security Deposit or
on receipt of personal guarantees of the assignee's or sublessee's obligations
under this Lease. If Landlord approves of an assignment or subletting hereunder
and this Lease contains any renewal options, expansion options, rights of first
refusal, rights of first negotiation or any other rights or options pertaining
to additional space in the Building, such rights and/or options shall not run to
the assignee or subtenant, it being agreed by the parties hereto that any such
rights and options are personal to Tenant named herein and may not be
transferred.
(c) Conditions to Assignment or Sublease. Tenant agrees that any
instrument by which Tenant assigns or sublets all or any portion of the Premises
shall expressly provide that the assignee or subtenant may not further assign or
sublet the assigned or sublet space without Landlord's prior consent (which
consent shall not, subject to Landlord's rights under Section 25(b), be
unreasonably withheld or delayed), and that the assignee or subtenant will
comply with all of the provisions of this Lease and that Landlord may enforce
the Lease provisions directly against such assignee or subtenant. If this Lease
is assigned, whether or not in violation of the terms and provisions of this
Lease, Landlord may collect Rent from the assignee. If the Premises, or any part
thereof, is sublet, Landlord may, upon a default under this Lease, collect rent
from the subtenant. In either event, Landlord may apply the amount collected
from the assignee or subtenant to Tenant's obligation to pay Rent under this
Lease.
(d) Events Constituting an Assignment or Sublease. For purposes of this
Section, the following events shall be deemed an assignment or sublease, as
appropriate: (i) the issuance of equity interests "(whether stock, partnership
interests or otherwise) in Tenant, or any assignee or subtenant, if applicable,
or any entity controlling any of them, to any person or group of related
persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant, or any assignee or subtenant, if
applicable, or (ii) a transfer of Control of Tenant, or any assignee or
subtenant, if applicable, or any entity controlling any of them, in a single
transaction or a series of related or unrelated transactions (including, without
limitation, by consolidation, merger, acquisition or reorganization), except
that the
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transfer of outstanding capital stock or other listed equity interests by
persons or parties other than "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, through the "over-the-counter" market or any
recognized national or international securities exchange, shall not be included
in determining whether Control has been transferred. "Control" shall mean direct
or indirect ownership of fifty percent (50%) or more of all the legal and,
equitable interest in any business entity. The restrictions set forth in this
subsection shall not apply to any public or private offering or equity interest
in Tenant or a merger or acquisition of Tenant with a third party, provided
that, in the event of a merger or acquisition, the new entity has a tangible net
wroth equal to or greater than that of Tenant as measured immediately before the
merger or acquisition.
(e) Processing Expenses. Tenant shall pay to Landlord the amount of
Landlord's cost of processing each proposed assignment or subletting, including.
without limitation, attorneys' and other professional fees, and the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all direct and indirect expense incurred
by Landlord arising from the assignee or sublessee taking occupancy of the
subject space, including, without limitation, costs of freight elevator
operation for moving of furnishings and trade fixtures, security service,
janitorial and cleaning service, rubbish removal service, costs of changing
signage, and costs of changing locks and making new keys (collectively,
"Occupancy Costs"). Notwithstanding anything to the contrary herein, Landlord
shall not be required to process any request for Landlord's consent to an
assignment or subletting until Tenant has paid to Landlord the amount of
Landlord's estimate of the Processing Costs and the Occupancy Costs, provided,
however, such costs shall reflect the actual expenses incurred and shall not
exceed $2,000.00 per assignment or subletting.
(f) Consideration to Landlord. In the event of any assignment or
sublease, whether or not requiring Landlord's consent, Landlord shall be
entitled to receive, as Additional Rent, one-half (1/2) of any consideration,
including, without limitation, payment for leasehold improvements owned by
Landlord, paid by the assignee or subtenant for the assignment or sublease and,
in the case of sublease, the excess of the amount of rent paid for the sublet
space by the subtenant over the total amount of Minimum Monthly Rent under
Section 5 and Additional Rent under Sections 7 and 9. Upon Landlord's request,
Tenant shall assign to Landlord all amounts to be paid to Tenant by the assignee
or subtenant and shall direct such assignee or subtenant to pay the same
directly to Landlord. If there is more than one sublease under this Lease, the
amounts (if any) to be paid by Tenant to Landlord pursuant to the preceding
sentence shall be separately calculated for each sublease and amounts due
Landlord with regard to any one sublease may not be offset against
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rental and other consideration pertaining due under any other sublease. Any
profits shall be calculated only above and beyond the dollars that are spent to
secure a Subtenant (i.e., Tenant Improvement's commissions, free rent, etc.).
With regard to an approved assignment or subletting, Tenant acknowledges
that Landlord's agreement to deal directly with the assignee or subtenant with
regard to such party's occupancy of the Premises and the administration of the
Lease, without requiring Tenant to monitor or become directly involved in such
matters, constitutes appropriate and acceptable consideration for the capture by
Landlord of any rent or consideration paid by the assignee or subtenant in
excess of that required to be paid by Tenant under the Lease.
(g) Procedures. If Tenant desires to assign this Lease or any interest
therein or sublet all or part of the Premises, Tenant shall give Landlord
written notice thereof designating the space proposed to be sublet and the terms
proposed. Landlord shall have the prior right and option (to be exercised by
written notice to Tenant given within fifteen (15) days after receipt of
Tenant's notice) (i) to sublet from Tenant any portion of the Premises proposed
by Tenant to be sublet, for the term for which such portion is proposed to be
sublet, but at the same Rent (including Additional Rent as provided for in
Sections 7 and 9) as Tenant is required to pay to Landlord under this Lease for
the same space, computed on a pro rata square footage basis, and during the term
of such sublease Tenant shall be released of its obligations under the Lease
with regard to the subject space, (ii) if the term of the sublease (including
any renewal terms) will expire during the final eighteen (18) months of the term
(or if Tenant has exercised a renewal option, if any, then during the final
eighteen (18) months of the subject renewal period), to terminate this Lease as
it pertains to the portion of the Premises so proposed by Tenant to be sublet,
or (iii) to approve Tenant's proposal to sublet conditional upon Landlord's
subsequent written approval of the specific sublease obtained by Tenant and the
specific subtenant named therein. If Landlord exercises its option in (i) above,
then Landlord may, at Landlord's sole cost, construct improvements in the
subject space and, so long as the improvements are suitable for general office
purposes, Landlord shall have no obligation to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, Tenant shall submit to Landlord
for Landlord's written approval Tenant's proposed sublease agreement (in which
the proposed subtenant shall be named) together with a current reviewed or
audited financial statement prepared by a codified public accountant for such
proposed subtenant and a credit report on such proposed subtenant prepared by a
recognized credit reporting agency. If Landlord fails to exercise any aforesaid
option to sublet or to terminate, this shall not be construed as or constitute a
waiver of any of the provisions of this Section. If Landlord exercises any such
option to sublet or to
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terminate, Landlord shall not have any liability for any real estate brokerage
commission(s) or with respect to any of the costs and expenses that Tenant may
have incurred in connection with its proposed subletting, and Tenant agrees to
hold Landlord harmless from and against any and all claims (including, without
limitation, claims for commissions) arising from such proposed subletting.
Landlord's foregoing rights and options shall continue throughout the term. For
purposes of this Section, a proposed assignment of this Lease in whole or in
part shall be deemed a proposed subletting of such space.
(h) Documentation. No permitted subletting by Tenant shall be effective
until there has been delivered to Landlord a counterpart of the sublease in
which the subtenant agrees to be and remain jointly and severally liable with
Tenant for the payment of Rent pertaining to the sublet space and for the
performance of all of the terms and provisions of this Lease; provided, however,
that the subtenant shall be liable to Landlord for rent only in the amount set
forth in the sublease. No permitted assignment shall be effective unless and
until there has been delivered to Landlord a counterpart of the assignment in
which the assignee assumes all of Tenant's obligations under this Lease arising
on or after the date of the assignment. The failure or refusal of a subtenant or
assignee to execute any such instrument shall not release or discharge the
subtenant or assignee from its liability as set forth above.
(i) No Merger. Without limiting any of the provisions of this Section, if
Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or substenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
26. Default. The occurrence of any of the following shall constitute a default
by Tenant under this Lease:
(a) Failure to Pay Rent. Failure to pay Rent when due, if the failure
continues for a period of five (5) days after written or fax notice of such
default has been given by Landlord to Tenant.
(b) Failure to Comply With Rules and Regulations. Failure to comply with
the Rules and Regulations, if the failure continues for a period of twenty-four
(24) hours after notice of such default is given by Landlord to Tenant. If the
failure to comply cannot reasonably be cured within twenty-four (24) hours, then
Tenant shall not be in default under this Lease if Tenant commences to cure the
failure to comply within twenty-four (24) hours and diligently and in good faith
continues to cure the failure to comply.
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(c) Other Defaults. Failure to perform any other provision of this Lease,
if the failure to perform is not cured within thirty (30) days after notice of
such default has been given by Landlord to Tenant. If the default cannot
reasonably be cured within thirty (30) days, then Tenant shall not be in default
under this Lease if Tenant commences to cure the default within thirty (30) days
and diligently and in good faith continues to cure the default.
(d) Appointment of Trustee or Receiver. The appointment of a trustee or
receiver to take poossession of substantially all of the Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenants interest in this Lease, where such seizure is not discharged
within sixty (60) days.
(e) Cross Default. Landlord and Tenant are parties to that certain Lease
dated the 15th day of March 1996 governing Tenant's occupancy of Suite 301 in
the Building (hereinafter referred to as the "Upstairs Lease"). Landlord and
Tenant hereby agree that a default under the Upstairs Lease shall constitute a
default under this Lease and that a default under this Lease shall constitute a
default under the Upstairs Lease. The Upstairs Lease is hereby so amended.
27. Remedies. If Tenant commits a default, Landlord shall have the following
alternative remedies, which are in addition to any remedies now or later allowed
by law:
(a) Maintain Lease in Force. Maintain this Lease in full force and effect
and recover the Rent and other monetary charges as they become due, without
terminating Tenants right to possession, irrespective of whether Tenant shall
have abandoned the Premises. If Landlord elects to not terminate the Lease,
Landlord shall have the right to attempt to re-let the Premises at such rent and
upon such conditions and for such a term, and to do all acts necessary to
maintain or preserve the Premises as Landlord deems reasonable and necessary
without being deemed to have elected to terminate the Lease including removal of
all persons and property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant. In the event any such re-letting occurs, this Lease shall terminate
automatically upon the new Tenant taking possession of the Premises.
Notwithstanding that Landlord fails to elect to terminate the Lease initially,
Landlord at any time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant.
(b) Terminate Lease. Terminate Tenant's right to possession by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
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surrender possession of the Premises to Landlord. In such event Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default including without limitation thereto, the following: (i) The
worth at the time of award of any unpaid Rent which had been earned at the time
of such termination; plus (ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus (iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after the time of
award exceeds the amount of such rental loss that is proved could be reasonably
avoided; plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including, without limitation, any costs or expenses incurred
by Landlord in (A) retaking possession of the Premises, including reasonable
attorney's fees therefor, (B) maintaining or preserving the Premises after such
default, (C) preparing the Premises for reletting to a new tenant, including
repair or necessary alterations to the Premises for such reletting, (D) leasing
commissions, and (E) any other costs necessary or appropriate to relet the
Premises; plus (v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
state law. Upon any such reentry Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises, which Landlord
in its sole discretion deems reasonable and necessary. As used in Subsection
27(b)(i) the "worth at the time of award" is computed by allowing interest at
the rate of fifteen percent (15%) per year from the date of default. As used in
Subsections 27(b)(a) and 27(b)(iii) the "worth at the time of award" is
computed by discounting such amounts at the discount rate of eight percent (8%)
per year.
28. Bankruptcy.
(a) Assumption of Lease. If Tenant becomes a Debtor under Chapter 7 of
the Bankruptcy Code ("Code") or a petition for reorganization or adjustment of
debts is filed concerning Tenant under Chapter 11 or 13 of the Code, or a
proceeding is filed under Chapter 7 of the Code and is transferred to Chapter 11
or 13 of the Code, the Trustee or Tenant, as Debtor and as Debtor-In-Possession,
may not elect to assume this Lease unless, at the time of such assumption, the
Trustee or Tenant has:
(i) Cured all defaults under the Lease and paid all sums due and
owing under the Lease or provided Landlord with "Adequate Assurance" (as
defined below) that (i) within ten (10) days from the date of such assumption,
the Trustee or Tenant will completely pay all sums due and owing under this
Lease and compensate
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Landlord for any actual pecuniary loss resulting from any existing default or
breach of this Lease, including, without limitation, Landlord's reasonable
costs, expenses, accrued interest, and attorneys' fees incurred as a result of
the default or breach; (ii) within twenty (20) days from the date of such
assumption, the Trustee or Tenant will cure all non-monetary defaults and
breaches under this Lease, or, if the nature of such non-monetary defaults is
such that more than twenty (20) days are reasonably required for such cure, that
the Trustee or Tenant will commence to cure such non-monetary defaults within
twenty (20) days and thereafter diligently prosecute such cure to completion;
and (iii) the assumption will be subject to all of the provisions of this Lease.
(ii) For purposes of this Section, Landlord and Tenant acknowledge
that, in the context of a bankruptcy proceeding involving Tenant, at a minimum,
"Adequate Assurance" shall mean (i) the Trustee or Tenant has and will continue
to have sufficient unencumbered assets after the payment of all secured
obligations and administrative expenses to assure Landlord that the Trustee or
Tenant will have sufficient funds to fulfill the obligations of Tenant under
this Lease; (ii) the Bankruptcy Court shall have entered an Order segregating
sufficient cash payable to Landlord and/or the Trustee or Tenant shall have
granted a valid and perfected first lien and security interest and/or mortgage
in or on property of Trustee or Tenant acceptable as to value and kind to
Landlord, to secure to Landlord the obligation of the Trustee or Tenant to cure
the monetary and/or non-monetary defaults and breaches under this Lease within
the time periods set forth above; and (iii) the Trustee or Tenant, at the very
minimum, shall deposit a sum equal to two (2) month's Minimum Monthly Rent to be
held by Landlord (without any allowance for interest thereon) to secure Tenant's
future performance under this Lease.
(b) Assignment of Lease. If the Trustee or Tenant has assumed the Lease
pursuant to the provisions of this Section for the purpose of assigning Tenant's
interest hereunder to any other person or entity, such interest may be assigned
only after the Trustee, Tenant or the proposed assignee has complied with all of
the terms, covenants and conditions of this Lease, including, without
limitation, those with respect to Additional Rent. Landlord and Tenant
acknowledge that such terms, covenants and conditions are commercially
reasonable in the context of a bankruptcy proceeding of Tenant. Any person or
entity to which this Lease is assigned pursuant to the provisions of the Code
shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such assignment.
Any such assignee shall upon request execute and deliver to Landlord an
instrument confirming such assignment.
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(c) Adequate Protection. Upon the filing of a petition by or against
Tenant under the Code, Tenant, as Debtor and as Debtor-In-Possession, and any
Trustee who may be appointed agree to adequately protect Landlord as follows:
(i) to perform each and every obligation of Tenant under this Lease until such
time as this Lease is either rejected or assumed by Order of the Bankruptcy
Court; (ii) to pay all monetary obligations required under this Lease,
including, without limitation, the payment of Minimum Monthly Rent, Tenant's
Share of Real Property Taxes, Tenant's Share of Operating Costs and any other
sums payable by Tenant to Landlord under this Lease which is considered
reasonable compensation for the use and occupancy of the Premises; (iii) provide
Landlord a minimum of thirty (30) days' prior written notice, unless a shorter
period is agreed to in writing by the parties, of any proceeding relating to any
assumption of this Lease or any intent to abandon the Premises, which
abandonment shall be deemed a rejection of this Lease; and (iv) to perform to
the benefit of Landlord as otherwise required under the Code. The failure of
Tenant to comply with the above shall result in an automatic rejection of this
Lease.
29. Limitation of Actions. Any claim, demand, right or defense of any kind by
Tenant which is based upon or arises in connection with this Lease or the
negotiations prior to its execution, shall be barred until Tenant commences an
action thereon, or interposes in a legal proceeding a defense by reason thereof,
within one (1) year after the date of the act or omission on which such claim,
demand, right or defense is based.
30. Limitation on Landlord's Liability. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements or for the purpose of binding Landlord personally or the assets of
Landlord except Landlord's interest in the Property, but are made and intended
for the purpose of binding only the Landlord's interest in the Property. No
personal liability or personal responsibility is assumed by, nor shall at any
time be asserted or enforceable against Landlord or its partners and their
respective heirs, legal representatives, successors and assigns on account of
this Lease or on account of any covenant, undertaking or agreement of Landlord
contained in this Lease.
31. Signs. Tenant shall not have the right to place, construct or maintain any
sign, advertisement, awning, banner or other exterior decoration without
Landlord's consent. Any sign that Tenant has Landlord's consent to place,
construct and maintain shall comply with all laws, and Tenant shall obtain any
approval required by such laws. Landlord makes no representation with respect to
Tenant's ability to obtain such approval. Tenant shall have the right to
maintain their signage on the front of the Building. In addition, Tenant, at
Tenant's sole cost and expense, shall have the right
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to lobby exposure signage on floor 2. Any signage shall be mutually acceptable
to both Landlord and Tenant.
32. Landlord's Right to Enter the Premises. Landlord and its authorized
representatives shall have the right to enter the Premises at reasonable times
and upon reasonable prior notice (except in an emergency when no such notice
shall be required) for any of the following purposes: (i) to determine whether
the Premises are in good condition and whether Tenant is complying with its
obligations under this Lease, (ii) to do any maintenance; to make any
restoration to the Premises or the Building that Landlord has the right or the
obligation to perform, and to make any improvements to the Premises or the
Building that Landlord deems necessary, (iii) to serve, post or keep posted any
notices required or allowed under the provisions of this Lease, (iv) to post any
ordinary "For Sale". signs at any time during the Term and to post any ordinary
"For Lease" signs during the last ninety (90) days of the Term, and (v) to show
the Premises to prospective brokers, agents, purchasers, tenants or lenders, at
any time during the Term.
Landlord shall not be liable in any manner for any inconvenience,
annoyance, disturbance, loss of business, nuisance, or other damage arising out
of Landlord's entry on the Premises as provided in this Section, except damage
resulting from the grossly negligent or willful acts of Landlord or its
authorized representatives. Tenant shall not be entitled to an abatement or
reduction of Rent if Landlord exercises any right reserved in this Section.
Landlord shall conduct its activities on the Premises as allowed in this Section
in a reasonable manner so as to cause minimal inconvenience, annoyance or
disturbance to Tenant.
33. Subordination. This Lease is and shall be prior to any mortgage recorded
after the date of this Lease affecting the Building. If, however, a lender
requires that this Lease be subordinate to any mortgage, this Lease shall be
subordinate to that mortgage if Landlord first obtains from the lender a written
agreement that provides substantially the following:
"As long as Tenant performs its obligations under this Lease, no
foreclosure of, deed given in lieu of foreclosure of, or sale under
the mortgage, and no steps or procedures taken under the mortgage,
shall affect Tenant's rights under this Lease."
Tenant shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure,
Tenant shall execute the written agreement and any other documents required by
the lender to accomplish the purposes of this Section.
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If requested by the holder of any mortgage or deed of trust, Tenant shall
enter into a new lease with the holder of such mortgage or deed of trust for the
balance of the term of this Lease upon the same terms and conditions set forth
herein, or shall attorn to such party provided such party agrees to recognize
this Lease as long as Tenant shall not be in default hereunder beyond the period
for curing the same.
34. Right to Estoppel Certificates. Tenant, within ten (10) days after notice
from Landlord, shall execute and deliver to Landlord, in recordable form, a
certificate prepared by Landlord stating that this Lease is unmodified and in
full force and effect, or in full force and effect as modified and stating the
modifications. The certificate shall also state the amount of Minimum Monthly
Rent, the dates to which Rent has been paid in advance, and the amount of any
Prepaid Rent or Security Deposit and such other matters as Landlord may
reasonably request. Failure to deliver the certificate within such ten (10) day
period shall be conclusive upon Tenant for the benefit of Landlord and any
successor to Landlord, that this Lease is in full force and effect and has not
been modified except as may be represented by Landlord requesting the
certificate.
35. Transfer of Landlord's Interest. If Landlord sells or transfers the
Property, Landlord, on consummation of the sale or transfer, shall be released
from any liability thereafter accruing under this Lease if Landlord's successor
has assumed in writing, for the benefit of Tenant, Landlord's obligations under
this Lease. If any Security Deposit or Prepaid Rent has been paid by Tenant,
Landlord shall transfer such Security Deposit or Prepaid Rent to Landlord's
successor and on such transfer Landlord shall be discharged from any further
liability with respect to such Security Deposit or Prepaid Rent.
36. Attorneys' Fees. If either party shall bring any action for relief against
the other party, declaratory or otherwise, arising out of this Lease, including
any action by Landlord for the recovery of Rent or possession of the Premises,
the losing party shall pay the successful party a reasonable sum for attorneys'
fees which shall be deemed to have accrued on the commencement of such action
and shall be paid whether or not such action is prosecuted to judgment.
37. Surrender; Holding Over.
(a) Surrender. On expiration or ten (10) days after termination of the
Term, Tenant shall surrender the Premises and all Tenant Improvements and
alterations to Landlord broom clean and in good condition. Tenant shall remove
all of its trade fixtures and personal property within the time period stated in
this Section. Tenant, at its cost, shall perform all restoration made necessary
by, and repair any damage to the Premises caused by, the removal of its trade
fixtures, personal property
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and signs to Landlord's reasonable satisfaction within the time period stated in
this Section. Landlord may, at its election, retain or dispose of in any manner
any of Tenant's trade fixtures or personal property that Tenant does not remove
from the Premises on expiration or within ten (10) days after termination of the
Term as allowed or required by the provisions of this Lease by giving ten (10)
days' notice to Tenant. Title to any such trade fixtures and personal property
that Landlord elects to retain or dispose of on expiration of such ten (10) day
period shall vest in Landlord. Tenant waives all claims against Landlord for any
damage to Tenant resulting from Landlord's retention or disposition of any such
trade fixtures and personal property. Tenant shall be liable to Landlord for
Landlords' costs for storing, removing and disposing of Tenant's trade fixtures
and personal property. If Tenant fails to surrender the Premises to Landlord on
expiration or ten (10) days after termination of the Term as required by this
Section, Tenant shall pay Landlord Rent in an amount equal to twice the Minimum
Monthly Rent applicable for the month immediately prior to the expiration or
termination of the Term for the entire time Tenant thus remains in possession
and Tenant shall hold Landlord harmless from all damages resulting from Tenant's
failure to timely surrender the Premises, including, without limitation, (i) any
Rent payable by, or any damages claimed by, any prospective tenant of any part
or all of the Premises, and (ii) Landlord's damages resulting from such
prospective tenant rescinding or refusing to enter into the prospective lease of
part or all of the Premises by reason of Tenant's failure to timely surrender
the Premises. If Tenant, without Landlord's prior consent, remains in possession
of the Premises after expiration or termination of the Term, or after the date
in any notice given by Landlord to Tenant terminating this Lease, such
possession by Tenant shall be deemed to be a tenancy at sufferance terminable at
any time by either parry.
(b) Holding Over With Landlord's Consent. If Tenant, with Landlord's
prior consent, remains in possession of the Premises after expiration or
termination of the Term, or after the date in any notice given by Landlord to
Tenant terminating this Lease, such possession by Tenant shall be deemed to be a
month-to-month tenancy terminable by Landlord by a notice given to Tenant at
least twenty (20) days prior to the end of any such monthly period or by Tenant
by a notice given to Landlord at least thirty (30) days prior to the end of any
such monthly period. During such month-to-month tenancy, Tenant shall pay Rent
in the amount then agreed to in writing by Landlord and Tenant. All provisions
of this Lease, except those pertaining to term, shall apply to the month-to-
month tenancy.
38. Agency Disclosure; Broker.
(a) Agency Disclosure. Landlord hereby acknowledges that it has been
previously disclosed to Landlord that Tenant has been represented by Eric
Olmstead
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of Leibsohn & Co. Tenant hereby acknowledges that it has been previously
disclosed to Tenant that Martin Smith Inc represents Landlord in this
transaction.
(b) Commission Indemnity. Tenant represents and warrants that Eric
Olmstead of Liebsohn & Co. is to be paid by Imation Corporation, the parent
corporation of the prior occupant of the Premises. Moreover, each party agrees
to indemnify and hold the other party harmless from and against any and all
liability, costs, damages, causes of action or other proceedings instituted by
any broker, agent or finder, licensed or otherwise, claiming through, under or
by reason of the conduct of the indemnifying party in any manner whatsoever in
connection with this Lease. Each party agrees to indemnify and hold the other
party harmless from and against any and all liability, costs, damages, causes of
action or other proceedings instituted by any broker, agent or finder, licensed
or otherwise, claiming through, under or by reason of the conduct of the
indemnifying party in any manner whatsoever in connection with this Lease.
39. Interest on Unpaid Rent. In addition to the Late Charge as provided in
Section 5(b), Rent not paid when due shall bear interest from the date due until
paid at the rate of eighteen percent (18%) per year, or the maximum legal rate
of interest, whichever is less.
40. Consent. Whenever the consent of either Landlord or Tenant is required
under this Lease, such consent shall not be effective unless given in writing
and shall not be unreasonably withheld or delayed, provided, however, that such
consent may be conditioned as provided in this Lease.
41. Definitions. As used in this Lease, the following words and phrases,
whether or not capitalized, shall have the following meanings:
(a) "Additional Rent" means pass-throughs of increases in Operating Costs
and Taxes, as defined in this Lease, and other monetary sums to be paid by
Tenant to Landlord under the provisions of this Lease.
(b) "Alteration" means any addition or change to, or modification of, the
Premises made by Tenant, including, without limitation, fixtures, but excluding
trade fixtures as defined in this Section.
(c) "Authorized representatives" means any officer, agent, employee,
independent contractor or invites of either party.
(d) "Award" means all compensation, sums or anything of value awarded,
paid or received on a total or partial condemnation.
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(e) "Common Areas" means all areas outside the Premises and within the
Building or on the Land that are provided and designated by Landlord from time
to time for the general, non-exclusive use of Landlord, Tenant and other tenants
of the Building and their authorized representatives, including, without
limitation, common entrances, lobbies, corridors, stairways and stairwells,
elevators, escalators, public restrooms and other public portions of the
Building.
(f) "Condemnation" means the exercise of any governmental power, whether
by legal proceedings or otherwise, by a condemnor and a voluntary sale or
transfer by Landlord to any condemnor, either under threat of condemnation or
while legal proceedings for condemnation are pending.
(g) "Condemnor" means any public or quasi-public authority or entity
having the power of condemnation.
(h) "Damage" means any injury, deterioration, or loss to a person,
property, the Premises or the Building caused by another person's acts or
omissions or by Acts of God. Damage includes death.
(i) "Damages" means a monetary compensation or indemnity that can be
recovered in the courts by any person who has suffered damage to his person,
property or rights through another's acts or omissions.
(j) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(k) "Encumbrance" means any mortgage, deed of trust or other written
security device or agreement affecting the Premises, and the note or other
obligation secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(l) "Expiration" means the coming to an end of the time specified in the
Lease as its duration, including any extension of the Term.
(m) "Force majeure" means strikes, lockouts, labor disputes, shortages of
labor or materials, fire or other casualty, Acts of God or any other cause
beyond the reasonable control of a party.
(n) "Good condition" means the good physical condition of the Premises and
each portion of the Premises, including, without limitation, all of the Tenant
Improvements, Tenant's alterations, Tenant's trade fixtures, Tenant's Personal
Property, all as defined in this Section, signs, walls, interior partitions,
windows, window coverings, glass, doors, carpeting and resilient flooring,
ceiling tiles,
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plumbing futures and lighting fixtures, as of which shall be in conformity with
building standard finishes, ordinary wear and tear, damage by fire or other
casualty and taking by condemnation excepted.
(o) "Hazardous substances" means any industrial waste, toxic waste,
chemical contaminant or other substance considered hazardous, toxic or lethal to
persons or property or designated as hazardous, toxic or lethal to persons or
property under any laws, including, without limitation, asbestos material or
materials containing asbestos.
(p) "Hold harmless" means to defend and indemnify from all liability,
losses, penalties, damages as defined in this Section, costs, expenses
(including, without limitation, attorney's fees), causes of action, claims or
judgments arising out of or related to any damage, as defined in this Section,
to any person or property.
(q) "Law" means any constitution, statute, ordinance, regulation, rule,
resolution, judicial decision, administrative order or other requirement of any
federal, state, county, municipal or other governmental agency or authority
having jurisdiction over the parties or the Property, or both, in effect either
at the time of execution of this Lease or at any time during the Term,
including, without limitation, any regulation or order of a quasi-official
entity or body (e.g., board of fire examiners or public utilities) and any
legally effective conditions, covenants or restrictions affecting the Property.
(r) "Lender" means the mortgagee, beneficiary, secured party or other
holder of an encumbrance, as defined in this Section.
(s) "Lien" means a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security for the performance of an act.
(t) "Maintenance" means repairs, replacement, repainting and cleaning.
(u) "Mortgage" means any deed of trust, mortgage or other written security
device or agreement affecting the Premises, and the note or other obligation
secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(v) "Mortgagee" means the beneficiary under a deed of trust or mortgagee
under a mortgage.
(w) "Mortgagor" means the grantor or trustor under a deed of trust or
mortgagor under a mortgage.
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(x) "Operating Costs" means all costs of any kind incurred by Landlord in
operating, cleaning, equipping, protecting, lighting, repairing, replacing,
heating, air-conditioning, maintaining and insuring the Property. Operating
Costs shall include, without limitation, the following costs: (i) salaries,
wages, bonuses and other compensation (including hospitalization, medical,
surgical, retirement plan, pension plan, union dues, life insurance, including
group life insurance, welfare and other fringe benefits, and vacation, holidays
and other paid absence benefits) relating to employees of Landlord or its agents
directly engaged in the operation, repair, or maintenance of the Property; (ii)
payroll, social security, workers' compensation, unemployment and similar taxes
with respect to such employees of Landlord or its authorized representatives,
and the cost of providing disability or other benefits imposed by law or
otherwise, with respect to such employees; (iii) uniforms (including the
cleaning, replacement and pressing thereof) provided to such employees; (iv)
premiums and other charges incurred by Landlord with respect to fire,
earthquake, other casualty, all risk, rent loss and liability insurance, any
other insurance as deemed necessary or advisable in the reasonable judgment of
Landlord and, after the Base Year, costs of repairing an insured casualty to the
extent of the deductible amount under the applicable insurance policy; (v) water
charges and sewer rents or fees; (vi) license, permit and inspection fees; (vii)
sales, use and excise taxes on goods and services purchased by Landlord in
connection with the operation, maintenance or repair of the Property and
Building systems and equipment; (viii) telephone, facsimile, messenger, express
delivery service, postage, stationery supplies and other expenses incurred in
connection with the operation, management, maintenance, or repair of the
Property; (ix) property management fees and expenses; (x) repairs to and
physical maintenance of the Property, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent provided in (xvi) and (xvii) below); (xi)
janitorial, window cleaning, security, extermination, water treatment, rubbish
removal, plumbing and other services and inspection or service contracts for
elevator, electrical, HVAC, mechanical and other building equipment and systems
or as may otherwise be necessary or proper for the operation or maintenance of
the Property; (xii) supplies, tools, materials, and equipment used in connection
with the operation, maintenance or repair of the Property; (xiii) accounting,
legal and other professional fees and expenses; (xiv) painting the exterior or
the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Property; (xv) all costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Property; (xvi) the cost of any improvements which Landlord elects to
capitalize made by Landlord to the Property during the term in compliance with
the requirements of any
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laws or regulation or insurance requirement with which the Property was not
required to comply during the Base Year, as reasonably amortized by Landlord,
with interest on the unamortized balance at the rate of twelve percent (12%) per
year, or the maximum legal rate of interest, whichever is less; (xvii) the cost
of any improvements which Landlord elects to capitalize made by Landlord to the
Property during the term of this Lease for the protection of the health and
safety of the occupants of the Property or that are intended to reduce other
Operating Costs, as reasonably amortized by Landlord, with interest on the
unamortized balance at the rate of twelve percent (12%) per year, or the maximum
legal rate of interest, whichever is less. In this regard, Landlord will follow
generally accepted accounting practices; (xviii) a reasonable reserve for repair
or replacement of equipment used in the maintenance or operation of the
Property; (xix) the cost of furniture, draperies, carpeting, landscaping and
other customary and ordinary items of personal property (excluding paintings,
sculptures and other works of art) provided by Landlord for use in common areas
of the Building or in the Building office (to the extent that such Building
office is dedicated to the operation and management of the Property), such costs
to be amortized over the useful life thereof; (xx) any such expenses and costs
resulting from substitution of work, labor, material or services in lieu of any
of the above itemizations, or for any such additional work, labor, services or
material resulting from compliance with any laws or orders applicable to the
Property; (xxi) Building office rent or rental value; and (xxii) all other costs
which, in accordance with generally accepted accounting principles used by
Landlord, as applied to the maintenance and operation of office and/or retail
buildings, are properly chargeable to the operation and maintenance of the
Property.
Operating Costs shall not include the following: (i) depreciation on the
Building; (ii) debt service; (iii) capital improvements, except as otherwise
provided in clauses (xvi) and (xvii) above, (iv) rental under any ground or
underlying leases; (v) Real Property Taxes, (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective tenants; (vii)
the cost of Tenant Improvements; (viii) advertising expenses; or (ix) real
estate broker's or other leasing commissions.
(y) "Parties" means Landlord and Tenant.
(z) "Party" means Landlord or Tenant.
(aa) "Person" means one or more human beings, or legal entities or other
artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human beings and legal
entities.
(bb) "Property" means the Premises, Building and Land.
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(cc) "Provision" means any term, agreement, covenant, condition, cause,
qualification, restriction, reservation, or other stipulation in this Lease that
defines or otherwise controls, establishes, or limits the performance required
or permitted by either party.
(dd) "Real Property Taxes" means any form of tax, assessment, general
assessment, special assessment, lien, levy, bond obligation, license fee,
license tax, tax or excise on rent, or any other levy, charge or expense,
together with any statutory interest thereon (individually and collectively, the
"Impositions"), now or hereafter imposed or required by any authority having the
direct or indirect power to tax, including any federal, state, county or city
government or any school, agricultural, lighting, drainage or other improvement
or special assessment district thereof (individually and collectively, the
"Governmental Agencies") on any interest of Landlord or Tenant or both
(including any legal or equitable interest of Landlord or its mortgagee, if any)
in the Premises or the Property, including, without limitation:
(i) any Impositions upon, allocable to or measured by the area of the
Premises or the Property, or the rental payable hereunder, including, without
limitation, any gross income tax or excise tax levied by any Governmental
Agencies with respect to the receipt of such rental; or
(ii) any Impositions upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair or use or occupancy by
Tenant of the Premises or any portion thereof; or
(iii) any Impositions upon or with respect to the building equipment
and personal property used in connection with the operation and maintenance of
the Property or upon or with respect to the furniture, fixtures and decorations
in the common areas of the Property; or
(iv) any Impositions upon this Lease or this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises; or
(v) any Impositions by Governmental Agencies (whether or not such
Impositions constitute tax receipts) in substitution, partially or totally, of
any impositions now or previously included within the definition of real
property taxes, including those calculated to increase tax increments to
Governmental Agencies and to pay for such services as fire protection, water
drainage, street, sidewalk and road maintenance, refuse removal or other
governmental services formerly provided without charge to property owners or
occupants; or
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(vi) any and all costs, including, without limitation, the fees of
attorneys, tax consultants and experts, incurred by Landlord should Landlord
elect to negotiate or contest the amount of such real property taxes in formal
or informal proceedings before the Governmental Agency imposing such real
property taxes; provided, however, that real property taxes shall in no event
include Landlord's general income, inheritance, estate, gift or franchise taxes.
(ee) "Rent" means Minimum Monthly Rent, as adjusted from time to time under
this Lease, Additional Rent, Prepaid Rent, Security Deposit, all as defined in
this Section, payments of Tenant's Share of increases in Real Property Taxes and
Operating Costs, insurance, utilities and other charges payable by Tenant to
Landlord.
(ff) "Rentable square feet of space" as to the Premises or the Building, as
the case may be, means the number of usable square feet of space times the
applicable R/U Ratio(s) as defined in this Section.
(gg) "Restoration" means the reconstruction, rebuilding, rehabilitation and
repairs that are necessary to return damaged portions of the Premises and the
Building to substantially the same physical condition as they were in
immediately before the damage.
(hh) "R/U Ratio" means the rentable area of a floor of the Building divided
by the usable area of such floor, both of which shall be computed in accordance
with American National Standard Z65.1-1986 Method of Measuring Floor Space in
Office Buildings as published by the Building Owners and Managers Association,
as amended from time to time.
(ii) "Substantially complete" or "substantially completed" or "substantial
completion" means the completion of Landlord's construction obligation, subject
to completion or correction of "punch list" items, that is, minor items of
incomplete or defective work or materials or mechanical maladjustments that are
of such a nature that they do not materially interfere with or impair Tenant's
use of the Premises for the Permitted Use.
(jj) "Successor" means assignee, transferee, personal representative, heir,
or other person or entity succeeding lawfully, and pursuant to the provisions of
this Lease, to the rights or obligations of either party.
(kk) "Tenant Improvements" means (i) the improvements and alterations set
forth in Exhibit C, (ii) window coverings, lighting fixtures, plumbing fixtures,
cabinetry and other fixtures installed by either Landlord or Tenant at any time
during
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the Term, and (iii) any improvements and alterations of the Premises made for
Tenant by Landlord at any time during the Term.
(ll) "Tenant's personal property" means Tenant's equipment, furniture, and
movable property placed in the Premises by Tenant.
(mm) "Tenant's trade fixtures" means any property attached to the Premises
by Tenant.
(nn) "Termination" means the ending of the Term for any reason before
expiration, as defined in this Section.
(oo) "Work" means the construction of any improvements or alterations or
the performance of any repairs done by Tenant or caused to be done by Tenant on
the Premises as permitted by this Lease.
42. Miscellaneous Provisions.
(a) Entire Agreement. This Lease sets forth the entire agreement of the
parties as to the subject matter hereof and supersedes all prior discussions and
understandings between them. This Lease may not be amended or rescinded in any
manner except by an instrument in writing signed by a duly authorized officer or
representative of each party hereto.
(b) Governing Law. This Lease shall be governed by, and construed and
enforced in accordance with, the laws of the State of Washington.
(c) Severability. Should any of the provisions of this Lease be found to
be invalid, illegal or unenforceable by any court of competent jurisdiction,
such provision shall be stricken and the remainder of this Lease shall
nonetheless remain in full force and effect unless striking such provision shall
materially alter the intention of the parties.
(d) Jurisdiction. In the event any action is brought to enforce any of
the provisions of this Lease, the parties agree to be subject to exclusive in
personam jurisdiction in the Superior Court, King County, for the State of
Washington or in the United States District Court for the Western District of
Washington and agree that in any such action venue shall lie exclusively at
Seattle, Washington.
(e) Waiver. No waiver of any right under this Lease shall be effective
unless contained in a writing signed by a duly authorized officer or
representative of the party sought to be charged with the waiver and no waiver
of any right arising from
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any breach or failure to perform shall be deemed to be a waiver of any future
right or of any other right arising under this Lease.
(f) Captions. Section captions contained in this Lease are included for
convenience only and form no part of the agreement between the parties.
(g) Notices. All notices or requested required or permitted under this
Lease shall be in writing. If given by Landlord such notices or requests may be
personally delivered or sent by certified mail, return receipt requested,
postage prepaid. If given by Tenant such notices or requests shall be sent by
certified mail, return receipt requested, postage prepaid. Such notices or
requests shall be deemed given when so delivered or mailed, irrespective of
whether such notice or request is actually received by the addressee. All
notices or requests to Landlord shall be sent to Landlord at Landlord's Address
for Notice and all notices or requests to Tenant shall be sent to Tenant at
Tenant's Address for Notice. Either party may change the address to which
notices shall be sent by notice to the other party.
(h) Binding Effect. Subject to the provisions of Section 25 captioned
"Assignment and Subletting," this Lease shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns. No
permitted assignment of this Lease or Tenant's rights hereunder shall be
effective against Landlord unless and until an executed counterpart of the
instrument of assignment shall have been delivered to Landlord and Landlord
shall have been furnished with the name and address of the assignee. The term
"Tenant" shall be deemed to include the assignee under any such permitted
assignment.
(i) Effectiveness. This Lease shall not be binding or effective until
properly executed and delivered by Landlord and Tenant.
(j) Gender and Number. As used in this Lease, the masculine shall include
the feminine and neuter, the feminine shall include the masculine and neuter,
the neuter shall include the masculine and feminine, the singular shall include
the plural and the plural shall include the singular, as the context may
require.
(k) Time of the Essence. Time is of the essence in the performance of all
covenants and conditions in this Lease for which time is a factor.
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Dated the date first above written.
Landlord: Tenant:
BURKE-STATE BLDG., L.L.C., a WatchGuard, Inc., a Washington
Washington limited liability corporation
company
By: /s/ H. Martin Smith III By: /s/ Steven N. Moore
--------------------------- ---------------------------
H. Martin Smith III Its: Chief Financial Officer
Managing Partner ---------------------------
By:
---------------------------
Its:
---------------------------
This Lease has been prepared for submission to you and your attorney. Martin
Smith Inc is not authorized to give legal or tax advice. Neither Landlord nor
Martin Smith Inc makes any representations or recommendations as to the legal
sufficiency, legal effect or tax consequences of this document or any
transaction relating thereto. These are questions for your attorney with whom
you should consult before signing the document to determine whether your legal
rights are adequately protected.
[Notary attached]
-42-
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Steve Moore is the
person who appeared before me, and said person acknowledged that he/she signed
this instrument, on oath stated that he/she was authorized to execute the
instrument, and acknowledged it as the (title) CFO of (entity) WatchGuard, Inc.,
a Washington corporation to be the free and voluntary act of such party for the
uses and purposes mentioned in the instrument.
Witness my hand and official seal this 17th day of November 1997.
/s/ Ronald Leibsohn
------------------------------------
Notary Public
(Print Name)
------------------------
Residing at Mercer Island
------------------------
My Commission Expires: 12-15-00
-------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that H. Martin Smith, III is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument, and acknowledged it as the (title) Managing Member of (entity)
BURKE-STATE BLDG, L.L.C., a Washington limited liability company to be the free
and voluntary act of such party for the uses and purposes mentioned in the
instrument.
Witness my hand and official seal this 18th day of December 1997.
/s/ Danette A. Brandt
------------------------------------
Notary Public
(Print Name)
------------------------
Residing at Edmonds, WA
------------------------
My Commission Expires: 3/8/2001
------------
Notary Seal Attached
-43-
<PAGE>
RIDER
This Rider is part of that certain Lease dated 10th day of October, 1997 by
and between BURKE-STATE BLDG., LLC, a Washington limited liability company
("Landlord"), and WatchGuard, Inc., a Washington corporation ("Tenant"), who
further agree as follows:
43. Disclosure. BURKE-STATE BLDG., LLC, is a Washington limited liability
company composed of H. Martin Smith, III, and Gregory B. Smith as the managing
members and other individuals and partnerships as members. The managing members
and several of the members are licensed real estate brokers and/or real estate
agents in the State of Washington.
Dated the date first above written.
Landlord: Tenant:
BURKE-STATE BLDG., L.L.C., a WatchGuard, Inc., a Washington
Washington limited liability corporation
company
By: /s/ H. Martin Smith III By: /s/ Steven N. Moore
--------------------------- -----------------------------
Managing Member Its: Chief Financial Officer
-----------------------------
By:
-----------------------------
Its:
-----------------------------
-44-
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Occidental Mall
Lots 1, 2, 3, and 4, Block 11, Town of Seattle, as laid out by D. S. Maynard,
commonly known as D. S. Maynard's Plat of Seattle, according to the plat
recorded in Volume 1 of Plats, Page 23, in King County, Washington; EXCEPT the
West 9 feet thereof condemned in District Court Cause No. 7089 for Occidental
Avenue, as provided by Ordinance No. 1109 of the City of Seattle; and EXCEPT
that portion of said Lot 2 conveyed to Wilbert L. Smith by Deed recorded under
recording number 186629 in King County, Washington.
Initials SM
------------
------------
------------
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-45-
<PAGE>
Exhibit 10.3
COMMERCIAL LEASE
THIS LEASE dated this 17th day of August, 1998, by and between CEDERSTRAND
RENTALS, a Washington general partnership (Landlord), and WATCHGUARD, INC., a
Washington corporation ("Tenant").
The parties covenant and agree as follows:
1. Premises. The Landlord does hereby lease to Tenant, and Tenant does
hereby lease from Landlord those certain premises (hereinafter referred to as
"premises" or "leased premises") commonly known as approximately 2,800 square
feet of the first floor (excluding entry, hall, stairs and other common areas)
which premises is more particularly shown in Exhibit 1 attached hereto, which is
a portion of the building commonly known as 820 First Avenue South, Seattle,
Washington, which property is legally described in Exhibit 2 attached hereto.
Tenant shall have the exclusive use of four (4) parking spaces (two (2) parking
spaces inside fenced area) which spaces shall be designated by Landlord when
Tenant takes possession of premises.
2. Business Purpose. The premises are to be used for the warehousing and
storage purposes and ancillary office functions related thereto. The premises
shall be used for no other purpose without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. In no case shall
the use of the premises by Tenant impinge upon the quiet enjoyment by other
tenants of their premises in the building. Tenant shall have access to the
premises and the parking spaces 24 hours per day, 7 days per week, 52 weeks per
year.
3. Term. The term of this Lease shall be for two (2) years commencing on
the 15th day of August, 1998, and terminating on the 14th day of August, 2000.
4. Option to Renew. At the expiration of the two (2) year term of this
Lease, Tenant shall have two options to renew this Lease for an additional one
(1) year period each. Tenant shall exercise the option by providing written
notice to Landlord not later than four (4) months prior to expiration of the
then current term of the Lease. For each option period, the base rent as
provided in paragraph 5 shall be increased following amounts:
Third lease year $3,640.00 per mo.
Fourth lease year $3,780.00 per mo.
1
<PAGE>
5. Base Rent. As base rent for the premises, the Tenant shall pay to the
Landlord before the 1st day of each rental month, the following amounts:
First lease year $3,360.00 per mo.
Second lease year $3,500.00 per mo.
6. Improvements Paid by Landlord. Tenant accepts the bare space in its
present "as is-where is" condition with the following exceptions which are the
only improvements which shall be made by Landlord:
(a) Broom clean the entire space, including steam cleaning the carpets
in the office of the space.
(b) Provide adequate lighting in the warehouse space.
(c) Confirm that all lighting, HVAC to office space and power to the
premises are in good working order at the time of occupancy.
(d) Securely demise the leased premises from any other space in the
building.
(e) Provide a single restroom for the exclusive use of the leased
premises.
Landlord shall expeditiously complete all build-out of said improvements,
provided that at all times restroom facilities are made available to Tenant.
Landlord represents that there are no material defects in the building.
7. Improvements Paid by Tenant. With the exception of those items stated
in paragraph 6, Tenant shall pay for any and all costs associated with any
improvements made by Tenant on the premises, all of which shall be done in
accordance with paragraph 24 and all applicable building codes and land use
codes.
8. Repairs and Maintenance. Common area maintenance, roof, foundation,
structural integrity of the building and major repairs or replacement of the
existing plumbing HVAC and electrical service and fixtures shall all be at
Landlord's sole cost and expense provided that Tenant shall replace all burned
out light bulbs, shall unplug any plugged toilet or waste pipe, and Tenant shall
repair any damage caused by the negligence of Tenant, its employees, agents, or
invitees. The premises have been inspected and are accepted by Tenant in their
present condition. After taking possession of the premises, Tenant shall at all
times keep the premises in a neat, clean and sanitary condition and shall
replace any glass of windows or doors as may become cracked or broken in the
leased premises. Tenant will at all times
2
<PAGE>
preserve the said premises in as good a repair as they are now or may hereafter
be put to at Tenant's sole expense, except that Tenant shall not be obligated to
repair any damage by casualty or reasonable wear and tear.
9. Utilities. Landlord shall pay natural gas, electric, sewer, water, and
garbage for the premises. The base year for such expenses shall be 1998 and
Tenant shall pay a pro rata share of any increases above the base year adjusted
to reflect 95% occupancy and a fully assessed building unless such increased
cost of utilities can be directly attributed to Tenant, in which case such
actual increased cost shall be paid by Tenant or reimbursed to Landlord by
Tenant within ten (10) days of invoice.
10. Garbage. Landlord shall provide one 2-yard capacity dumpster for the
use of all Tenants in the building, which dumpster shall be emptied not less
than one time per week. WatchGuard, Inc.'s use of the dumpster shall not be
more than one-fourth (1/4th) of its capacity, and should it become necessary to
increase such capacity as a result of the needs of a Tenant, Tenant shall
reimburse Landlord for such cost.
11. HVAC. Building standard HVAC service to the office of the premises
shall be available from 7:00 o'clock a.m. to 6:00 o'clock p.m., Monday through
Friday, on generally accepted business days and from 9:00 o'clock a.m. to 1:00
p.m. on Saturdays. Additional HVAC service for after hours use will be
available at a charge that shall be initially agreed upon and determined
according to the actual cost thereof.
12. Late Payment Penalty. Any rent, or reimbursement for elevator
service, real estate taxes, liability insurance, utilities, common area
maintenance and the like, which is not paid by Tenant within ten (10) days of
its due date, shall incur a late payment penalty of five percent (5%) of the
unpaid amount. In addition, all liquidated, unpaid amounts shall bear interest
at twelve percent (12%) per annum.
13. Care of Premises/Compliance. Except as otherwise specifically
provided herein, the Landlord shall not be called upon to make any improvements
or repair of any kind upon the said premises and the said premises shall at all
times be kept and used by Tenant in accordance with the laws of the State of
Washington and ordinances of the City of Seattle, and in accordance with all
directions, rules, and regulations of the health officer, fire marshal, building
inspector, or other proper officer of the City of Seattle at the sole cost and
expense of said Tenant; and Tenant will permit no waste, damage or injury to the
premises, and at Tenant's own cost and expense, will keep all drainage pipes
free and open and will protect water, heating, and other pipes on the premises
so that they will not freeze or become clogged, and will repair all leaks, and
will also repair all damages caused by leaks on the premises
3
<PAGE>
by reason of Tenant's failure to protect and keep free, open, and unfrozen any
of the pipes and plumbing on said premises.
14. Use. The Tenant shall conduct and carry on in said premises, the
business for which said premises are leased, and shall not use the premises for
illegal purposes. The Tenant agrees that no stock of goods will be carried, or
anything done in or about the premises which will increase the present rate of
insurance; provided, however, if the Tenant shall engage in such business with
the consent of the Landlord, which business shall increase insurance rates,
Tenant shall pay such increase. Tenant agrees that it has determined to
Tenant's satisfaction that the premises can be used for the purposes for which
they are leased and waives any right to terminate this Lease in the event that
the premises cannot be used for such purposes or for any reason it may not be
used for such purposes during the term of the Lease.
15. Accidents and Liability. All personal property on said leased
premises shall be at the risk of Tenant. Landlord or Landlord's agent shall not
be liable for any damage, either to person or property, sustained by Tenant or
others caused by any defects now in said premises, or the building in which the
premises are located, or any service facilities, or hereafter occurring therein,
or due to the building in which the leased premises are situated, or any part or
appurtenance thereof, becoming out of repair, or caused by fire or by the
bursting or leaking of water, gas, sewer, or steam pipes, or from any act or
neglect of co-tenants or other occupants of said building, or any other persons,
or due to the happening of any accident from whatsoever cause in and about said
building. Except to the extent caused by the negligence or intentional
misconduct of Landlord or its agents, Tenant agrees to defend and hold Landlord
and Landlord's agent harmless from any and all claims for damages suffered or
alleged to be suffered in or about the leases premises by any person, firm or
corporation.
Tenant agrees to maintain public liability insurance on the premises in the
minimum limit of One Million Dollars ($1,000,000.00) for property damage and in
the minimum of One Million Dollars ($1,000,000.00) for bodily injuries and
death, and shall name Landlord as an additional insured. Tenant shall furnish
Landlord a certificate indicating that the insurance policy is in full force and
effect, that Landlord has been named as an additional insured, and that the
policy may not be cancelled unless thirty (30) days' prior written notice of the
proposed cancellation has been given to Landlord.
16. Liens and Insolvency. Tenant shall keep the leased premises and the
property in which the leased premises are situated, free from any liens arising
out of any work performed, materials furnished, or obligations incurred by
Tenant. In the event Tenant becomes insolvent, voluntarily or involuntarily
bankrupt, or if a receiver,
4
<PAGE>
assignee or other liquidating officer is appointed for the business of Tenant,
then the Landlord may cancel this Lease at Landlord's option.
17. Assignment. Tenant shall not let or sublet the whole or any part
thereof, nor assign this Lease or any part thereof without the written consent
of Landlord. This Lease shall not be assignable by operation of law. If
consent is once given by Landlord to the assignment of his Lease, or any
interest therein, Landlord shall not be barred from afterwards refusing to
consent to any further assignment. Consent to sublet or assignment shall not be
unreasonably withheld. Tenant shall reimburse Landlord's reasonable attorneys'
fees and costs incurred relative to any assignment or sublet proposed by Tenant.
18. Access. Tenant will allow Landlord or Landlord's agent free access at
all reasonable times to leased premises for the purpose of inspection or of
making repairs, additions, or alterations to the leased premises, the building
or any property owned by or under the control of Landlord, but this right shall
not be construed as an agreement on the part of Landlord to make any repairs
except as specifically provided in this Lease. Reasonable times for entry for
inspection, repairs or alterations shall be defined as normal business hours
upon twenty-four (24) hours' advance written notice (which includes notice by
facsimile), except in emergencies.
19. Possession. Tenant shall be provided possession of the premises on
the Lease commencement date, provided, however, that Landlord shall have an
additional thirty (30) days after said Lease commencement date to complete
construction of improvements set forth in paragraph 6 above.
20. Damage or Destruction. In the event the premises are damaged to such
an extent as to render the same untenantable in whole or in a substantial part
thereof, or are destroyed, it shall be optional with Landlord to repair or
rebuild the same; and after the happening of any such contingency, Tenant shall
give Landlord immediate written notice thereof. Landlord shall have no more
than thirty (30) days after date of such notification to notify Tenant in
writing of Landlord's intentions to repair or rebuild said premises, or the part
so damaged as aforesaid, and if Landlord elects to repair or rebuild said
premises, Landlord shall prosecute the work of such repairing or rebuilding
without unnecessary delay, and during such period the rent of said premises
shall be abated in the same ratio that portion of the premises rendered for the
time being unfit for occupancy shall bear to the whole of the leased premises.
If Landlord shall fail to give the notice aforesaid, or does not complete the
repairs within six (6) months of the date of damage, Tenant shall have the right
to declare this Lease terminated by written notice served upon Landlord or
Landlord's agent.
5
<PAGE>
In the event the building in which the premises hereby leased are located
shall be damaged (even though the premises hereby leased shall not be damaged
thereby) to such an extent that in the opinion of Landlord it shall not be
practicable to repair or rebuild, or is destroyed, then it shall be optional
with Landlord to terminate this Lease by written notice served on Tenant within
ninety (90) days after such damage or destruction.
21. Notices. Any notice required to be served in accordance with the
terms of this Lease shall be sent by mail. Notice to Landlord shall be directed
to P.O. Box 18213, Seattle, Washington 98118, and, after taking possession of
the premises, notices from Landlord shall be sent to Tenant at the leased
premises.
22. Governmental Fees. All fees which relate to the conduct of Tenant's
business on the premises or relate to any improvements made on the premises by
Tenant shall be paid by Tenant.
23. Signs. Landlord will provide building standard signage for Tenant at
the main building entrance and adjacent to Tenant's entry door. All signage
shall be mutually agreed upon and subject to all City codes.
24. Alterations. Tenant shall not make any alterations, additions or
improvements in the premises without the prior written consent of Landlord in
writing first obtained which consent shall not be unreasonably withheld as to
nonstructural changes, and all alterations, additions and improvements which
shall be made shall be at the sole cost and expense of Tenant, and shall become
the property of the Landlord, and shall remain in and be surrendered with the
premises as a part thereof of the termination of this Lease, without
disturbance, molestation or injury. If Tenant shall perform work with the
consent of Landlord, as aforesaid, Tenant agrees to comply with all laws,
ordinances, rules and regulations of the City of Seattle or any other authorized
public authority. Tenant agrees that Landlord has the right to make alterations
to the premises and to the building in which the premises are situated and
Landlord shall not be liable for any damage which Tenant might suffer by reasons
of such undertaking. Landlord shall have reasonable access to the premises for
the purpose of accessing utilities for the building or for the purpose of making
modifications to the building as may be needed to accommodate other tenants in
the building.
25. Default and Reentry. If any rents above reserved, or any part
thereof, shall be and remain unpaid when the same shall become due, or if Tenant
shall violate or default in any of the covenants and agreements herein
contained, then Landlord may cancel this Lease upon giving the notice required
by law, but in no event, except a delinquency in the rent, less than ten (10)
days' notice of and opportunity to cure
6
<PAGE>
said violation or default, and reenter said premises, but notwithstanding such
reentry by Landlord, the liability of Tenant for the rent provided for herein
shall not be extinguished for the balance of the term of this Lease and Tenant
covenants and agrees to make good to Landlord any deficiency arising from a
reentry and reletting of the premises at a lesser rental than herein agreed to.
Tenant shall pay such deficiency each month as the amount thereof is ascertained
by the lessor.
26. Cost and Attorneys' Fees. If by reason of any default on the part of
Tenant it becomes necessary for Landlord to employ an attorney or in case
Landlord shall bring suit to recover any rent due hereunder, or for breach of
any provision of this Lease or to recover possession of the leased premises, or
if Tenant shall bring any action for any relief against Landlord, declaratory or
otherwise, arising out of this Lease, then the prevailing party shall be
entitled to recovery of all costs of this dispute, including reasonable
attorneys' fees, expert witness fees, and the costs and fees incurred in any
arbitration, court proceeding or appeal.
27. Nonwaiver of Breach. The failure of Landlord to insist upon strict
performance of any of the covenants and agreements of this Lease, or to exercise
any right herein conferred in any one or more instances, shall not be construed
to be a waiver or relinquishment of any such, or any other covenants or
agreements, but the same shall be and remain in full force and effect.
28. Removal of Property. At the conclusion of the tenancy, Tenant shall
have the right and the obligation to remove all of its furnishings, equipment
and trade fixtures on the premises. In the event of any lawful entry in, or
taking possession of, the leased premises as aforesaid, Landlord shall have the
right, but not the obligation, to remove from the leased premises all personal
property located therein, and may store the same in any place selected by
Landlord, including but not limited to a public warehouse, at the expense and
risk of the owners thereof, with the right to sell such stored property, after
commercially reasonable notice to Tenant and to any party holding a perfected
security interest in such property, and after it has been stored for a period of
thirty (30) days or more. The proceeds of sale shall first be applied to the
cost of such sale, second to the payment of reasonable charges for moving and
storage, if any, and third to the payment of any other sums of money which may
then be due from Tenant to Landlord under any of the terms hereof or to any
creditor of Tenant holding a perfected security interest in the priority
established by law, and the balance, if any, to be paid to Tenant.
29. Heirs and Successors. Subject to the provisions hereof pertaining to
assignment and subletting, the covenants and agreements of this Lease shall be
binding upon the heirs, legal representatives, successors and assigns of any or
all of the parties hereto.
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30. Hold-Over. If Tenant shall, with the written consent of Landlord,
hold over after the expiration of the term of this Lease, such tenancy shall be
for an indefinite period of time on a month-to-month tenancy, which tenancy may
be terminated as provided by the laws of the State of Washington. During such
tenancy, Tenant agrees to pay to Landlord the same rental rates as set forth
herein, unless a different rate is agreed upon, and to be bound by all of the
terms, covenants and conditions as herein specified, so far as applicable.
31. Subordination. This Lease is subject and thereby subordinated to all
present and future mortgages, deeds of trust and other encumbrances affecting
the demised premises of the property of which said premises are a part. Tenant
agrees to execute, at no expense to Landlord, any instrument which may be
reasonably deemed necessary or desirable by Landlord to further effect the
subordination of this Lease to any mortgage, deed of trust or encumbrance.
Notwithstanding the foregoing provisions of this section, no such subordination
shall adversely affect Tenant's rights under this Lease.
32. Common Areas. The premises are part of a building which is occupied
or may be occupied by other tenants. Tenant agrees to conform to Landlord's
reasonable written ruses and regulations pertaining to the parts of the building
that are in common use by tenants.
33. Condemnation. In the event a substantial part of the premises is
taken by the right of eminent domain, or purchase by the condemnor, in lieu
thereof, so as to render the remaining premises untenantable, then this Lease
shall be cancelled as of the time of taking at the option of either party. In
the event of a partial taking which does not render the premises untenantable,
the rent shall be reduced in direct proportion to the taking. Tenant shall have
no claim to any portion of the compensation for the taking of the land or
building. Landlord shall have no claim to any portion of the compensation paid
to Tenant by the condemnor.
34. Subrogation Waiver. To the extent allowed by their respective
insurance policies, each of Landlord and Tenant herewith and hereby releases and
relieves the other and waives their entire right of recovery against the other
for loss or damage arising out of or incident to the perils described in
standard fire insurance policies and all perils described in the "Extended
Coverage" insurance endorsement approved for use in the site where the premises
are located, which occurs in, on or to the premises, whether due to the
negligence of either party, their agents, employees or otherwise.
Notwithstanding the foregoing, this provision shall not be construed in any
fashion which shall cause impairment of either party's primary insurance
coverage.
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35. Surrender of Premises. Tenant agrees, upon expiration or sooner
termination of this Lease, to peacefully quit and surrender the premises without
notice, leave the premises neat and clean and to deliver all keys to the
premises to Landlord.
36. Tenant's Compliance With Environmental Laws. The parties acknowledge
that there are certain federal, state and local laws, regulations and guidelines
now in affect and that additional laws, regulations and guidelines may hereafter
be enacted, relating to or affecting the leased premises and the larger parcel
of land upon which the leased premises may be a part, concerning the impact on
the environment of construction, land use, the maintenance and operation of
structures and the conduct of business.
Tenant shall not cause, or permit to be caused, any act or practice by
negligence, or omission, or otherwise, that would adversely affect the
environment or do anything or expressly authorize anything to be done that would
violate any of said laws, regulations or guidelines. Any violation of this
covenant shall be an event of default under this Lease. Tenant shall indemnify
and hold Landlord harmless from any and all costs, expenses, claims, losses,
damages, fines, and penalties, including reasonable attorneys' fees, that may in
any manner arise out of or be imposed because of the failure of Tenant to comply
with this covenant. The foregoing shall cover all requirements whether or not
foreseeable at the present time and regardless of the expense attendant thereon.
Landlord shall not cause, or permit to be caused, any act or practice by
negligence, or omission, or otherwise, that would adversely affect the
environment or do anything or expressly authorize anything to be done that would
violate any of said laws, regulations or guidelines. Any violation of this
covenant shall be an event of default under this Lease. Landlord shall
indemnify and hold Tenant harmless from any and all costs, expenses, claims,
losses, damages, fines and penalties, including reasonable attorneys' fees, that
may in any manner arise out of or be imposed because of the failure of Landlord
to comply with this covenant. The foregoing shall cover all requirements
whether or not foreseeable at the present time and regardless of the expense
attendant thereon.
37. Authority/Consent. Any corporate officer signing this Lease on behalf
of a corporation warrants that he/she has authority to enter into this Lease on
behalf of such corporation.
38. Real Estate Commission. A real estate commission equal to three
percent (3%) of the total rent due for the initial two-year term of this Lease
will become due and owing to Leibsohn & Company by Landlord at such time as
Tenant
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pays the first month's rent to Landlord. Landlord shall pay its agent, Eric
Cederstrand of Colliers International, in accordance with a separate agreement.
Both parties warrant and represent that there is no other commission or
liability owed to any broker or any other party as a result of consummation of
this Lease.
39. Facsimile/Counterparts. A facsimile copy of a signed copy of this
Lease shall have the same binding effect as an original. This Lease may be
executed in counterparts. Parties will circulate an original, notarized Lease as
soon as practical after exchanging facsimile copies.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and
year first above written.
<TABLE>
<CAPTION>
<S> <C>
LANDLORD: TENANT:
CEDERSTRAND RENTALS, a WATCHGUARD, INC., a
Washington general partnership Washington corporation
By: /s/ Kenneth K. Cederstrand By: /s/ Steven N. Moore
--------------------------- ----------------------------
Kenneth K. Cederstrand Steve Moore,
General Partner Chief Financial officer
</TABLE>
10
<PAGE>
STATE OF WASHINGTON )
) ss.
County of King )
On this _____ day of August, 1998, before me personally appeared Kenneth K.
Cederstrand, to me known to be one of the general partners of Cederstrand
Rentals, the partnership that executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
partnership, for the uses and purposes therein mentioned, and on oath stated
that he was authorized to execute said instrument.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal
the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
/s/ Debora L. Nelson
- ----------------------------- ------------------------------------------------
Name (printed): Debora L. Nelson
NOTARY SEAL Notary Public in and for the State of Washington,
residing at King County
My Commission expires: 10/25/99
- ----------------------------- ------------------------------------------------
</TABLE>
STATE OF WASHINGTON )
) ss.
County of King )
On this _____ day of August, 1998, before me personally appeared Steve
Moore, to me known to be the Chief Financial Officer of WatchGuard, Inc., the
corporation that executed the within and foregoing instrument, and acknowledged
said instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that she was
authorized to execute said instrument.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal
the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
/s/ Debora L. Nelson
- ----------------------------- ------------------------------------------------
Name (printed): Debora L. Nelson
NOTARY SEAL Notary Public in and for the State of Washington,
residing at King County
My Commission expires: 10/25/99
- ----------------------------- ------------------------------------------------
</TABLE>
11
<PAGE>
EXHIBIT 2
Legal Description
PORTIONS LOTS 2, 3 AND 4, BLOCK 324, SEATTLE TIDE LANDS, IN KING COUNTY,
WASHINGTON, DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHEAST CORNER OF SAID LOT 2;
THENCE WEST ALONG THE NORTH LINE OF SAID LOT 23.13 FEET TO THE EASTERLY LINE OF
STREET AS CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE NUMBER 397727, AS
PROVIDED BY ORDINANCE NO. 77088, AND AS AMENDED BY ORDINANCE NO. 77749 OF THE
CITY OF SEATTLE;
THENCE ALONG THE EASTERLY LINE OF SAID STREET AS CONDEMNED, SOUTHWESTERLY ALONG
THE ARC OF A CURVE TO RIGHT HAVING A RADIUS OF 345 FEET A DISTANCE OF 79.32 FEET
TO A POINT OF TANGENCY;
THENCE SOUTHWESTERLY ALONG A LINE TANGENT TO SAID CURVE AT SAID POINT, A
DISTANCE OF 49.54 FEET TO A POINT IN THE SOUTH LINE OF SAID LOT 3, 6.62 FEET
EAST, MEASURED ALONG SAID SOUTH LINE FROM THE SOUTHWEST CORNER THEREOF;
THENCE CONTINUING ALONG SAID TANGENT A DISTANCE OF 6.86 FEET TO A POINT OF
CURVATURE;
THENCE SOUTHERLY ALONG THE ARC OF A CURVE TO THE LEFT HAVING A RADIUS OF 39.70
FEET, A DISTANCE OF 17.32 FEET TO A POINT IN THE SOUTH LINE OF THE NORTH 23 FEET
OF SAID LOT 4;
THENCE EAST ALONG SAID SOUTH LINE TO THE EAST LINE OF SAID LOT 4;
THENCE NORTH AND NORTHWESTERLY ALONG THE EASTERLY LINES OF SAID LOTS 2, 3 AND 4
AT THE POINT OF BEGINNING.
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EXHIBIT 10.4
SILICON VALLEY BANK
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Borrower: WatchGuard Technologies, Inc.
Address: 316 Occidental Avenue South, Suite 200
Seattle, WA 98104
Date: March 20, 1998
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into on
the above date between SILICON VALLEY BANK ("Silicon"), whose address is 3003
Tasman Drive, Santa Clara, California 95054, and the borrower named above (the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). This Agreement amends and restates the QuickStart Loan
and Security Agreement between Silicon and Borrower (then known as Seattle
Software Labs, Inc.), dated August 5, 1997, and the Schedules thereto.
1. LOANS
1.1. Loans
Silicon will make one or more loans to the Borrower (the "Loans") up to the
amounts (the "Credit Limits") shown on the Schedule to this Agreement (the
"Schedule") as the Credit Limit for such loans. The terms of the Loans are
stated in this Agreement and in the Schedule. The terms of the Schedule are
incorporated into this Agreement. The Borrower is responsible for monitoring
the total amount of Loans and other Obligations outstanding from time to time,
and the Borrower shall not permit the amount of any Loan to exceed at any time
the applicable Credit Limit for such Loan. The Borrower shall not permit the
total amount of Loans and all other obligations to exceed at any time the
aggregate Credit Limit for the Loans. If at any time the total of all
outstanding Loans and all other Obligations exceeds the aggregate Credit Limit,
the Borrower shall immediately pay the amount of the excess to Silicon, without
notice or demand.
1.2. Interest; Debit to Deposit Accounts
All Loans and all other monetary Obligations shall bear interest at the
applicable rates shown on the Schedule. Interest shall be payable monthly, on
the due date shown on the monthly billing from Silicon to the Borrower. The
Borrower shall
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regularly deposit all funds received from its business activities in accounts
maintained by the Borrower at Silicon. The Borrower hereby requests and
authorizes Silicon to debit any of the Borrower's accounts with Silicon,
including without limitation account no. 3300074939, for payments of interest
and principal due on the Loans and all other obligations owing by the Borrower
to Silicon. Silicon shall promptly notify the Borrower of all debits which
Silicon makes against the Borrower's accounts. Any such debit against the
Borrower's accounts shall in no way be deemed a setoff by Silicon.
1.3. Fees
The Borrower shall pay to Silicon at closing a commitment fee and other
fees in the amounts shown on the Schedule. These fees are in addition to all
interest and other sums payable to Silicon and are not refundable.
1.4. Additional Costs
In case of any law, regulation, treaty or official directive or the
interpretation or application thereof by any court or any governmental authority
charged with the administration thereof or the compliance with any guideline or
request of any central bank or other governmental authority (whether or not
having the force of law) which:
(a) subjects Silicon to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by the Borrower or otherwise
with respect to the transactions contemplated hereby (except for taxes on the
overall net income of Silicon imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Silicon; or
(c) imposes upon Silicon any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Silicon,
reduce the income receivable by Silicon or impose any expense upon Silicon with
respect to any loans, Silicon shall notify the Borrower thereof. Borrower
agrees to pay to Silicon the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by Silicon of a statement of the
amount and setting forth Silicon's calculation thereof, all
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in reasonable detail, which statement shall be deemed true and correct absent
manifest error.
2. GRANT OF SECURITY INTEREST
2.1. Obligations
The term "Obligations" as used in this Agreement means the following: the
obligation to pay all Loans and all interest on the Loans when due, and to pay
and perform when due all other present and future indebtedness, liabilities,
obligations, guarantees, covenants, agreements, warranties and representations
of the Borrower to Silicon, whether joint or several, monetary or non-monetary,
and whether created pursuant to this Agreement or any other present or future
agreement (such as future agreements relating to letters of credit issued by
Silicon) or otherwise. Silicon may, in its discretion, require that the
Borrower pay monetary Obligations in cash to Silicon, or charge them to the
Borrower's Loan account, in which event they shall bear interest at the rates
applicable to the Loan to which such amounts are charged.
2.2. Collateral
As security for all Obligations, the Borrower hereby grants Silicon a
continuing security interest in all of the Borrower's assets, including but not
limited to all of the Borrower's interest in the types of property described
below, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): (a) all accounts, contract rights, chattel
paper, letters of credit, documents, securities, money, and instruments, and all
other obligations now or in the future owing to the Borrower; (b) all inventory,
goods, merchandise, materials, raw materials, work in process, finished goods,
farm products, advertising, packaging and shipping materials, supplies, and all
other tangible personal property which is held for sale or lease or furnished
under contracts of service or consumed in the Borrower's business, and all
warehouse receipts and other documents; (c) all equipment, including without
limitation all machinery, fixtures, trade fixtures, vehicles, furnishings,
furniture, materials, tools, machine tools, office equipment, computers and
peripheral devices, appliances, apparatus, parts, dies, and jigs; (d) all
general intangibles including, but not limited to, deposit accounts, goodwill,
drawings, blueprints, customer lists, security deposits, loan commitment fees,
federal, state and local tax refunds and claims, all rights in all litigation
presently or hereafter pending for any cause or claim (whether in contract, tort
or otherwise), and all judgments now or hereafter arising therefrom, all rights
to purchase or sell real or personal property, all rights as a licensor or
licensee of any kind, all royalties, licenses, processes, telephone numbers,
purchase orders, and all insurance policies and claims (including without
limitation credit, liability, property and other insurance), and all other
rights, privileges and
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franchises of every kind; (e) all books and records, whether stored on computers
or otherwise maintained; (f) all of the Borrower's cash; and (g) all
substitutions, additions and accessions to any of the foregoing, and all
products, proceeds and insurance proceeds of the foregoing, and all guaranties
of and security for the foregoing; and all books and records relating to any of
the foregoing. Borrower does not grant Silicon a security interest in, or lien
on, patent applications, trademarks, trademark applications or copyrights or
copyright applications and shall not grant a security interest in, or lien on,
such assets of Borrower to any third party without Silicon's prior written
approval.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER
The Borrower represents and warrants to Silicon as follows, and the
Borrower covenants that the following representations shall continue to be true,
and that the Borrower shall comply with all of the following covenants:
3.1. Corporate Existence and Authority
The Borrower is and shall continue to be duly authorized, validly existing
and in good standing under the laws of the state of its incorporation, as
identified on the copy of the Borrower's Certificate of Incorporation delivered
to Silicon. The Borrower is and shall continue to be qualified and licensed to
do business in all jurisdictions in which any failure to do so would have a
material adverse effect on the Borrower. The execution, delivery and
performance by the Borrower of this Agreement, and all other documents executed
by the Borrower in connection with the Loans have been duly and validly
authorized, are enforceable against the Borrower in accordance with their terms,
and do not violate any law or any provision of, and are not grounds for
acceleration under, any agreement or instrument that is binding upon the
Borrower.
3.2. Name, Trade Names and Styles
The name of the Borrower set forth in the heading to this Agreement is its
correct name. Listed on an Exhibit to the Schedule are all prior names of the
Borrower and all of the Borrower's present and prior trade names. The Borrower
shall give Silicon 15 days' prior written notice before changing its name or
doing business under any other name. The Borrower has complied, and shall in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
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3.3. Place of Business; Location of Collateral
The address set forth in the heading to this Agreement is the chief
executive office for the Borrower. In addition, the Borrower has places of
business only at, and Collateral of the Borrower is located only at, the
locations set forth on the Schedule. The Borrower shall give Silicon at least
15 days' prior written notice before changing its chief executive office or
moving Collateral (other than inventory sold in the ordinary course of business)
to any location other than a location listed on the Schedule.
3.4. Title to Collateral; Permitted Liens
The Borrower is now, and shall at all times in the future be, the sole
owner of all the Collateral, except for items of equipment that are leased by
the Borrower and general intangibles subject to nonexclusive licenses granted by
Borrower to its customers in the ordinary course of business. The Collateral
now is and shall remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for the following ("Permitted
Liens"): (a) purchase money security interests in specific items of equipment,
other than equipment financed by the Loans; (b) leases of specific items of
equipment; (c) liens in favor of First Portland Corporation, provided that the
obligations secured by such liens shall not exceed the amount outstanding on the
date of this Amended and Restated Loan and Security Agreement; (d) liens for
taxes not yet payable; (e) additional security interests and liens consented to
in writing by Silicon in its sole discretion; and (f) security interests being
terminated substantially concurrently with this Agreement. Silicon shall have
the right to require, as a condition to its consent under subparagraph (e)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on terms satisfactory to Silicon in its sole discretion,
acknowledge that the holder's security interest is subordinate to Silicon's
security interest. Silicon now has, and shall continue to have, a first
priority, perfected and enforceable security interest in all of the Collateral.
The Collateral shall not be subject to any other liens or security interests of
any type except for the Permitted Liens. The Borrower shall at all times defend
Silicon and the Collateral against all claims of others. None of the Collateral
now is or shall be affixed to any real property in such a manner, or with such
intent, as to become a fixture.
3.5. Maintenance of Collateral
The Borrower shall maintain the Collateral in good working condition. The
Borrower shall not use the Collateral for any unlawful purpose.
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3.6. Books and Records
The Borrower has maintained and shall maintain at the Borrower's Address
complete and accurate books and records, comprising an accounting system in
accordance with generally accepted accounting principles.
3.7. Financial Condition and Statements
All financial statements now or in the future delivered to Silicon have
been, and shall be, prepared in conformity with generally accepted accounting
principles and now and in the future shall completely and accurately reflect the
financial condition of the Borrower, at the times and for the periods therein
stated. Since the last date covered by any such statement, there has been no
material adverse change in the financial condition or business of the Borrower.
The Borrower is now and shall continue to be solvent.
3.8. Tax Returns and Payments; Pension Contributions
The Borrower has timely filed, and shall timely file, all tax returns and
reports required by foreign, federal, state and local law. The Borrower has
timely paid, and shall timely pay, all foreign, federal, state and local taxes,
assessments, deposits and contributions now or in the future owed by the
Borrower. The Borrower may, however, defer payment of any contested taxes,
provided that the Borrower (a) in good faith contests the Borrower's obligation
to pay the taxes by appropriate proceedings promptly and diligently instituted
and conducted, (b) notifies Silicon in writing of the commencement of, and any
material development in, the proceedings, and (c) posts bonds or takes any other
steps required to keep the contested taxes from becoming a lien upon any of the
Collateral. The Borrower is unaware of any claims or adjustments proposed for
any of the Borrower's prior tax years which could result in additional taxes
becoming due and payable by the Borrower. The Borrower has paid and shall
continue to pay all amounts necessary to fund all present and future pension,
profit sharing and deferred compensation plans in accordance with their terms.
The Borrower has not and shall not withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any such plan which could result in any liability of the
Borrower, including, without limitation, any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
3.9. Compliance with Law
The Borrower has complied, and shall comply, in all material respects, with
all provisions of all foreign, federal, state and local laws and regulations
relating to the
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Borrower, including, but not limited to, those relating to ownership of real or
personal property, conduct and licensing of the Borrower's business, and
environmental matters.
3.10. Litigation
Except as disclosed in the Schedule, there is no claim, suit, litigation,
proceeding or investigation pending or (to best of the Borrower's knowledge)
threatened by or against or affecting the Borrower in any court or before any
governmental agency (or any basis therefor known to the Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of the Borrower, or in any material
impairment in the ability of the Borrower to carry on its business in
substantially the same manner as it is now being conducted. The Borrower shall
promptly inform Silicon in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against the Borrower
involving amounts in excess of $100,000.
3.11. Use of Proceeds
All proceeds of all Loans shall be used solely for lawful business
purposes.
3.12. Hazardous Substances
The terms "hazardous waste," "hazardous substance," "disposal," "release,"
and "threatened release," as used in this Agreement, shall have the same
meanings as set forth in the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. (S) 9601, et seq. ("CERCLA"),
the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801, et
seq., the Resource Conservation and Recovery Act, 49 U.S.C. (S) 6901, et seq.,
or other applicable state or federal laws, rules, or regulations adopted
pursuant to any of the foregoing. The Borrower represents and warrants that:
(a) the Borrower has no knowledge of (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any hazardous
waste or substance by any prior owners or occupants of any of the real
properties owned or operated by the Borrower, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters; (b)
neither the Borrower nor any subtenant, contractor, agent or other user
authorized by Borrower of any of the real properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, or about any of the real properties owned or operated by
the Borrower except in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. The
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Borrower authorizes Silicon and its agents, upon 24 hours' prior notice (which
need not be in writing), to enter upon the real properties to make such
inspections and tests as Silicon may deem appropriate to determine compliance of
the real properties owned or operated by the Borrower with this Section of the
Agreement. Any inspections or tests made by Silicon shall be for Silicon's
purposes only and shall not be construed to create any responsibility or
liability on the part of Silicon to the Borrower or to any other person. The
Borrower hereby (a) releases and waives any future claims against Silicon for
indemnity or contribution in the event the Borrower becomes liable for cleanup
or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Silicon against any and all claims, losses, liabilities, damages,
penalties, and expenses which Silicon may directly or indirectly sustain or
suffer resulting from a breach of this Section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release or
threatened release occurring prior to the Borrower's ownership or interest in
the real properties, whether or not the same was or should have been known to
the Borrower. The provisions of this Section of the Agreement, including the
obligation to indemnify, shall survive the payment of the obligations and the
termination or expiration of this Agreement and shall not be affected by
Silicon's acquisition of any interest in any of the real properties, whether by
foreclosure or otherwise.
3.13. No Conflicts
Performance of this Agreement does not conflict with or result in a breach
of any agreement to which Borrower is a party or by which Borrower is bound.
3.14. No Transfers or Encumbrances
During the term of this Agreement, Borrower will not transfer or otherwise
encumber any interest in the Collateral, except for nonexclusive licenses
granted by Borrower in the ordinary course of business or as set forth in this
Agreement and the Permitted Liens.
3.15. Validity of Patents
To its knowledge, each of Borrower's patents, patent applications and like
provisions are valid and enforceable, and none of Borrower's patents have been
judged invalid or unenforceable, in whole or in part, and no claim has been made
that any part of the Collateral violates the rights of any third party except as
previously disclosed to Silicon.
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3.16. Notice of Change in Composition
Borrower shall promptly advise Silicon of any material change in the
composition of the Collateral, including but not limited to any subsequent
ownership right of the Borrower in or to any Trademark, Patent or Copyright not
specified in this Agreement.
3.17. Duty to Protect and Defend
Borrower shall (i) protect and defend its trademarks, patents and
copyrights, (ii) use commercially reasonable efforts to detect infringements of
its trademarks, patents and copyrights and promptly advise Silicon in writing of
material infringements detected, and (iii) not allow any of its trademarks,
patents or copyrights to be abandoned, forfeited or dedicated to the public
without the written consent of Silicon, which shall not be unreasonably
withheld, unless Borrower determines that reasonable business practices suggest
that abandonment appropriate.
3.18. After-Acquired Collateral
This Agreement creates, and in the case of after-acquired Collateral, this
Agreement will create at the time Borrower first has rights in such after-
acquired Collateral, in favor of Silicon a valid and perfected first priority
security interest in the Collateral in the United States securing the payment
and performance of the obligations evidenced by the Loan Agreement.
3.19. No Authorization Necessary to Pledge
To its knowledge, except as has been already made or obtained, no
authorization, approval or other action by, and no notice to or filing with, any
U.S. governmental authority or U.S. regulatory body is required either (i) for
the grant by Borrower of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by Borrower in the U.S., or
(ii) for the perfection in the United States or the exercise by Silicon of its
rights and remedies hereunder.
3.20. Accurate Information
All information heretofore, herein or hereafter supplied to Silicon by or
on behalf of Borrower with respect to the Collateral is accurate and complete in
all material respects.
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3.21. No Conflicting Agreement
Borrower shall not enter into any agreement that would materially impair or
conflict with Borrower's obligations hereunder without Silicon's prior written
consent, which consent shall not be unreasonably withheld. Borrower shall not
permit the inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way prevent the creation of a security
interest in Borrower's rights and interests in any property included within the
definition of the Collateral acquired under such contracts, except that certain
contracts may contain antiassignment provisions that could in effect prohibit
the creation of a security interest in such contracts.
3.22. Notice of Impairment of Value
Upon any executive officer of Borrower obtaining actual knowledge thereof,
Borrower will promptly notify Silicon in writing of any event that materially
adversely affects the value of any Collateral, the ability of Borrower to
dispose of any Collateral or the rights and remedies of Silicon in relation
thereto, including the levy of any legal process against any of the Collateral.
4. ADDITIONAL DUTIES OF THE BORROWER
4.1. Financial and Other Covenants
The Borrower shall at all times comply with the financial and other
covenants set forth in the Schedule.
4.2. Overadvance; Proceeds of Accounts
If for any reason the total of all outstanding Loans and all other
Obligations exceeds the total Credit Limit, as stated in the Schedule, without
limiting Silicon's other remedies, and whether or not Silicon declares an Event
of Default, the Borrower shall remit to Silicon all checks and other proceeds of
the Borrower's accounts and general intangibles, in the same form as received by
the Borrower, within one day after the Borrower's receipt of the same, to be
applied to the Obligations in such order as Silicon shall determine in its
discretion.
4.3. Insurance
The Borrower shall at all times insure all of the tangible personal
property Collateral and carry such other business insurance, with insurers
reasonably acceptable to Silicon, in such form and amounts as Silicon may
reasonably require. All such insurance policies shall name Silicon as an
additional loss payee, and shall
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contain a lenders loss payee endorsement in form reasonably acceptable to
Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply
such proceeds in reduction of the Obligations as Silicon shall determine in its
sole and absolute discretion, except that, provided no Event of Default has
occurred, Silicon shall release to the Borrower insurance proceeds with respect
to equipment totaling less than $100,000, which shall be utilized by the
Borrower for the replacement of the equipment with respect to which the
insurance proceeds were paid. Silicon may require reasonable assurance that the
insurance proceeds so released shall be so used. If the Borrower fails to
provide or pay for any insurance, Silicon may, but is not obligated to, obtain
the same at the Borrower's expense. The Borrower shall promptly deliver to
Silicon copies of all reports made to insurance companies. Statutory notice
regarding insurance:
WARNING
Unless you provide us with evidence of the insurance coverage as required
by our contract or loan agreement, we may purchase insurance at your expense to
protect our interest. This insurance may, but need not, also protect your
interest. If the collateral becomes damaged, the coverage we purchase may not
pay any claim you make or any claim made against you. You may later cancel this
coverage by providing evidence that you have obtained property coverage
elsewhere.
You are responsible for the cost of any insurance purchased by us. The
cost of this insurance may be added to your contract or loan balance. If the
cost is added to your contract or loan balance, the interest rate on the
underlying contract or loan will apply to this added amount. The effective date
of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.
This coverage we purchase may be considerably more expensive than insurance
you can obtain on your own and may not satisfy any need for property damage
coverage or any mandatory liability insurance requirements imposed by applicable
law.
4.4. Report
The Borrower shall provide Silicon with such written reports with respect
to the Borrower as Silicon shall from time to time reasonably specify, including
but not limited to the financial reports required as stated in the Schedule.
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4.5. Access to Collateral Books and Records
At all reasonable times after the conversion of the Bridge Loan (as
described on the Schedule) to the Secured Accounts Receivable Line of Credit (as
described on the Schedule), and upon one business day's notice, Silicon, or its
agents, shall have the right to inspect the Collateral, and the right to audit
and copy the Borrower's accounting books, records, ledgers, journals, or
registers and the Borrower's books and records relating to the Collateral,
provided that no prior notice is required upon the occurrence and continuation
of an Event of Default. Silicon shall take reasonable steps to keep
confidential all information obtained in any such inspection or audit, but
Silicon shall have the right to disclose any such information to its auditors,
regulatory agencies and attorneys, and pursuant to any subpoena or other legal
process. The Borrower shall reimburse Silicon for Silicon's actual costs for
conducting two such audits per year, and such costs shall not exceed $1,200 per
audit. Silicon may debit the Borrower's deposit accounts with Silicon for the
cost of such audits, in which event Silicon shall send notification thereof to
the Borrower.
4.6. Negative Covenants
Except as may be expressly permitted in the Schedule, the Borrower shall
not, without Silicon's prior written consent, do any of the following: (a) merge
or consolidate with another corporation, except that the Borrower may merge or
consolidate with another corporation if the Borrower is the surviving
corporation in the merger and the aggregate value of the assets acquired in the
merger does not exceed 25% of the Borrower's Tangible Net Worth (as defined in
the Schedule) as of the end of the month prior to the effective date of the
merger, and the assets of the corporation acquired in the merger are not subject
to any liens or encumbrances, except Permitted Liens; (b) acquire any assets,
including stock of any other entity, outside the ordinary course of business for
an aggregate purchase price (whether paid in cash, in stock of the Borrower or
other consideration) exceeding 25% of the Borrower's Tangible Net Worth (as
defined in the Schedule) as of the end of the month prior to the effective date
of the acquisition; (c) enter into any other transaction outside the ordinary
course of business (except as permitted by the other provisions of this
Section); (d) sell or transfer any Collateral, except for the sale of finished
inventory in the ordinary course of the Borrower's business; (e) make any loans
of any money or any other assets to shareholders, employees or any other person
except in the ordinary course of business; (f) incur any debts that are outside
the ordinary course of business or that would have a material, adverse effect on
the Borrower or on the prospect of repayment of the Obligations; (g) guarantee
or otherwise become liable with respect to the obligations of another party or
entity; (h) pay or declare any dividends on the stock of the Borrower (except
for dividends payable solely in stock
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of the Borrower); (i) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of the stock of the Borrower; (j) make any change in the
Borrower's capital structure which has a material adverse effect on that
Borrower or on the prospect of repayment of the Obligations; or (k) dissolve or
elect to dissolve. Transactions permitted by the foregoing provisions of this
Section are only permitted if no Event of Default and no event which (with
notice or passage of time or both) would constitute an Event of Default would
occur as a result of such transaction.
4.7. Litigation Cooperation
Should any third-party suit or proceeding be instituted by or against
Silicon with respect to any Collateral or in any manner relating to the
Borrower, the Borrower shall, without expense to Silicon, make available the
Borrower and its officers, employees and agents and the Borrower's books and
records to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
4.8. Verification
Silicon may, from time to time, following prior notification to the
Borrower, verify directly with the respective account debtors the validity,
amount and other matters relating to the Borrower's accounts, by means of mail,
telephone or otherwise, either in the name of the Borrower or Silicon or such
other name as Silicon may reasonably choose, provided that no prior notification
shall be required following an Event of Default. Silicon shall not be required
to obtain the Borrower's consent prior to any such verification of accounts,
whether or not an Event of Default has occurred.
4.9. Execute Additional Documentation
The Borrower agrees, at its expense, on request by Silicon, to execute from
time to time all documents in form satisfactory to Silicon, as Silicon may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
all of the transactions contemplated by this Agreement.
4.10. Registration of Intellectual Property Rights
Borrower shall register or cause to be registered with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, those additional intellectual property rights developed or acquired
by Borrower from time to time in connection with any product prior to the sale
or licensing of such product to any third party.
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Borrower may elect not to register such additional intellectual property
rights if it reasonably determines, in accordance with industry practices, that
such registration is not required.
5. TERM
5.1. Maturity Date
This Agreement shall continue in effect until the payment in full of the
Obligations, provided, however, that the Borrower shall repay in full each Loan
described on the Schedule, with all accrued but unpaid interest on that Loan, on
or before the Maturity Date stated on the Schedule for such Loan.
5.2. Early Termination
Subject to Section 5.3, this Agreement may be terminated, without penalty,
prior to the Maturity Date as follows: (a) by the Borrower, effective three
business days after written notice of termination is given to Silicon; or (b) by
Silicon at any time after the occurrence of an Event of Default, without notice,
effective immediately.
5.3. Payment of Obligations
On the due dates stated in the Schedule, or on any earlier effective date
of termination, the Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Notwithstanding
any termination of this Agreement, all of Silicon's security interests in all of
the Collateral and all of the terms and provisions of this Agreement shall
continue in full force and effect until all Obligations have been paid and
performed in full; provided that, without limiting the fact that Loans are
discretionary on the part of Silicon, Silicon may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Silicon, nor shall any such
termination relieve the Borrower of any Obligation to Silicon, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations, Silicon shall promptly deliver to the Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate any of Silicon's security interests.
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<PAGE>
6. EVENTS OF DEFAULT AND REMEDIES
6.1. Events of Default
The occurrence of any of the following events shall constitute an "Event of
Default" under this Agreement, and the Borrower shall give Silicon immediate
written notice thereof:
(a) any warranty, representation, statement, report or certificate made or
delivered to Silicon by the Borrower or any of the Borrower's officers or
employees, now or in the future, shall be untrue or misleading in any material
respect; or (b) the Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or (c) the total outstanding balance
of any Loan exceeds the applicable Credit Limit, or the total Loans and other
Obligations outstanding at any time exceed the aggregate Credit Limit for all
Loans; or (d) the Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other
nonmonetary Obligation which by its nature cannot be cured; or (e) the Borrower
shall fail to pay or perform any other nonmonetary Obligation, under this
Agreement or any other agreement or document relating to the Loans; or (f) any
levy, assessment, attachment, seizure, lien or encumbrance is made on all or any
part of the Collateral; or (g) dissolution, termination of existence, insolvency
or business failure of the Borrower, or appointment of a receiver, trustee or
custodian for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by the Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (h) the commencement of any proceeding against the Borrower
or any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (i)
revocation or termination of, or limitation of liability upon, any guaranty of
the Obligations; or (j) commencement of proceedings by any guarantor of any of
the Obligations under any bankruptcy or insolvency law; or (k) the Borrower
makes any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, unless such payment is permitted in the
applicable subordination agreement, or if any person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (l) the Borrower shall generally not pay its debts as they become
due; or the Borrower shall conceal, remove or transfer any part of its property,
with intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or
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<PAGE>
similar law; or (m) either the Borrower or any other party thereto shall breach
any subordination agreement executed in connection with the Loans; or (n) the
current shareholders of the Borrower shall cease to own more than 50% of the
outstanding common stock of the Borrower. If any of the foregoing defaults,
other than a failure to pay money and breach of a financial covenant set forth
in the Schedule, is curable, it may be cured (and no Event of Default shall have
occurred) if the Borrower cures the default within fifteen days (or within
thirty days in the case of clause (h) of this Section 6.1). Silicon may cease
making any Loans hereunder during the above cure periods, and thereafter if an
Event of Default has occurred.
6.2. Remedies
Upon the occurrence of any Event of Default and the expiration of any
applicable cure period under Section 6.1, and at any time thereafter, Silicon,
at its option, and without notice or demand of any kind (all of which are hereby
expressly waived by the Borrower), may do any one or more of the following: (a)
cease making Loans or otherwise extending credit to the Borrower under this
Agreement or any other document or agreement; (b) accelerate and declare all or
any part of the Obligations to be immediately due, payable, and performable,
notwithstanding any deferred or installment payments allowed by any instrument
evidencing or relating to any Obligation; (c) take possession of any or all of
the Collateral wherever it may be found, and for that purpose the Borrower
hereby authorizes Silicon without judicial process to enter onto any of the
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof without
charge for so long as Silicon deems it reasonably necessary in order to complete
the enforcement of its rights under this Agreement or any other agreement;
provided, however, that should Silicon seek to take possession of any or all of
the Collateral by Court process, the Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of and not
dispose of any such Collateral until after trial or final judgment; (d) require
the Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and the Borrower, and to remove the Collateral to such locations as
Silicon may deem advisable; (e) require the Borrower to deliver to Silicon, in
kind, all checks and other payments received with respect to all accounts and
general intangibles, together with any necessary endorsements, within one day
after the date received by the Borrower; (f) complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the
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purpose of removal, Silicon shall have the right to use the Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (g) sell, lease or otherwise dispose of any of the Collateral in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at any one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on credit,
and to adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale; Silicon shall have the right to
conduct such disposition on the Borrower's premises without charge, for such
time or times as Silicon deems reasonable, or on Silicon's premises, or
elsewhere and the Collateral need not be located at the place of disposition;
Silicon may directly or through any affiliated company purchase or lease any
Collateral at any such public disposition, and if permissible under applicable
law, at any private disposition; any sale or other disposition of Collateral
shall not relieve the Borrower of any liability the Borrower may have if any
Collateral is defective as to title or physical condition or otherwise at the
time of sale; (h) demand payment of, and collect any accounts and general
intangibles comprising, Collateral and, in connection therewith, the Borrower
irrevocably authorizes Silicon to endorse or sign the Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to the Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Silicon's
sole discretion, to grant extensions of time to pay, compromise claims and
settle accounts and the like for less than face value; (i) offset against any
sums in any general, special or other deposit accounts maintained by the
Borrower with Silicon; and (j) demand and receive possession of any of the
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable fees of
professionals (including attorneys' fees), expenses, costs, liabilities and
obligations incurred by Silicon with respect to the foregoing shall be added to
and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional two percent per annum above
the rate otherwise applicable.
6.3. Standards for Determining Commercial Reasonableness
The Borrower and Silicon agree that a sale or other disposition
(collectively, "Sale") of any Collateral which complies with the following
standards shall conclusively be deemed to be commercially reasonable: (a) notice
of the Sale is given to the Borrower at least seven days prior to the Sale, and,
in the case of a public Sale, notice of the Sale is published at least seven
days before the Sale in a newspaper of general circulation in the county where
the Sale is to be conducted; (b) notice of the
17
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Sale describes the Collateral in general, nonspecific terms; (c) the Sale is
conducted at a place designated by Silicon, with or without the Collateral being
present; (d) the Sale commences at any time between 8:00 a.m. and 6:00 p.m.; (e)
payment of the purchase price in cash or by cashier's check or wire transfer is
required; (f) with respect to any Sale of any of the Collateral, Silicon may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from the Borrower any and all information concerning the same. Silicon may
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable.
6.4. Power of Attorney
Effective only upon the occurrence and during the continuance of an Event
of Default, the Borrower hereby irrevocably appoints Silicon (and any of
Silicon's designated officers, or employees) as the Borrower's true and lawful
attorney to: (a) send requests for verification of accounts or notify account
debtors of Silicon's security interest in the accounts; (b) endorse the
Borrower's name on any checks or other forms of payment or security that may
come into Silicon's possession; (c) sign the Borrower's name on any invoice or
bill of lading relating to any account, drafts against account debtors,
schedules and assignments of accounts, verifications of accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to the Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Silicon determines to be reasonable; provided
Silicon may exercise such power of attorney to sign the name of the Borrower on
Uniform Commercial Code filings in accordance with Section 4.9 regardless of
whether an Event of Default has occurred. The appointment of Silicon as the
Borrower's attorney in fact, and each and every one of Silicon's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Silicon's obligation to
provide advances hereunder is terminated.
6.5. Application of Proceeds
All proceeds realized as the result of any Sale of the Collateral shall be
applied by Silicon first to the costs, expenses, liabilities, obligations and
attorneys' fees incurred by Silicon in the exercise of its rights under this
Agreement, second to the interest due upon any of the Obligations, and third to
the principal of the Obligations, in such order as Silicon shall determine in
its sole discretion. Any surplus shall be paid to the Borrower or other persons
legally entitled thereto; the Borrower shall remain liable to Silicon for any
deficiency. If Silicon, in its sole discretion, directly or indirectly enters
into a deferred payment or other credit transaction with any purchaser at any
Sale or other disposition of Collateral, Silicon shall have the option,
exercisable at any time, in its sole discretion, of either reducing the
Obligations by the
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<PAGE>
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Silicon of the cash therefor.
6.6. Remedies Cumulative
In addition to the rights and remedies set forth in this Agreement, Silicon
shall have all the other rights and remedies accorded a secured party under the
Uniform Commercial Code of Washington and each state in which any Collateral is
located, and under all other applicable laws, and under any other instrument or
agreement now or in the future entered into between Silicon and the Borrower,
and all of such rights and remedies are cumulative and none is exclusive.
Exercise or partial exercise by Silicon of one or more of its rights or remedies
shall not be deemed an election, nor bar Silicon from subsequent exercise or
partial exercise of any other rights or remedies. The failure or delay of
Silicon to exercise any rights or remedies shall not operate as a waiver
thereof, but all rights and remedies shall continue in full force and effect
until all of the Obligations have been fully paid and performed.
7. GENERAL PROVISIONS
7.1. Notices
All notices to be given under this Agreement shall be in writing and shall
be given either personally or by regular first-class mail, or certified mail
return receipt requested, addressed to Silicon or the Borrower at the addresses
shown in the heading to this Agreement, or at any other address designated in
writing by one party to the other party. In addition, Borrower shall send a
copy of any notice to Silicon to the following address: 915 - 118th Avenue S.E.,
Suite 250, Bellevue, WA 98005, Attn: Jo Surbrugg. All notices shall be deemed
to have been given upon delivery in the case of notices personally delivered to
the Borrower or to Silicon, or at the expiration of two business days following
the deposit thereof in the United States mail, with postage prepaid.
7.2. Severability
Should any provision of this Agreement be held by any court of competent
jurisdiction to be void or unenforceable, such defect shall not affect the
remainder of this Agreement, which shall continue in full force and effect.
7.3. Integration
This Agreement and such other written agreements, documents and instruments
as may be executed in connection herewith are the final, entire and complete
agreement between the Borrower and Silicon and supersede all prior and
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contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. ORAL AGREEMENTS OR ORAL
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF
A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. UNDER OREGON LAW, MOST
AGREEMENTS, PROMISES AND COMMITMENTS MADE BY SILICON AFTER OCTOBER 3, 1989,
CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY
OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN
WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY SILICON TO BE ENFORCEABLE.
7.4. Waivers
The failure of Silicon at any time or times to require the Borrower to
strictly comply with any of the provisions of this Agreement or any other
present or future agreement between the Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent thereto. None of the provisions of this
Agreement or any other agreement now or in the future executed by the Borrower
and delivered to Silicon shall be deemed to have been waived by any act or
knowledge of Silicon or its agents or employees, but only by a specific written
waiver signed by an officer of Silicon and delivered to the Borrower. The
Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general
intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.
7.5. No Liability for Ordinary Negligence
Neither Silicon, nor any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing Silicon shall be
liable for any claims, demands, losses or damages, of any kind whatsoever, made,
claimed, incurred or suffered by the Borrower or any other party through the
ordinary negligence of Silicon, or any of its directors, officers, employees,
agents, attorneys or any other person affiliated with or representing Silicon.
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7.6. Amendment
The terms and provisions of this Agreement may not be waived or amended,
except in a writing executed by the Borrower and a duly authorized officer of
Silicon.
7.7. Time of Essence
Time is of the essence in the performance by the Borrower of each and every
obligation under this Agreement.
7.8. Attorneys' Fees and Costs
The Borrower shall reimburse Silicon for all reasonable attorneys' fees and
fees of other professionals, and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, account debtors; commence,
intervene in, or defend any action or proceeding (including any appeal or
review); initiate any complaint to be relieved of the automatic stay in
bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party
claim, or other claim; examine, audit, copy, and inspect any of the Collateral
or any of the Borrower's books and records; or protect, obtain possession of,
lease, dispose of, or otherwise enforce Silicon's security interest in, the
Collateral and otherwise represent Silicon in any litigation relating to the
Borrower. If either Silicon or the Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its reasonable costs and professionals' fees,
including (but not limited to) reasonable attorneys' fees and costs incurred in
the enforcement of, execution upon, or defense of, any order, decree, award or
judgment, and in any appeal or review by an appellate court. All fees and costs
to which Silicon may be entitled pursuant to this Section shall immediately
become part of the Borrower's Obligations, shall be due on demand, and shall
bear interest at a rate equal to the highest interest rate applicable to any of
the Obligations.
7.9. Benefit of Agreement
The provisions of this Agreement shall be binding upon and inure to the
benefit of the respective successors, assigns, heirs, beneficiaries and
representatives of the parties hereto; provided, however, that the Borrower may
not assign or transfer any of its rights under this Agreement without the prior
written consent of Silicon, and any
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prohibited assignment shall be void. No consent by Silicon to any assignment
shall release the Borrower from its liability for the Obligations. The Borrower
agrees and consents to Silicon's sale or transfer, whether now or later, of one
or more participation interests in the Loans to one or more purchasers, whether
related or unrelated to Silicon. Silicon may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Silicon may have about the Borrower or about any other
matter relating to the Loans and the Borrower hereby waives any rights to
privacy it may have with respect to such matters. The Borrower additionally
waives any and all notices of sale of participation interests, as well as all
notices of any repurchase of such participation interests. The Borrower also
agrees that the purchasers of any such participation interests shall be
considered as the absolute owners of such interests in the Loans and shall have
all the rights granted under the participation agreement or agreements governing
the sale of such participation interests.
7.10. Section Headings; Construction
Section headings are only used in this Agreement for convenience. The
Borrower acknowledges that the headings may not describe completely the subject
matter of the applicable section, and the headings shall not be used in any
manner to construe, limit, define or interpret any term or provision of this
Agreement. This Agreement has been fully reviewed and negotiated between the
parties, and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or the Borrower under any
rule of construction or otherwise.
7.11. Mutual Waiver of Jury Trial
The Borrower and Silicon each hereby waive the right to trial by jury in
any action or proceeding based upon, arising out of, or in any way relating to,
this Agreement or any other present or future instrument or agreement between
Silicon and the Borrower, or any conduct, acts or omissions of Silicon or the
Borrower or any of their directors, officers, employees, agents, attorneys or
any other persons affiliated with Silicon or the Borrower, in all of the
foregoing cases, whether sounding in contract or tort or otherwise.
7.12. Governing Law; Jurisdiction; Venue
This Agreement and all acts and transactions hereunder and all rights and
obligations of Silicon and the Borrower shall be governed by, and construed in
accordance with, the laws of the State of Washington. Any undefined term used
in this Agreement that is defined in the Washington Uniform Commercial Code
shall
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have the meaning assigned to that term in the Washington Uniform Commercial
Code. As a material part of the consideration to Silicon to enter into this
Agreement, the Borrower (i) agrees that all actions and proceedings relating
directly or indirectly hereto shall, at Silicon's option, be litigated in courts
located within Washington, and that the exclusive venue therefor shall be, at
Silicon's option, King County, Washington; (ii) consents to the jurisdiction and
venue of any such court and consents to service of process in any such action or
proceeding by personal delivery or any other method permitted by law; and (iii)
waives any and all rights the Borrower may have to object to the jurisdiction of
any such court, or to transfer or change the venue of any such action or
proceeding.
Borrower:
WATCHGUARD TECHNOLOGIES, INC.
By: /s/ Steven N. Moore
-------------------------
Title: Chief Financial Officer
--------------------------
Silicon:
SILICON VALLEY BANK
By: [signature illegible]
---------------------------
Title: Silicon Valley Bank
----------------------
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EXHIBIT 10.5
LOAN MODIFICATION AGREEMENT
BETWEEN: WatchGuard Technologies, Inc., a Delaware corporation ("Borrower"),
whose address is 316 Occidental Avenue South, Suite 300, Seattle, WA
98104
AND: Silicon Valley Bank ("Silicon"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054
DATE: September 18, 1998
This Loan Modification Agreement is entered into on the above date by
Borrower and Silicon.
1. Background
Borrower entered into a Loan and Security Agreement with Silicon in August,
1997, and an Amended and Restated Loan and Security Agreement dated as of March
20, 1998 (as amended from time to time, the "Loan Agreement"). Capitalized
terms used in this Loan Modification Agreement shall, unless otherwise defined
in this Agreement, have the meaning given to such terms in the Loan Agreement.
Silicon and Borrower are entering into this Agreement to state the terms
and conditions of certain modifications to the Loan Agreement and the Schedule,
as amended prior to the date of this Agreement.
2. Modification to Loan Agreement and Schedule
2.1 The Schedule to the Loan Agreement is hereby deleted and replaced by
the Amended and Restated Schedule to Loan and Security Agreement attached to
this Agreement.
2.2 Borrower acknowledges and agrees that all Obligations, including
without limitation Borrower's obligation to repay amounts advanced by Silicon to
Borrower on the terms of the Loan Agreement and Schedule as modified by this
Loan Modification Agreement, are secured by all liens and security interests
granted by Borrower to Silicon in the Loan Agreement.
<PAGE>
3. Conditions Precedent
This Loan Modification Agreement shall not take effect until Borrower
delivers to Silicon a Certified Resolution of Borrower and such other documents
as Silicon shall reasonably require to give effect to the terms of this Loan
Modification Agreement.
4. No Other Modifications
Except as expressly modified by this Loan Modification Agreement, the terms
of the Loan Agreement, as amended prior to the date of this Loan Modification
Agreement, shall remain unchanged and in full force and effect. Silicon's
agreement to modify the Loan Agreement pursuant to this Loan Modification
Agreement shall not obligate Silicon to make any future modifications to the
Loan Agreement or any other loan document. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of any indebtedness of any Borrower to
Silicon. It is the intention of Silicon and Borrower to retain as liable
parties all makers and endorsers of the Loan Agreement or any other loan
document. Except as provided in the Amended and Restated Schedule to Loan and
Security Agreement attached to this Agreement, no maker, endorser, or guarantor
shall be released by virtue of this Loan Modification Agreement. The terms of
this paragraph shall apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
5. Representations and Warranties
5.1 The Borrower represents and warrants to Silicon that the execution,
delivery and performance of this Agreement are within the Borrower's corporate
powers, and have been duly authorized and are not in contravention of law or the
terms of the Borrower's articles of incorporation, bylaws or of any undertaking
to which the Borrower is a party or by which it is bound.
5.2 The Borrower understands and agrees that in entering into this
Agreement, Silicon is relying upon the Borrower's representations, warranties
and agreements as set forth in the Loan Agreement and other loan documents.
Borrower hereby reaffirms all representations and warranties in the Loan
Agreement, all of which are true as of the date of this Agreement.
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<PAGE>
Borrower:
WATCHGUARD TECHNOLOGIES, INC.
By: /s/ Steven N. Moore
-------------------------
Title: Chief Financial Officer
--------------------------
Silicon:
SILICON VALLEY BANK
By: [signature illegible]
---------------------------
Title: Silicon Valley Bank
----------------------
-3-
<PAGE>
AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: WatchGuard Technologies, Inc.
Date: September _____, 1998
QUICK START LINE OF CREDIT
Credit Limit: Silicon previously extended a Quick Start Line of Credit to
Borrower in the maximum amount of $750,000.
Interest Rate: The interest rate applicable to this Loan was a rate equal to
the "Prime Rate" in effect from time to time, plus 1.50% per
annum. Interest calculations were made on the basis of a 360-
day year and the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by Silicon as its
"prime rate"; it is a base rate upon which other rates
charged by Silicon are based, and it is not necessarily the
best rate available at Silicon. The interest rate applicable
to the Obligations shall change on each date there is a
change in the Prime Rate.
Commitment Fee: Previously collected.
Maturity Date: August 31, 1998. At that time, this Loan was terminated and
all amounts outstanding under this Loan were deemed to be
advanced under the Secured Accounts Receivable Line of
Credit.
SECURED ACCOUNTS RECEIVABLE LINE OF CREDIT
Credit Limit: An amount not to exceed the lesser of: (i) $3,000,000 at any
one time outstanding; or (ii) the amount of the "Borrowing
Base", as defined below. For purposes of this Schedule, the
"Borrowing Base" shall mean the sum of (i) 75% of the Net
Amount of Borrower's eligible domestic accounts receivable,
and (ii) 50% of the Net Amount of Borrower's eligible foreign
accounts receivable. With respect to
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<PAGE>
Borrower's accounts, "Net Amount" means the gross amount of
the account, minus all applicable sales, use, excise and
other similar taxes and minus all discounts, credits and
allowances of any nature granted or claimed. Silicon allowed
Borrower to exceed their availability under the Borrowing
Base by up to $114,000, to an aggregate outstanding balance
under the Secured Accounts Receivable Line of Credit of
$1,000,000, through June 29, 1998; however, as of June 30,
1998, the entire amount outstanding under the Secured
Accounts Receivable Line of Credit was required to be fully
secured and supported by the Borrowing Base. In addition, the
gross value of Borrower's accounts receivable were required
to exceed $1,750,000 through August 31, 1998.
Without limiting the fact that the determination of which
accounts are eligible for borrowing is a matter of Silicon's
discretion, the following shall not be deemed eligible for
borrowing: accounts in which Silicon does not have a first
priority, perfected security interest; accounts outstanding
for more than 90 days from the invoice date, accounts subject
to any contingencies, accounts owing from an account debtor
outside the United States (except as approved in writing by
Silicon), accounts owing from governmental agencies, accounts
owing from one account debtor to the extent they exceed 25%
of the total eligible accounts outstanding, accounts owing
from an affiliate of the Borrower, and accounts owing from an
account debtor to whom the Borrower is or may be liable for
goods purchased from such account debtor or otherwise.
Accounts owing from Otsuka Shokai and SYSCOM will be eligible
as foreign accounts receivable for Borrowing Base purposes,
with an advance rate of 50%. In addition, if more than 50% of
the accounts owing from an account debtor are outstanding
more than 90 days from the invoice date or are otherwise not
eligible accounts, then all accounts owing from that account
debtor shall be deemed ineligible for borrowing.
Interest Rate: The interest rate applicable to this Loan shall be a rate
equal to the "Prime Rate" in effect from time to time, plus
1.00%
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<PAGE>
per annum. Interest calculations shall be made on the basis
of a 360-day year and the actual number of days elapsed.
"Prime Rate" means the rate announced from time to time by
Silicon as its "prime rate"; it is a base rate upon which
other rates charged by Silicon are based, and it is not
necessarily the best rate available at Silicon. The interest
rate applicable to the Obligations shall change on each date
there is a change in the Prime Rate.
Commitment Fee: No new fee.
Maturity Date: March 23, 1999, at which time all unpaid principal and
accrued but unpaid interest shall be due and payable.
SECURED EQUIPMENT TERM LOAN
Credit Limit: An amount not to exceed the lesser of (i) $250,000 at any one
time outstanding; or (ii) the amount of the "Equipment
Borrowing Base", as defined below. For purposes of this
Schedule, the "Equipment Borrowing Base" meant 80% of the
invoice value of equipment purchased by Borrower. Silicon had
no obligation to advance against taxes, freight charges,
installation charges or other similar amounts relating to
Borrower's equipment, whether or not such amounts are
identified on the invoices submitted to Silicon. Equipment
included in the Equipment Borrowing Base were required to be
new equipment, at the time of purchase by Borrower, owned by
Borrower, in good working order, were required to be subject
to any liens in favor of any person or entity other than
Silicon, and were required to be subject to a first priority,
perfected security interest in favor of Silicon. Silicon had
no obligation to make advances against non-standard
equipment, such as tooling, software and custom equipment.
Silicon had no obligation to make advances on this Secured
Equipment Term Loan after March 5, 1998. The Borrower's
indebtedness to Silicon with respect to this Secured
Equipment Term Loan shall be evidenced by this Schedule and
the Loan Agreement, not by a separate
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<PAGE>
promissory note unless required by Silicon.
Borrower shall not have the right to reborrow any amount on
this Secured Equipment Term Loan that has been repaid by
Borrower. The unpaid principal balance owing on this Secured
Equipment Term Loan at any time may be evidenced by Silicon's
internal records, including daily computer print-outs (which
Silicon shall provide to Borrower periodically).
Purpose: Borrowers used the proceeds of this Secured Equipment Term
Loan to finance the purchase of new equipment.
Interest Rate: The interest rate applicable to the Secured Equipment Term
Loan shall be a rate equal to the "Prime Rate" (as defined
above) in effect from time to time, plus 1.5% per annum.
Interest calculations shall be made on the basis of a 360-day
year and the actual number of days elapsed. The interest rate
applicable to the Obligations shall change on each date there
is a change in the Prime Rate.
Amortization: Borrower shall pay Silicon monthly payments of interest only
on the last day each month. In addition, Borrower shall pay
Silicon on the last day of each month, commencing with April
5, 1998, the amount necessary to repay fully the amount of
the Secured Equipment Term Loan in 36 equal monthly payments.
Maturity Date: March 5, 2001, at which time all unpaid principal and accrued
but unpaid interest, fees and other charges shall be due and
payable.
Commitment Fee: No new fee.
SECURED EQUIPMENT TERM LOAN NO. 2
Credit Limit: An amount not to exceed the lesser of (i) $500,000 at
any one time outstanding; or (ii) the amount of the
"Equipment Borrowing Base", as defined below. For
purposes of this Schedule, the "Equipment Borrowing
Base" shall mean 90% of the invoice value of equipment
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<PAGE>
purchased by Borrower. Silicon shall have no obligation to
advance against taxes, freight charges, installation charges
or other similar amounts relating to Borrower's equipment,
whether or not such amounts are identified on the invoices
submitted to Silicon. However, in the case of the $140,000
ONYX System purchase, the Equipment Borrowing Base shall
include software, installation and costs. Equipment to be
included in the Equipment Borrowing Base must be new
equipment, at the time of purchase by Borrower, owned by
Borrower, in good working order, must not be subject to any
liens in favor of any person or entity other than Silicon,
and must be subject to a first priority, perfected security
interest in favor of Silicon. Silicon shall have no
obligation to make advances against non-standard equipment,
such as tooling, software and custom equipment. Silicon shall
have no obligation to make advances on this Secured Equipment
Term Loan No. 2 after December 31, 1998. Silicon shall make
advances under this Secured Equipment Term Loan No. 2 from
time to time, based on invoices and other documentation as
shall be requested by Silicon to support such advances. The
Borrower's indebtedness to Silicon with respect to this
Secured Equipment Term Loan No. 2 shall be evidenced by this
Schedule and the Loan Agreement, not by a separate promissory
note unless required by Silicon.
Borrower shall submit to Silicon such invoices, advance
requests and other information, in form acceptable to
Silicon, as Silicon shall reasonably require from time to
time.
Once the maximum amount of the principal has been advanced
under this Secured Equipment Term Loan No. 2, Borrower is no
longer entitled to further advances on this Loan. Borrower
shall not have the right to reborrow any amount on this
Secured Equipment Term Loan No. 2 that has been repaid by
Borrower. Advances may be requested in writing by Borrower or
an authorized person. Silicon may, but need not, require that
all oral
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<PAGE>
requests be confirmed in writing. The unpaid principal
balance owing on this Secured Equipment Term Loan No. 2 at
any time may be evidenced by Silicon's internal records,
including daily computer print-outs (which Silicon shall
provide to Borrower periodically).
Purpose: Borrowers shall use the proceeds of this Secured Equipment
Term Loan No. 2 to finance the purchase of new equipment.
Interest Rate: The interest rate applicable to the Secured Equipment Term
Loan No. 2 shall be a rate equal to the "Prime Rate" (as
defined above) in effect from time to time, plus 1.00% per
annum. Interest calculations shall be made on the basis of a
360-day year and the actual number of days elapsed. The
interest rate applicable to the Obligations shall change on
each date there is a change in the Prime Rate.
Amortization: Borrower shall pay Silicon monthly payments of interest only
on the last day each month. In addition, Borrower shall pay
Silicon on the last day of each month, commencing with
January 31, 1999, the amount necessary to repay fully the
amount of the Secured Equipment Term Loan No. 2 in 36 equal
monthly payments.
Maturity Date: December 31, 2002, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall be
due and payable.
Commitment Fee: $5,000, which is fully earned and payable at closing.
Prior Names of
Borrower: See attached Exhibit B
Trade Names of
Borrower: See attached Exhibit B
Trademarks of
Borrower: See attached Exhibit B
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<PAGE>
Other Locations
and Addresses: See attached Exhibit B
Material Adverse
Litigation: See attached Exhibit B
Financial
Covenants: The Borrower shall at all times comply with all of the
following covenants, all of which shall be determined and
measured on a monthly basis in accordance with generally
accepted accounting principles, on a consolidated basis with
any subsidiary of Borrower, except as otherwise stated below:
Tangible Net
Worth: Borrower shall at all times maintain a Tangible Net Worth of
not less than $2,000,000.
Profitability: Borrower shall not incur a loss (as defined below) in
excess of $1,750,000 for the quarters ending June 30,
1998 and September 30, 1998, and a loss in excess of
$1,000,000 for the quarter ending December 31, 1998.
For purposes of this paragraph, "loss" means net income
after taxes of less than $0.00, as reported on
Borrower's financial statements.
Quick Ratio: Borrower shall maintain a ratio of Quick Assets (defined
below) to current liabilities less deferred revenue of
not less than 1.50:1.0.
Liquidity: Borrower shall at all times maintain a minimum Term Liquidity
Coverage of at least 1.75:1.0.
Definitions: "Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-I" by Standard &
Poor's Corporation (or a similar rating by a similar rating
organization), certificates of deposit and banker's
acceptances, and accounts receivable (net of allowance for
doubtful accounts).
"Tangible Net Worth" means stockholders' equity plus debt, if
any, that has been subordinated to the Loans in a
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<PAGE>
written subordination agreement on terms satisfactory to
Silicon, and accrued interest thereon, less goodwill,
patents, capitalized software costs, deferred organizational
costs, tradenames, trademarks, and all other assets which
would be classified as intangible assets under generally
accepted accounting principles.
"Term liquidity coverage" means (a) cash + cash equivalents
(readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-I" by Standard &
Poors Corporation or a similar rating by a similar rating
organization, certificates of deposit and banker's
acceptances) + availability under the Secured Accounts
Receivable Line of Credit divided by (b) the outstanding
Secured Equipment Term Loan and Secured Equipment Term Loan
No. 2 balances.
Other Covenants: Borrower shall at all times comply with all of the following
additional covenants:
Banking Relationship. Borrower and its subsidiaries shall at
all times maintain their primary banking relationship with
Silicon. Neither Borrower nor its subsidiaries shall
establish any deposit accounts of any type with any bank or
other financial institution other than Silicon without
Silicon's prior written consent.
Financial Statements and Reports. The Borrower shall provide
Silicon: (a) within 30 days after the end of each month, a
monthly financial statement (consisting of a income statement
and a balance sheet) prepared by the Borrower in accordance
with generally accepted accounting principles; (b) within 20
days after the end of each month, an accounts receivable
aging report and an accounts payable aging report, in such
form as Silicon shall reasonably specify; (c) within 20 days
after the end of each month, a Borrowing Base Certificate in
the form attached to this Agreement as Exhibit A, as Silicon
may reasonably modify such Certificate from time to time,
signed by the Chief Financial Officer of the Borrower; (d)
within 30 days after the end of each month, a
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<PAGE>
Compliance Certificate in such form as Silicon shall
reasonably specify, signed by the Chief Financial Officer of
the Borrower, setting forth calculations showing compliance
(at the end of each such calendar month) with the financial
covenants set forth on the Schedule, and certifying that
throughout such month the Borrower was in full compliance
with all other terms and conditions of this Agreement and the
Schedule, and providing such other information as Silicon
shall reasonably request; and (e) within 90 days following
the end of the Borrower's fiscal year, complete annual CPA-
audited financial statements, such audit being conducted by
independent certified public accountants reasonably
acceptable to Silicon, together with an unqualified opinion
of such accountants.
Conditions to
Closing: Without in any way limiting the discretionary nature of
advances under this Agreement, before requesting any such
advance, the Borrower shall satisfy each of the following
conditions:
1. Loan
Documents: Silicon shall have received this Agreement, the Schedule, a
Warrant in a form satisfactory to Silicon, executed by the
Borrower, and such other loan documents as Silicon shall
require, each duly executed and delivered by the parties
thereto.
2. Documents
Relating
to Authority,
Etc.: Silicon shall have received each of the following in form and
substance satisfactory to it:
(a) Certified Copies of the Articles of Incorporation
and Bylaws of the Borrower;
(b) A Certificate of Good Standing issued by the
Secretary of State of the Borrower's state of incorporation
and such other states as Silicon may reasonably request with
respect to the Borrower;
(c) A certified copy of a Resolution adopted by the
Board of Directors of the Borrower authorizing the execution,
delivery and performance of this Agreement, and any other
documents or certificates to be
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<PAGE>
executed by the Borrower in connection with this transaction;
and
(d) Incumbency Certificates describing the office and
identifying the specimen signatures of the individuals
signing all such loan documents on behalf of the Borrower.
3. Perfection
and Priority
of Security: Silicon shall have received evidence satisfactory to it that
its security interest in the Collateral has been duly
perfected and that such security interest is prior to all
other liens, charges, security interests, encumbrances and
adverse claims in or to the Collateral other than Permitted
Liens, which evidence shall include, without limitation, a
certificate from the appropriate state agencies showing the
due filing and first priority of the UCC Financing Statements
to be signed by the Borrower covering the Collateral.
4. Insurance: Silicon shall have received evidence satisfactory to it that
all insurance required by this Agreement is in full force and
effect, with loss payee designations and additional insured
designations as required by this Agreement.
5. Other
Information: Silicon shall have received such other statements, opinions,
certificates, documents and information with respect to
matters contemplated by this Agreement as it may reasonably
request, all of which must be acceptable to Silicon.
Silicon shall have conducted an examination of the Borrower's
books, records, ledgers, journals, and registers, as Silicon
may deem necessary, and shall be satisfied with the results
of such examination in its sole discretion.
Silicon and the Borrower agree that the terms of this Schedule supplement
the Loan and Security Agreement between Silicon and the Borrower and agree to be
bound by the terms of this Schedule.
Borrower:
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<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
By: /s/ Steven N. Moore
-------------------
Title: Chief Financial Officer
-----------------------
Silicon:
SILICON VALLEY BANK
By: [Signature Illegible]
---------------------
Title: SVP
---
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<PAGE>
EXHIBIT 10.6
WATCHGUARD TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
As Amended and Restated as of May 7, 1997
SECTION 1. PURPOSE
The purpose of this 1996 Stock Option Plan (the "Plan") is to enhance the
long-term shareholder value of WatchGuard Technologies, Inc., a Delaware
corporation (the "Company"), by offering opportunities to employees, directors,
officers, consultants, agents, advisors and independent contractors of the
Company and its Subsidiaries (as defined in Section 2 below) to participate in
the Company's growth and success, and to encourage them to remain in the service
of the Company and its Subsidiaries and to acquire and maintain stock ownership
in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 Award
"Award" means an award or grant made to a Participant pursuant to the Plan,
including awards or grants of Incentive Stock Options or Nonqualified Stock
Options or any combination of the foregoing.
2.2 Board
"Board" means the Board of Directors of the Company.
2.3 Cause
"Cause" means willful misconduct with respect to, or that is harmful to,
the Company or any of its affiliates including, without limitation, dishonesty,
fraud, unauthorized use or disclosure of confidential information or trade
secrets or other misconduct (including, without limitation, conviction for a
felony), in each case as reasonably determined by the Plan Administrator.
2.4 Code
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 Common Stock
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
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2.6 Corporate Transaction
"Corporate Transaction" means any of the following events:
(a) A "Change of Control", which shall be deemed to have occurred if
(i) a tender or exchange offer shall be made and consummated for the ownership
of a majority of the outstanding voting securities of the Company, (ii) the
Company shall be merged with or into or consolidated with another corporation
and as a result of such merger or consolidation less than 66-2/3% of the
outstanding voting securities of the surviving or resulting corporation shall be
owned in the aggregate by the former stockholders of the Company, (iii) the
Company shall sell substantially all of its assets to another entity which is
not a wholly owned subsidiary of the Company, (iv) a person, within the meaning
of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date of adoption
of this Plan) of the Exchange Act shall acquire a majority or more of the
outstanding voting securities of the Company (whether directly or indirectly,
beneficially or of record) or (v) any other event shall take place that the
Board of Directors shall determine constitutes a "Change of Control" for the
purposes hereof. Ownership of voting securities shall take into account and
shall include ownership as determined by applying Rule 13d-3(d)(1)(i) (as in
effect on the date of adoption of this Plan) pursuant to the Exchange Act; or
(b) Adoption of any plan or proposal for the liquidation or
dissolution of the Company.
2.7 Disability
As used in this Plan, the term "total disability" refers to a mental or
physical impairment of the Optionee which is expected to result in death or
which has lasted or is expected to last for a continuous period of 12 months or
more and which causes the Optionee to be unable, in the opinion of the Company
and two independent physicians, to perform his or her duties for the Company and
to be engaged in any substantial gainful activity. Total disability shall be
deemed to have occurred on the first day after the Company and the two
independent physicians have furnished their opinion of total disability to the
Plan Administrator.
2.8 Early Retirement
"Early Retirement" means retirement as that term is defined by the Plan
Administrator from time to time for purposes of the Plan.
2.9 Exchange Act
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.10 Fair Market Value
"Fair Market Value" shall be as established in good faith by the Plain
Administrator or (i) if the Common Stock is listed on the Nasdaq National
Market, the closing price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (ii) if the Common Stock is listed
on the New York Stock Exchange, the closing price for the Common
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Stock as reported in The Wall Street Journal for the New York Stock Exchange--
Composite Transactions (or similar successor consolidated transactions report)
for a single trading day.
2.11 Good Reason
"Good Reason" means the occurrence of any of the following events or
conditions:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction of the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are inconsistent with such status, title, position or
responsibilities; or any removal of the Holder from or failure to reappoint or
reelect the Holder to any of such positions, except in connection with the
termination of the Holder's employment for Cause, for Disability or as a result
of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Company's requiring the Holder (without the Holder's consent)
to be based at any place outside a 35-mile radius of his or her place of
employment prior to a Corporate Transaction, except for reasonably required
travel on the Company's business that is not materially greater than such travel
requirements prior to the Corporate Transaction;
(d) the Company's failure to (i) continue in effect any material
compensation or benefit plan (or the substantial equivalent thereof) in which
the Holder was participating at the time of a Corporate Transaction, including,
but not limited to, the Plan, or (ii) provide the Holder with compensation and
benefits at least equal (in terms of benefit levels and/or reward opportunities)
to those provided for under each employee benefit plan, program and practice as
in effect immediately prior to the Corporate Transaction (or as in effect
following the Corporate Transaction, if greater);
(e) any material breach by the Company of any provision of the Plan;
or
(f) any purported termination of the Holder's employment or service
for Cause by the Company that does not comply with the terms of the Plan.
2.12 Grant Date
"Grant Date" means the date designated in a resolution of the Plan
Administrator as the date an Award is granted. If the Plan Administrator does
not designate a Grant Date in the resolution, the Grant Date shall be the date
the Plan Administrator adopted the resolution.
2.13 Holder
"Holder" means the Participant to whom an Award is granted, or the personal
representative of a Holder who has died.
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2.14 Incentive Stock Option
"Incentive Stock Option" means an option to purchase Common Stock granted
under Section 7 of the Plan with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
2.15 Nonqualified Stock Option
"Nonqualified Stock Option" means an option to purchase Common Stock
granted under Section 7 of the Plan other than an Incentive Stock Option.
2.16 Option
"Option" means the right to purchase Common Stock granted under Section 7
of the Plan.
2.17 Participant
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary who has been designated
by the Plan Administrator as eligible to participate in the Plan.
2.18 Plan Administrator
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1 of the Plan.
2.19 Retirement
"Retirement" means retirement as of the individual's normal retirement date
under the Company's 401(k) plan or other similar plan applicable to salaried
employees.
2.20 Subsidiary
"Subsidiary," except as expressly provided otherwise, means any entity that
is directly or indirectly controlled by the Company or in which the Company has
a significant ownership interest, as determined by the Plan Administrator.
SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. The Board may delegate the responsibility for
administering the Plan with respect to designated classes of eligible
Participants to different committees, subject to such limitations as the Board
deems appropriate. Committee members shall serve for such term as the Board may
determine,
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subject to removal by the Board at any time. The composition of any
committee responsible for administering the Plan with respect to officers and
directors of the Company who are subject to Section 16 of the Exchange Act with
respect to securities of the Company shall comply with the requirements of Rule
16b-3 under Section 16(b) of the Exchange Act.
3.2 Administration and Interpretation by the Plan Administrator
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares
Subject to adjustment from time to time as provided in Section 11.1 of the
Plan, a maximum of 3,867,493 shares of Common Stock shall be available for
issuance under the Plan. Shares issued under the Plan shall be drawn from
authorized and unissued shares.
4.2 Limitations
Subject to adjustment from time to time as provided in Section 11.1 of the
Plan, not more than 250,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual Participant in the aggregate in any one fiscal
year of the Company, such limitation to be applied in a manner consistent with
the requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
4.3 Reuse of Shares
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares), including,
without limitation, in connection with the cancellation of an Award and the
grant of a replacement Award, shall again be available for issuance in
connection with future grants of Awards under the Plan.
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SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and key
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services or other benefits to the
Company or its Subsidiaries.
SECTION 6. AWARDS
6.1 Form and Grant of Awards
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards
may consist of Incentive Stock Options and/or Nonqualified Stock Options.
Awards may be granted singly or in combination.
6.2 Acquired Company Awards
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other entities ("Acquired Entities") (or
the parent of the Acquired Entity) and the new Award is substituted, or the old
award is assumed, by reason of a merger, consolidation, acquisition of property
or of stock, reorganization or liquidation (the "Acquisition Transaction"). In
the event that a written agreement pursuant to which the Acquisition Transaction
is completed is approved by the Board and said agreement sets forth the terms
and conditions of the substitution for or assumption of outstanding awards of
the Acquired Entity, said terms and conditions shall be deemed to be the action
of the Plan Administrator without any further action by the Plan Administrator,
except as may be required for compliance with Rule 16b-3 under the Exchange Act,
and the persons holding such Awards shall be deemed to be Participants and
Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 Grant of Options
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 Option Exercise Price
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options.
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7.3 Term of Options
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 Exercise of Options
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option will become exercisable according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
<TABLE>
<CAPTION>
Period of Optionee's Continuous Employment or
Service With the Company or Its Subsidiaries Percent of Total Option
From the Grant Date That Is Exercisable
- ----------------------------------------------------- ------------------------------------------------
<S> <C>
After 12 months 25%
Each additional month thereafter 2.0833%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5 of the Plan. The
Plan Administrator may determine that an Option may not be exercised as to less
than 100 shares at any one time (or the lesser number of remaining shares
covered by the Option).
7.5 Payment of Exercise Price
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check, except that the Plan Administrator in its sole
discretion may, either at the time the Option is granted or at any time before
it is exercised and subject to such limitations as the Plan Administrator may
determine, authorize payment in cash and/or one or more of the following
alternative forms: (i) Common Stock already owned by the Holder for at least
six months (or any shorter period necessary to avoid a charge to the Company's
earnings for financial reporting purposes) having a Fair Market Value on the day
prior to the exercise date equal to the aggregate Option exercise price; (ii) a
promissory note authorized pursuant to Section 9 of the Plan; (iii) if the
Common Stock is publicly traded, delivery of a properly executed exercise
notice, together with irrevocable instructions, to (a) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(b) the
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Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board; or (iv) such other consideration as the Plan Administrator may
permit.
7.6 Post-Termination Exercises
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time. In case of termination of
the Holder's employment or services other than by reason of death or Cause, the
Option shall be exercisable, to the extent of the number of shares purchasable
by the Holder at the date of such termination, only: (i) within one year if the
termination of the Holder's employment or services are coincident with
Retirement, Early Retirement at the Company's request or Disability or (ii)
within three months after the date the Holder ceases to be an employee,
director, officer, consultant, agent, advisor or independent contractor of the
Company or a Subsidiary if termination of the Holder's employment or services is
for any reason other than Retirement, Early Retirement at the Company's request
or Disability, but in no event later than the remaining term of the Option. Any
Option exercisable at the time of the Holder's death may be exercised, to the
extent of the number of shares purchasable by the Holder at the date of the
Holder's death, by the personal representative of the Holder's estate entitled
thereto at any time or from time to time within one year after the date of
death, but in no event later than the remaining term of the Option. In case of
termination of the Holder's employment or services for Cause, the Option shall
automatically terminate upon first notification to the Holder of such
termination, unless the Plan Administrator determines otherwise. If a Holder's
employment or services with the Company are suspended pending an investigation
of whether the Holder shall be terminated for Cause, all the Holder's rights
under any Option likewise shall be suspended during the period of investigation.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
Unless the Plan Administrator determines otherwise, a leave of absence approved
in accordance with Company procedures shall not be considered a termination of
employment or services, except that with respect to Incentive Stock Options such
leave of absence shall be subject to any requirements of Section 422 of the
Code.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 Dollar Limitation
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time
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<PAGE>
during any calendar year (under the Plan and all other stock option plans of the
Company) exceeds $100,000, such portion in excess of $100,000 shall be treated
as a Nonqualified Stock Option. In the event the Participant holds two or more
such Options that become exercisable for the first time in the same calendar
year, such limitation shall be applied on the basis of the order in which such
Options are granted.
8.2 10% Stockholders
If a Participant owns 10% or more of the total voting power of all classes
of the Company's stock, then the exercise price per share of an Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Grant Date and the Option term shall not exceed five years.
For purposes of Section 8.2, in determining stock ownership, an employee
shall be deemed to own the shares owned, directly or indirectly, by or for his
or her brothers, sisters, spouse, ancestors and lineal descendants. Shares
owned, directly or indirectly, by or for a corporation, partnership, estate or
trust shall be deemed to be owned proportionately by or for its stockholders,
partners or beneficiaries. If an employee or a person related to the employee
owns an unexercised option or warrant to purchase shares of the Company, the
shares subject to that portion of the option or warrant which is unexercised
shall not be counted in determining stock ownership. For purposes of this
Section 8.2, shares owned by an employee shall include all shares actually
issued and outstanding immediately before the grant of the incentive stock
option to the employee.
8.3 Eligible Employees
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3 of the Plan, "parent corporation" and
"subsidiary corporation" shall have the meanings attributed to those terms for
purposes of Section 422 of the Code.
8.4 Term
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 Exercisability
An Option designated as an Incentive Stock Option must be exercised within
three months after termination of employment for reasons other than death to
qualify for Incentive Stock Option tax treatment, except that in the case of
termination of employment due to Disability, such Option must be exercised
within one year after such termination.
8.6 Taxation of Incentive Stock Option
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Participant must hold the shares issued upon
the exercise of an Incentive Stock Option for two years after the date of grant
of the Incentive Stock Option and
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<PAGE>
one year from the date of exercise. A Participant may be subject to the
alternative minimum tax at the time of exercise of an Incentive Stock Option.
The Plan Administrator may require a Participant to give the Company prompt
notice of any disposition of shares acquired by the exercise of an Incentive
Stock Option prior to the expiration of such holding periods.
SECTION 9. LOANS, LOAN GUARANTEES AND INSTALLMENT PAYMENTS
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator in its sole discretion may authorize, either at
the Grant Date or at any time before the acquisition of Common Stock pursuant to
the Award, (i) the extension of a loan to the Holder by the Company, (ii) the
payment by the Holder of the purchase price, if any, of the Common Stock in
installments, or (iii) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or
guarantees, including the interest rate and terms of repayment, will be subject
to the Plan Administrator's discretion. Loans, installment payments and
guarantees may be granted with or without security. The maximum credit
available is the purchase price, if any, of the Common Stock acquired plus the
maximum federal and state income and employment tax liability that may be
incurred in connection with the acquisition.
SECTION 10. ASSIGNABILITY
No Option granted under the Plan may be assigned or transferred by the
Holder other than by will or by the laws of descent and distribution, and during
the Holder's lifetime, such Options may be exercised only by the Holder.
Notwithstanding the foregoing, and to the extent permitted by Rule 16b-3 under
the Exchange Act and Section 422 of the Code, the Plan Administrator, in its
sole discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Options to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Holder's death.
SECTION 11. ADJUSTMENTS
11.1 Adjustment of Shares
In the event that at any time or from time to time a stock dividend, stock
split, spin-off, combination or exchange of shares, recapitalization, merger,
consolidation, distribution to stockholders other than a normal cash dividend,
or other change in the Company's corporate or capital structure results in (i)
the outstanding shares, or any securities exchanged therefor or received in
their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (ii) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator,
in its sole discretion, shall make such equitable adjustments as it shall deem
appropriate in the circumstances in (a) the maximum number of and class of
securities subject to the Plan as set forth in Section 4.1 of the Plan, (b) the
maximum number and class of securities that may be made subject to Awards to any
individual Participant
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<PAGE>
as set forth in Section 4.2 of the Plan, and (c) the number and class of
securities that are subject to any outstanding Award and the per share price of
such securities, without any change in the aggregate price to be paid therefor.
The determination by the Plan Administrator as to the terms of any of the
foregoing adjustments shall be conclusive and binding.
11.2 Corporate Transaction
Except as otherwise provided in the instrument that evidences the Award, in
the event of any Corporate Transaction, each Option that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested, except that such acceleration will not occur if in the
opinion of the Company's accountants it would render unavailable "pooling of
interest" accounting for a Corporate Transaction that would otherwise qualify
for such accounting treatment. Except as otherwise provided in the instrument
that evidences the Award (except that this exception shall not apply if in the
opinion of the Company's accountants application of this exception would render
unavailable "pooling of interest" accounting for a Corporate Transaction that
would otherwise qualify for such accounting treatment), such Award shall not so
accelerate if and to the extent that such Award is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a comparable award for the purchase of
shares of the capital stock of the successor corporation or its parent
corporation. The determination of Award comparability shall be made by the Plan
Administrator, and its determination shall be conclusive and binding. All such
Awards shall terminate and cease to remain outstanding immediately following the
consummation of the Corporate Transaction, except to the extent assumed by the
successor corporation or its parent corporation. Any such Awards that are
assumed or replaced in the Corporate Transaction and do not otherwise accelerate
at that time shall be accelerated in the event the Holder's employment or
services should subsequently terminate within two years following such Corporate
Transaction, unless such employment or services are terminated by the Company
for Cause or by the Holder voluntarily without Good Reason.
11.3 Further Adjustment of Awards
Without limiting the preceding Section 11.2 of the Plan, the Plan
Administrator shall have the discretion, exercisable at any time before a sale,
merger, consolidation, reorganization, liquidation or change in control of the
Company, as defined by the Plan Administrator, to take such further action as it
determines to be necessary or advisable, and fair and equitable to Participants,
with respect to Awards. Such authorized action may include (but shall not be
limited to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on, Awards so as to provide for earlier, later,
extended or additional time for exercise, payment or settlement or lifting
restrictions, differing methods for calculating payments or settlements,
alternate forms and amounts of payments and settlements and other modifications,
and the Plan Administrator may take such actions with respect to all
Participants, to certain categories of Participants or only to individual
Participants. The Plan Administrator may take such actions before or after
granting Awards to which the action relates and before or after any
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<PAGE>
public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for such
action.
11.4 Limitations
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 12. WITHHOLDING OF TAXES
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant or exercise of any Award. In such instances, the Plan Administrator may,
in its sole discretion and subject to the Plan and applicable law, permit the
Holder to satisfy withholding obligations, in whole or in part, by paying cash,
by electing to have the Company withhold shares of Common Stock or by
transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation.
SECTION 13. AMENDMENT AND TERMINATION OF PLAN
13.1 Amendment of Plan
The Plan may be amended by the stockholders of the Company. The Board may
also amend the Plan in such respects as it shall deem advisable; however, to the
extent required for compliance with Rule 16b-3 under the Exchange Act, Section
422 of the Code or any applicable law or regulation, shareholder approval will
be required for any amendment that will (i) increase the total number of shares
as to which Options may be granted under the Plan, (ii) materially modify the
class of persons eligible to receive Awards, (iii) materially increase the
benefits accruing to Participants under the Plan, or (iv) otherwise require
shareholder approval under any applicable law or regulation.
13.2 Termination of Plan
The Company's stockholders or the Board may suspend or terminate the Plan
at any time. The Plan will have no fixed expiration date; provided, however,
that no Incentive Stock Options may be granted more than 10 years after the
Plan's effective date.
13.3 Consent of Holder
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, alter or impair any rights or
obligations under any Award theretofore granted under the Plan.
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<PAGE>
SECTION 14. GENERAL
14.1 Notification
The Plan Administrator shall promptly notify a Participant of an Award, and
a written grant shall promptly be executed and delivered by or on behalf of the
Company.
14.2 Continued Employment or Services; Rights in Awards
Neither the Plan, participation in the Plan as a Participant nor any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Participant or employee of the Company any right to be retained in the employ of
the Company or limit the Company's right to terminate the employment or services
of the Participant.
14.3 Registration; Certificates for Shares
The Company shall be under no obligation to any Participant to register for
offering or resale under the Securities Act or register or qualify under state
securities laws, any shares of Common Stock, security or interest in a security
paid or issued under, or created by, the Plan. The Company may issue
certificates for shares with such legends and subject to such restrictions on
transfer and stop-transfer instructions as counsel for the Company deems
necessary or desirable for compliance by the Company with federal and state
securities laws.
14.4 No Rights as a Shareholder
No Option shall entitle the Holder to any dividend, voting or other right
of a shareholder unless and until the date of issuance under the Plan of the
shares that are the subject of such Awards, free of all applicable restrictions.
14.5 Compliance With Laws and Regulations
It is the Company's intention that, so long as any of the Company's equity
securities are registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, the Plan shall comply in all respects with Rule 16b-3 under the Exchange
Act and, if any Plan provision is later found not to be in compliance with such
Rule 16b-3, the provision shall be deemed null and void, and in all events the
Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
Notwithstanding anything in the Plan to the contrary, the Board, in its sole
discretion, may bifurcate the Plan so as to restrict, limit or condition the use
of any provision of the Plan to Participants who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Participants. Additionally, in
interpreting and applying the provisions of the Plan, any Option granted as an
Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
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<PAGE>
14.6 No Trust or Fund
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
14.7 Severability
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 15. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's stockholders at any time within 12
months of such adoption or, if earlier, and to the extent required for
compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of
the Company's stockholders after adoption of the Plan by the Board.
Adopted by the Board on March 7, 1996 and approved by the Company's
stockholders on March 7, 1996 and adjustments made due to the Company's
reincorporation in Delaware on May 5, 1997 and to the Company's name change on
August 7, 1997.
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<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/ Date of Shareholder
Adjustment Section Effect of Amendment Approval
- ---------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Sept. 27, 1996 4.1 increase plan pool Sept. 27, 1996
from 450,000 to
1,500,000 shares
March 30, 1997 4.1 increase plan pool March 30, 1997
from 1,500,000 to
2,500,000 shares
May 7, 1997 Conform to Delaware N/A
corporate law
May 15, 1997 4.1 increase plan pool Aug. 4, 1997
from 2,500,000 to
3,867,493 shares
</TABLE>
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<PAGE>
EXHIBIT 10.7
Prototype Cash or Deferred
Profit-Sharing Plan #001
STANDARDIZED
ADOPTION AGREEMENT
PROTOTYPE CASH OR DEFERRED
PROFIT-SHARING PLAN AND TRUST
Sponsored by
AMERICAN FUNDS DISTRIBUTORS, INC.
The Employer named below hereby establishes a Cash or Deferred Profit-Sharing
Plan for eligible Employees as provided in this Adoption Agreement and the
accompanying Basic Prototype Plan and Trust/Basic Plan Document #03 (the
"Plan"). If multiple Employers are adopting the Plan, complete Section l based
on the lead Employer. Additional Employers may adopt this Plan by attaching
executed signature pages to the back of the Employer's Adoption Agreement.
1. EMPLOYER INFORMATION
Employer's Name: WatchGuard Technologies, Inc.
Address: 316 Occidental Ave. S.
Suite 200
Seattle, WA 98104
Principal Address (if different):
Telephone Number: (206)521-8360
Tax I.D. Number: 91-1712427
Employer's Fiscal Year: December 31
Form of Business:
[_] Sole Proprietor [_] Partnership [_] S Corporation
[X] Corporation [_] Other
Member of:
[_] Controlled Group [_] Affiliated Service Group
[_] Group of trades or businesses under common control
Date of Incorporation: February 14, 1996
Name of Plan: WatchGuard Retirement Plan
Three Digit Plan Number for Annual 001
Return/Report:
2. EFFECTIVE DATE
2.(a) This is a new Plan having an effective date of September 1, 1998.
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
2.(b) This is an amended Plan.
The effective date of the original plan was _______________________.
The effective date of the amended Plan is _________________________.
2.(c) If different from above, the Effective Date for the Plan's
Elective Deferral provisions shall be ______________________.
3.(e) "Limitation Year" The 12-consecutive month period commencing on
January 1 and ending on December 31. If applicable, the Limitation
Year will be a short Limitation Year commencing on September 1,
1998 and ending on December 31, 1998. Thereafter, the Limitation
Year shall end on the date last specified.
3.(f) "Net Profit"
[X] (i) Not applicable. Profits will not be required for any
contributions to the Plan.
[_] (ii) As defined in paragraph l.50 of the Plan.
3.(h) "Plan Year" The 12-consecutive month period commencing on January 1
and ending on December 31. If applicable, the Plan Year will be a
short Plan Year commencing on September 1, 1998 and ending on
December 31, 1998. Thereafter, the Plan Year shall end on the date
last specified.
3.(g) "Qualified Early Retirement Age" For purposes of making
distributions under the provisions of a Qualified Domestic Relations
Order, the Plan's Qualified Early Retirement Age with regard to the
Participant against whom the Order is entered shall be the date the
Order is determined to be qualified. This will only allow payout to
the alternate payee(s).
3.(i) "Qualified Joint and Survivor Annuity" The safe-harbor provisions of
paragraph 8.7 of the Plan [X] are [ ] are not applicable. If not
applicable, the survivor annuity shall be ___% (50%, 66-2/3%, 75% or
100%) of the annuity payable during the lives of the Participant and
Spouse. If no answer is specified, 50% will be used.
3.(j) "Taxable Wage Base" [paragraph 1.81]
[_] (i) Not Applicable- Plan is not integrated with Social
Security.
[X] (ii) The maximum earnings considered wages for such Plan Year
under Code Section 3121(a).
[_] (iii) ___% (not more than 100%) of the amount considered wages
for such Plan Year under Code Section 3121(a).
[_] (iv) $__________, provided that such amount is not in excess
of the amount determined under subsection (ii) above.
[_] (v) For the 1989 Plan Year $10,000. For all subsequent Plan
Years, 20% of the maximum earnings considered wages for
such Plan Year under Code Section 3121(a).
4. ELIGIBILITY REQUIREMENTS
Employees meeting the following Service and Age requirements shall be
eligible to participate in the Plan:
4.(a) Service: N/A [not more than one (1)] Year of Service. [A Year of
Service is a 12-consecutive month period during which a Participant
is credited with 1,000 hours.] If the Year of Service selected is a
fractional year, an Employee will not be required to complete any
specified number of Hours of Service to receive credit for such
fractional year.
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<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
4.(b) Age: Attainment of age 18 (not more than age 21).
4.(c) Initial Participants: Employees employed on the Plan's Effective
Date [ ] do [X] do not have to satisfy the eligibility requirements
specified above.
NOTE: Employees covered under the terms of a collective bargaining
agreement (the agreement should indicate that retirement benefits
were the subject of good faith bargaining and the agreement should
benefit Employees of whom two percent or less are professionals, as
deemed in Section 1.410(b)-9 of the Regulations) between the
Employer and Employee representatives (does not include any
organization more than half of whose members are Employees who are
owners, officers, or executives of the Employer) and nonresident
aliens [within the meaning of Section 770(b)(1)(B)] with no U.S.
income [within the meaning of Section 911(d)(2)] from the Employer
which constitutes income from sources within the United States
[within the meaning of Section 86(a)(3)] are excluded from Plan
participation.
3. DEFINITIONS
3.(a) "Allocation Date(s)" Allocations to Participant Accounts will be
done in accordance with Article V of the Plan:
[_] (i) daily. [_] (iv) semi-annually.
[X] (ii) monthly. [_] (v) annually.
[_] (iii) quarterly.
3.(b) "Compensation" Compensation shall be determined on the basis of the
Plan Year.
Compensation [X] shall [ ] shall not include Employer contributions
made pursuant to a Salary Savings Agreement, for this Plan or any
other plan, which are not includable in the gross income of the
Employee for the reasons indicated in the definition of Compensation
at paragraph 1.13 of the Plan.
Compensation [X] shall [ ] shall not be limited to Compensation
earned while a Participant is in the Plan. Compensation shall be
determined on the basis of the following safe-harbor definition of
Compensation in IRS Regulation Section 1.414(s)-l(c):
[X] (i) Code Section 3401(a) - W-2 income subject to income tax
withholding.
[_] (ii) Code Section 415 - W-2 income, share of profits and
other taxable income.
3.(c) "Entry Date"
[_] (i) The first day of the Plan Year nearest the date on which
an Employee meets the eligibility requirements.
[_] (ii) The earlier of the first day of the Plan Year or the
first day of the seventh month of the Plan Year
coinciding with or following the date on which an
Employee meets the eligibility requirements.
[_] (iii) The first day of the Plan Year following the date on
which the Employee meets the eligibility requirements.
If this election is made, the Service requirement at
4(a) may not exceed 1/2 year and the age requirement at
4(b) may not exceed 20 1/2.
[_] (iv) The first day of the month or if earlier the first day
of the Plan Year coinciding with or following the date
on which an Employee meets the eligibility requirements.
[X] (v) The first day of the Plan Year, or the first day of the
fourth, seventh or tenth month of the Plan Year
coinciding with or following the date on
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<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
which an Employee meets the eligibility requirements.
3.(d) Hours of Service" shall be determined on the basis of the method
selected below. Only one method may be selected. The method selected
shall be applied to all Employees covered under the Plan as follows:
[_] (i) on the basis of actual hours for which an Employee is
paid or entitled to payment.
[_] (ii) on the basis of days worked.
An Employee shall be credited with ten (10) Hours of
Service if under paragraph 1.43 of the Plan such
Employee would be credited with at least one (1) Hour of
Service during the day.
[_] (iii) on the basis of weeks worked.
An Employee shall be credited with forty-five (45) Hours
of Service if under paragraph 1.43 of the Plan such
Employee would be credited with at least one (1) Hour of
Service during the week.
[_] (iv) on the basis of semi-monthly payroll periods.
An Employee shall be credited with ninety-five (95)
Hours of Service if under paragraph 1.43 of the Plan
such Employee would be credited with at least one (1)
Hour of Service during the semi-monthly payroll period.
[X] (v) on the basis of months worked.
An Employee shall be credited with one-hundred-ninety
(190) Hours of Service if under paragraph 1.43 of the
Plan such Employee would be credited with at least one
(1) Hour of Service during the month.
[_] (vi) on the basis of Elapsed Time, as provided in Article XVI
of the Plan.
5. RETIREMENT AGES
If the Employer imposes a requirement that Employees retire upon reaching a
specified age, the Normal Retirement Age selected below may not exceed the
Employer-imposed mandatory retirement age.
5.(a) Normal Retirement Age shall be 65 (not to exceed age 65).
5.(b) Normal Retirement Age shall be the later of attaining age _____ (not
to exceed age 65) or the _____ (not to exceed the 5th) anniversary
of the first day of the first Plan Year in which the Participant
commenced participation in the Plan.
5.(c) Early Retirement Age:
[X] (i) Not applicable.
[_] (ii) The Plan shall have an Early Retirement Age of _____
(not less than 55) and completion of _____ Years of
Service.
6. EMPLOYEE CONTRIBUTIONS
[X] 6.(a) Participants shall be permitted to make Elective
Deferrals in any amount from 2% up to 15% of their
Compensation. Participants may amend their Salary
Savings Agreements to change the contribution percentage
as provided below:
[X] (i) on the first day of each month of the Plan Year.
[_] (ii) on the first day of the Plan Year and on the first day
of the fourth, seventh, and tenth months of the Plan
Year.
[_] (iii) on the first day of the Plan Year and on the first day
of the seventh month of
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<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
the Plan Year.
[_] 6(b) Participants shall be required to make after-tax
Voluntary Contributions as follows (Thrift Savings
Plan):
[_] (i) in any amount from ___% up to ___% of Compensation.
[_] (ii) a percentage determined by the Employee on his or her
enrollment form.
NOTE: Elective Deferrals may not be recharacterized as Voluntary
Contributions for purposes of the Average Deferral Percentage (ADP)
Test. The ADP Test will apply to contributions under (a) above. The
Average Contribution Percentage (ACP) Test will apply to
contributions under (b) above, and may apply to (a).
7. EMPLOYER CONTRIBUTIONS AND ALLOCATION
The Employer shall make contributions to the Plan in accordance with the
formula or formulas selected below. The Employer's contribution shall be
subject to the limitations contained in Articles III and X of the Plan.
For this purpose, a contribution for a Plan Year shall be limited for the
Limitation Year which ends with or within such Plan Year. Also, the
integrated allocation formulas below are for Plan Years beginning in 1989
and later. The Employer's allocation for earlier years shall be as
specified in its Plan prior to amendment for the Tax Reform Act of 1986.
7.(a) Profits Requirement: Current or Accumulated Net Profits are not
required unless otherwise indicated below:
[X] (i) Matching Contributions.
[_] (ii) Qualified Non-Elective Contributions.
[_] (iii) Discretionary contributions.
NOTE: Elective Deferrals can always be contributed regardless of profits.
Complete this Section in conjunction with Section 3(f).
[X] 7.(b) Salary Savings Agreement:
The Employer shall contribute and allocate to each Participant's
account an amount equal to the amount withheld from the Compensation
of such Participant pursuant to his or her Salary Savings Agreement.
If applicable, the maximum percentage is specified in Section 6
above. An Employee who has terminated his or her election under the
Salary Savings Agreement other than for hardship reasons may not
make another Elective Deferral:
[_] (i) until the first day of the next Plan Year.
[X] (ii) for a period of 1 month(s) (not to exceed 12 months).
[X] 7.(c) Matching Contribution: [See Sections (g) and (h)]:
[_] (i) Percentage Match On Elective Deferrals: The Employer
shall contribute and allocate to each eligible
Participant's account an amount equal to ___% of the
amount contributed and allocated in accordance with
Section 7(b) above. The Employer shall not match
Participant Elective Deferrals as provided above in
excess of $___ or in excess of ___ % of the
Participant's Compensation.
[_] (ii) Percentage Match On Voluntary Contributions: The
Employer shall contribute and allocate to each eligible
Participant's account an amount equal to ___% of the
amount of Voluntary Contributions (if provided for under
Section 6(b) above) made in accordance with paragraph
4.1 or 4.7 of the Plan. The Employer shall not match
Participant Voluntary
-5-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
Contributions in excess of $___ or in excess of ___% of
the Participant's Compensation.
[X] (iii) Discretionary Match: The Employer shall contribute and
allocate to each eligible Participant's account a
percentage of the Participant's Elective Deferral
contributed and allocated in accordance with Section
7(b) above. The Employer shall set such percentage prior
to the end of the Plan Year. The Employer shall not
match Participant Elective Deferrals in excess of
$__________ or in excess of 6% of the Participant's
Compensation.
[X] (iv) Qualified Match: Matching Contributions will be treated
as Qualified Matching Contributions to the extent
specified below:
[_] (A) all Matching Contributions.
[_] (B) none.
[X] (C) the amount necessary to meet the [ ] ADP
Test, [ ] the ACP Test, [X] both the ADP and
ACP Tests.
[X] (v) Eligibility for Matching Contributions: Matching
Contributions, whether or not Qualified, will only be
made on Employee Contributions:
[_] (A) not withdrawn prior to the end of the
valuation period.
[_] (B) not withdrawn prior to the end of the Plan
Year.
[X] (C) without regard to their withdrawal.
[X] (vi) Matching Contribution Computation Period: The time
period upon which Matching Contributions will be based
shall be:
[_] (A) weekly.
[_] (B) bi-weekly.
[_] (C) semi-monthly.
[X] (D) monthly.
[_] (E) quarterly
[_] (F) semi-annually.
[_] (G) annually.
[X] 7.(d) Qualified Non-Elective Employer Contribution - [See Sections (g) and
(h)]: These contributions are fully vested when contributed. The
Employer shall have the right to make an additional discretionary
contribution which shall be allocated to each eligible Employee in
proportion to his or her Compensation as a percentage of the
Compensation of all eligible Employees. This part of the Employer's
contribution and the allocation thereof shall be unrelated to any
Employee contributions made hereunder. The amount of Qualified Non-
Elective Contributions taken into account for purposes of meeting
the ADP or ACP Test requirements is:
[_] (i) all such Qualified Non-Elective Contributions.
[_] (ii) none.
[X] (iii) the amount necessary to meet [ ] the ADP Test, [ ] the
ACP Test, [X] both the ADP and ACP Tests.
Qualified Non-Elective Contributions will be allocated to:
[_] (iv) all Employees eligible to participate.
[X] (v) only non-Highly Compensated Employees eligible to
participate.
[_] 7.(e) Additional Employer Contribution Other Than Qualified Non-Elective
Contributions -Non-Integrated [See Sections (g) and (h)]:
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<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
The Employer shall have the right to make an additional
discretionary contribution which shall be allocated to each eligible
Employee in proportion to his or her Compensation as a percentage of
the Compensation of all eligible Employees. This part of the
Employer's contribution and the allocation thereof shall be
unrelated to any Employee contributions made hereunder.
[X] 7(f) Additional Employer Contribution - Integrated Allocation Formula
[See Sections (g) and (h)]:
The Employer shall have the right to make an additional
discretionary contribution. The Employer's contribution for the Plan
Year plus any forfeitures shall be allocated to the accounts of
eligible Participants as follows:
(i) First, to the extent contributions and forfeitures are
sufficient, all Participants will receive an allocation equal
to 3% of their Compensation.
(ii) Next, any remaining Employer Contributions and forfeitures will
be allocated to Participants who have Compensation in excess of
the Taxable Wage Base (excess Compensation). Each such
Participant will receive an allocation in the ratio that his or
her excess Compensation bears to the excess Compensation of all
Participants. Participants may only receive an allocation of 3%
of excess Compensation.
(iii)Next, any remaining Employer contributions and forfeitures will
be allocated to all Participants in the ratio that their
Compensation plus excess Compensation bears to the total
Compensation plus excess Compensation of all Participants.
Participants may only receive an allocation of up to 2.7% of
their Compensation plus excess Compensation, under this
allocation method. If the Taxable Wage Base defined at Section
3(j) is less than or equal to the greater of $10,000 or 20% of
the maximum, the 2.7% need not be reduced. If the amount
specified is greater than the greater of $10,000 or 20% of the
maximum Taxable Wage Base, but not more than 80%, 2.7% must be
reduced to 1.3%. If the amount specified is greater than 80%
but less than 100% of the maximum Taxable Wage Base, the 2.7%
must be reduced to 2.4%.
NOTE: If the Plan is not Top-Heavy or if the Top-Heavy minimum
contribution or benefit is provided under another Plan [see
Section 11(c)(ii)] covering the same Employees, subsections (i)
and (ii) above may be disregarded and 5.7%, 4.3% or 5.4% may be
substituted for 2.7%, 1.3% or 2.4% where it appears in (iii)
above.
(iv) Next, any remaining Employer contributions and forfeitures will
be allocated to all Participants (whether or not they received
an allocation under the preceding paragraphs) in the ratio that
each Participant's Compensation bears to all Participants'
Compensation.
NOTE: Only one plan maintained by the Employer may be integrated with
Social Security.
7.(g) Allocation of Excess Amounts (Annual Additions):
In the event that the allocation formula above results in an Excess
Amount, such excess shall be distributed to the Participant to the
extent such excess does not exceed the Participant's Elective
Deferrals and non-deductible Required Voluntary Contributions. To
the extent the Excess Amount exceeds the sum of the aforementioned
Employee contributions, such excess shall be:
[_] (i) placed in a suspense account accruing no gains or losses
for the benefit of the Participant.
[X] (ii) reallocated as additional Employer contributions to all
other Participants
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<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
to the extent that they do not have any Excess Amount.
7.(h) Minimum Employer Contribution Under Top-Heavy Plans:
For any Plan Year during which the Plan is Top-Heavy, the sum of the
contributions and forfeitures as allocated to eligible Employees
under Sections 7(e), 7(f) and 9 of this Adoption Agreement shall not
be less than the amount required under paragraph 14.2 of the Plan.
Top-Heavy minimums will be allocated to:
[X] (i) all eligible Participants.
[_] (ii) only eligible non-Key Employees who are Participants.
7.(i) Return of Excess Contributions and/or Excess Aggregate
Contributions:
In the event that one or more Highly Compensated Employees is
subject to both the ADP and ACP tests and the sum of such tests
exceeds the Aggregate Limit, the limit will be satisfied by reducing
the ADP and/or ACP of the affected Highly Compensated Employees.
8. ALLOCATIONS TO TERMINATED EMPLOYEES
(This option is not applicable if Hours of Service are determined on
the basis of Elapsed Time selected under Section 3(d)(vi) above.)
8.(a) For Plan Years beginning prior to 1993:
[_] (i) the Employer will not allocate Employer-related
contributions to any Participant who terminates
employment during the Plan Year.
[_] (ii) the Employer will allocate Employer-related
contributions to Employees who terminate during the Plan
Year as a result of:
[ ] (A) retirement.
[ ] (B) Disability.
[ ] (C) death.
[ ] (D) other termination provided that the
Participant has completed a Year of Service.
[ ] (E) other termination.
8.(b) For Plan Years beginning in 1993 and thereafter, the Employer will
allocate Employer-related contributions, except Matching
Contributions, to any Participant who is (i) credited with more than
500 Hours of Service, or (ii) employed on the last day of the Plan
Year without regard to the number of Hours of Service. The Employer
will also allocate Employer-related contributions to any Participant
who terminates during the Plan Year without accruing the necessary
Hours of Service if he or she terminates as a result of:
[X] (i) retirement.
[X] (ii) Disability.
[X] (iii) death.
Matching Contributions will be allocated to each Participant without
regard to whether he or she is employed on the last day of the Plan
Year and without regard to his or her Hours of Service.
-8-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
9. ALLOCATION OF FORFEITURES
NOTE: Forfeitures of Excess Aggregate Contributions shall be applied at
the end of the Plan Year in which they occur to reduce Employer
contributions. Subsections (a), (b) and (c) below apply to
forfeitures of amounts other than Excess Aggregate Contributions.
9.(a) Allocation Alternatives:
Forfeitures shall be applied to reduce the Employer's contribution
for such Plan Year. If forfeitures were reallocated, pursuant to a
prior document's provisions, they will continue to be reallocated in
the same manner until the end of the Plan Year in which this
Adoption Agreement is signed.
9.(b) Date for Reallocation of Forfeitures:
NOTE: If no distribution has been made to a former Participant, subsection
(i) below will automatically apply to such Participant.
[_] (i) Forfeitures shall be applied to reduce the Employer's
contribution at the end of the Plan Year during which
the former Participant incurs his or her fifth
consecutive one-year Break in Service.
[X] (ii) Forfeitures shall be applied to reduce the Employer's
contribution at the end of the next Plan Year during
which the Participant has received distribution of his
or her vested interest.
9.(c) Restoration of Forfeitures:
If amounts are forfeited prior to five consecutive one-year Breaks
in Service, the Funds for restoration of account balances will be
obtained from the following resources in the order indicated (fill
in the appropriate number):
[1] (i) current year's forfeitures.
[2] (ii) additional Employer contributions.
10. LIMITATIONS ON ALLOCATIONS
This Section is not applicable if this is the only Plan the Employer
maintains or ever maintained. Plans include Welfare Benefit Funds as
described in Code Section 419(e) or an individual medical account as
defined under Code Section 415(1)(2) under which amounts are treated as
Annual Additions.
[_] 10.(a) If the Participant is covered under another qualified
Defined Contribution Plan maintained by the Employer, other
than a Master or Prototype Plan, the provisions of Article X
of the Plan will apply as if the other plan were a Master or
Prototype Plan.
[_] 10.(b) If a Participant is or ever has been a Participant in a
Defined Benefit Plan maintained by the Employer, attach
provisions which will satisfy the 1.0 limitation of Code
Section 415(e). Such language must preclude Employer
discretion. The Employer must also specify the interest and
mortality assumptions used in determining Present Value in
the Defined Benefit Plan.
[_] 10.(c) The minimum contribution or benefit required under Code
Section 416 relating to Top-Heavy Plans shall be satisfied
by either: [ ] this Plan or [ ] ________________ (Name of
other qualified plan of the Employer). If a Defined Benefit
Plan is or was maintained, an attachment must be provided
showing interest and mortality assumptions used in
determining the Top-Heavy Ratio.
-9-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
11. VESTING
11.(a) Computation Period: (This option is not applicable if Hours of
Service are determined on the basis of Elapsed Time selected under
Section 3(d)(vi) above.)
The computation period for purposes of determining Years of Service
and Breaks in Service for purposes of computing a Participant's
nonforfeitable right to his or her account balance derived from
Employer contributions:
[_] (i) shall not be applicable since Participants are always
fully vested.
[X] (ii) shall commence on the first day of the Plan Year during
which an Employee first performs an Hour of Service for
the Employer and each subsequent 12-consecutive-month
period shall commence on the anniversary thereof.
A Participant shall receive credit for a Year of Service if he or
she completes at least 1,000 Hours of Service at any time during the
12-consecutive-month computation period. Consequently, a Year of
Service may be earned prior to the end of the 12-consecutive-month
computation period and the Participant need not be employed at the
end of the 12-consecutive-month computation period to receive credit
for a Year of Service.
11.(b) Vesting Schedules:
Contributions under Sections 6(a), (b), 7(c)(iv) and (d) are always
fully vested.
NOTE: The vesting schedules below only apply to a Participant who has at
least one Hour of Service during or after the 1989 Plan Year. If
applicable, Participants who separated from Service prior to the
1989 Plan Year will remain under the vesting schedule as in effect
in the Plan prior to amendment for the Tax Reform Act of 1986.
[_] (i) Full and immediate Vesting.
<TABLE>
<CAPTION>
Years of Service
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7
[_] (ii) ___% 100%
[_] (iii) ___% ___% 100%
[_] (iv) ___% 20% 40% 60% 80% 100%
[_] (v) ___% ___% 20% 40% 60% 80% 100%
[_] (vi) 10% 20% 30% 40% 60% 80% 100%
[X] (vii) 20% 40% 60% 80% 100%
[_] (viii) ___% ___% ___% ___% ___% ___% 100%
</TABLE>
NOTE: The percentages selected for schedule (viii) may not be less for any
year than the percentages shown at schedule (v).
[X] (A) All contributions other than those which are fully
vested when contributed will vest under schedule (viii)
above.
[_] (B) All Matching Contributions will vest under schedule ____
above. All other Employer contributions other than those
which are fully vested when contributed will vest under
schedule ____ above.
11.(c) Service disregarded for Vesting:
[X] (i) Not Applicable. All Service shall be considered.
[_] (ii) Service prior to the Effective Date of this Plan or a
predecessor plan shall be disregarded when computing a
Participant's vested and nonforfeitable interest.
-10-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
[_] (iii) Service prior to a Participant having attained age 18
shall be disregarded when computing a Participant's
vested and nonforfeitable interest.
N/A 11.(d) Top-Heavy Vesting:
Each Participant shall acquire a vested and nonforfeitable
percentage in his or her account balance attributable to Employer
contributions and the earnings thereon under the procedures selected
above except with respect to any Plan Year during which the Plan is
Top-Heavy, in which case the [ ] Two-twenty vesting schedule
[Section 11(b)(iv)] or [ ] Three-Year Cliff vesting schedule
[Section 11(b)(iii)] shall automatically apply unless the Employer
has already elected a faster vesting schedule. If the Plan is
switched to Section 11(b)(iii) or 11(b)(iv) because of its Top-Heavy
status, that vesting schedule will remain in effect, even if the
Plan later becomes non-Top-Heavy, until the Employer executes an
amendment of this Adoption Agreement indicating otherwise.
12. SERVICE WITH PREDECESSOR ORGANIZATION
For purposes of satisfying the Service requirements for Eligibility and
Vesting, Hours of Service shall include Service with the following
predecessor organization(s):
------------------------------------------------------------------------
------------------------------------------------------------------------
13. ROLLOVER/TRANSFER CONTRIBUTIONS
13.(a) Rollover Contributions, as described at paragraph 4.3 of the Plan,
[X] shall [_] shall not be permitted. If permitted, Employees [X]
may [_] may not make Rollover Contributions prior to meeting the
eligibility requirements for participation in the Plan.
13.(b) Transfer Contributions, as described at paragraph 4.4 of the Plan
[X] shall [_] shall not be permitted. If permitted, Employees [X]
may [_] may not Transfer Contributions prior to meeting the
eligibility requirements for participation in the Plan.
NOTE: Even if available, the Employer may refuse to accept such
contributions if its Plan meets the safe-harbor rules of paragraph
8.7 of the Plan.
14. HARDSHIP WITHDRAWALS
Hardship withdrawals, as provided for in paragraph 6.9 of the Plan, [_]
are [X] are not permitted.
15. PARTICIPANT LOANS
Participant loans, as provided for in paragraph 13.4 of the Plan, [X] are
[_] are not permitted. If permitted, repayments of principal and interest
shall be repaid to the Participant's segregated account.
16. EMPLOYER INVESTMENT DIRECTION
The Employer investment direction provisions, as set forth in paragraph
13.5 of the Plan, [_] shall [X] shall not be applicable.
-11-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
17. EMPLOYEE INVESTMENT DIRECTION
The Employee investment direction provisions, as set forth in paragraph
13.6 of the Plan, [X] shall [ ] shall not be applicable.
NOTE: To the extent that Employee investment direction was previously
allowed, the Trustee shall have the right to either make the assets
part of the general Trust, or leave them as separately invested
subject to the provisions of paragraph 13.6 of the Plan.
18. EARLY PAYMENT OPTION
A Participant who separates from Service prior to retirement, death or
Disability may make application to the Employer requesting an early payment
of his or her vested account balance. Amounts under $3,500 [X] will [_]
will not be cashed out immediately.
18.(a) A Participant who has not separated from Service [ ] may [X] may not
obtain a distribution of his or her vested Employer contributions.
Distribution can only be made if the Participant has completed five
Years of Service.
18.(b) A Participant who has attained age 59-1/2 and has not separated from
Service [ ] may [X] may not obtain distribution of his or her vested
Employer contributions.
18.(c) A Participant who has attained the Plan's Normal Retirement Age and
who has not separated from Service [X] may [ ] may not receive a
distribution of his or her vested account balance.
NOTE: If the Participant has had the right to withdraw his or her account
balance in the past, this right may not be takeaway. Required
minimum distributions will be paid regardless of the option selected
above. For timing of distributions, see Section 19(a) below.
19. DISTRIBUTION OPTION
l9.(a) Tuning of Distributions:
In cases of termination including death, Disability or retirement,
benefits shall be paid:
[_] (i) as soon as administratively feasible following the close
of the Plan Year during which a distribution is
requested or is otherwise payable.
[X] (ii) as soon as administratively feasible following the date
on which a distribution is requested or is otherwise
payable.
[_] (iii) as soon as administratively feasible after the close of
the Plan Year during which the Participant incurs a one-
year Break in Service.
l9.(b) Optional Forms of Payment:
[X] (i) Lump Sum.
[_] (ii) Installment Payments.
[_] (iii) Other form(s) as previously provided (indicate all forms
that apply):_____
19.(c) Recalculation of Life Expectancy:
In determining required distributions under the Plan, a Participant
and/or Spouse (Surviving Spouse) [X] shall [ ] shall not have the
right to have their life expectancy recalculated annually. If life
expectancy is recalculated, it will follow the Employer's
administrative policy.
-12-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
20. SPONSOR CONTACT
Employers should direct questions concerning the language contained in and the
qualification of the Prototype to:
Capital Guardian Trust Company
Corporate Employee Benefits Department
(Phone Number) (714) 671-7000
In the event that the Sponsor amends, discontinues or abandons this Prototype
Plan, notification will be provided to the Employer at the address provided on
the first page of this Adoption Agreement.
21. SIGNATURES
Due to the significant tax ramifications, the Sponsor recommends that before the
Employer execute this Adoption Agreement, the Employer contact its attorney or
tax advisor.
21.(a) EMPLOYER DELEGATE OR COMMITTEE APPOINTMENT: The Employer has
appointed the following individual(s) to act on behalf of the
Employer regarding all communications and requests between the
Employer and the Recordkeeper, pursuant to the terms and conditions
of the Plan. Unless otherwise directed by the Employer in written
directions to the Recordkeeper, the Recordkeeper may act upon the
instructions of any one of the persons listed below.
<TABLE>
<CAPTION>
NAME(S) (please type or print) SIGNATURE(S)
<S> <C>
1. Steven N. Moore CFO 1. /s/ Steven N. Moore
---------------------------------- ------------------------------
Address 316 Occidental Ave. South
-------------------------
Suite 200
Seattle, WA 98104
2. Andy Majenski 2. /s/ Andy Majenski
---------------------------------- ------------------------------
Suite 200
-------------------------
Seattle, WA 98104
3. Tricia Haber 3. /s/ Tricia Haber
---------------------------------- ------------------------------
Address 316 Occidental Ave. South
-------------------------
Suite 200
Seattle, WA 98104
---------------------------------- ------------------------------
</TABLE>
21.(b) EMPLOYER:
Name and address of Employer if different specified in Section 1
above.
-----------------------------------------------------------------
-----------------------------------------------------------------
-13-
<PAGE>
Prototype Cash or Deferred
Profit-Sharing Plan #001
The Employer hereby adopts the Plan, appoints Capital Guardian Trust
Company as Trustee and directs that contributions to the Plan shall
be invested in accordance with the instructions provided by it. The
Employer has read the Plan and Trust and Adoption Agreement, agrees
to the terms and conditions set forth therein and has consulted with
an attorney about the effect of establishing the Plan.
This agreement and the corresponding provisions of the Plan and
Trust Basic Plan Document #03 were adopted by the Employer the 25th
day of Aug, 1998.
Signed for the Employer by: STEVEN N. MOORE
-------------------------
Title: CFO
-------------------------
Signature: /s/ Steven N. Moore
-------------------------
The Employer understands that its failure to properly complete the
Adoption Agreement may result in disqualification of its Plan.
Employer's Reliance: An Employer who has ever maintained or who
later adopts any plan (including a welfare benefit fund, as defined
in section 419(e) of the Code, which provides post-retirement
medical benefits allocated to separate accounts for Key Employees,
as defined in Section 419A(d)(3) of the Code, or an individual
medical account, as defined in section 415(1)(2)of the Code) in
addition to this Plan may not rely on the opinion letter issued by
the National Office of the Internal Revenue Service as evidence that
this Plan is qualified under Section 401 of the Internal Revenue
Code. If the employer who adopts or maintains multiple plans wishes
to obtain reliance that his or her plan(s) are qualified,
application for a determination letter should be made to the
appropriate Key District Director of Internal Revenue.
This Adoption Agreement may be used only in conjunction with Basic
Plan Document #03.
21.(c) TRUSTEE APPOINTMENT AND ACCEPTANCE:
The Employer hereby appoints Capital Guardian Trust Company to serve
as Trustee, and such Trustee hereby confirms acceptance of the
appointment and duties pursuant to the accompanying Plan and this
Adoption Agreement.
Capital Guardian Trust Company hereby accepts appointment as Trustee
the ___ day of __________ , 19__.
Signed for the Trustee by: _____________________________________
Title: _____________________________________
Signature: _____________________________________
NOTE: In accordance with paragraph 13.7 of Basic Plan Document #03
an additional trustee may be appointed to govern Plan assets
held outside the Fund. If so, the additional trustee shall be
appointed in a separate trust agreement.
-14-
<PAGE>
EXHIBIT 10.8
TO
WatchGuard Technologies, Inc.'s
Registration Statement on Form S-1
"[ * ]" = omitted, confidential material, which material has been
separately filed with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
<PAGE>
DEVELOPMENT AND SUPPLY AGREEMENT
This Development and Supply Agreement (this "Agreement") is entered into as
of the 25th day of March, 1998 (the "Effective Date") by and between WatchGuard
Technologies, Inc., a Delaware corporation having principal offices at 316
Occidental Avenue South, Suite 200, Seattle, Washington 98104, and its
subsidiaries (collectively "WATCHGUARD"), and SMART Modular Technologies, Inc.,
a California corporation having principal offices at 4305 Cushing Parkway,
Fremont, California 94538 ("SMART").
IN CONSIDERATION of the mutual covenants and agreements contained herein,
the parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, these terms shall have the following
definitions:
1.1 "Developed Technology" means all works of authorship, discoveries,
improvements, inventions, information and trade secrets which are first
conceived, made, created, reduced to practice or fixed in a tangible medium of
expression by SMART alone, or jointly by WATCHGUARD and SMART, in the course of
the development and design of the Product under this Agreement.
1.2 "Product" means the product(s) listed in Exhibit A or added to this
Agreement by mutual agreement of the parties, as well as derivatives, new
releases and updates thereof.
1.3 "Statement of Work" means the schedule attached as Exhibit B, setting
forth the milestones, deliverables, and a schedule for the performance of the
parties' obligations under this Agreement.
2. PRODUCT DEVELOPMENT
2.1 SMART Obligations. SMART shall use commercially reasonable efforts
to accomplish the tasks for which it is responsible in accordance with the
Statement of Work. SMART shall provide WATCHGUARD with such technical support
by qualified SMART personnel as WATCHGUARD may reasonably request in connection
with WATCHGUARD's efforts to accomplish the tasks for which WATCHGUARD is
responsible in accordance with the Statement of Work.
<PAGE>
2.2 WATCHGUARD Obligations. WATCHGUARD shall use commercially reasonable
efforts to accomplish the tasks for which it is responsible in accordance with
the Statement of Work. In consideration of SMART's development of the Product,
WATCHGUARD shall pay SMART the amounts, if any, as indicated and in accordance
with the Statement of Work, and shall comply with the purchase commitment
obligation specified elsewhere in this Agreement. WATCHGUARD shall provide
SMART with such technical support by qualified WATCHGUARD personnel as SMART may
reasonably request in connection with SMART's efforts to accomplish the tasks
for which SMART is responsible in accordance with the Statement of Work.
2.3 Project Management. SMART and WATCHGUARD shall each designate a
project representative to coordinate their business relationship in accordance
with this Agreement.
2.4 Changes to Product. SMART reserves the right to make substitutions
and/or modifications in the Product specifications provided that (i) such
substitutions and/or modifications do not cause a material adverse effect on the
Product's overall performance, and (ii) WATCHGUARD has been notified thereof.
WATCHGUARD reserves the right to specify modifications to the Product from time
to time and, consistent with the Statement of Work, SMART agrees to incorporate
such modifications. The parties shall negotiate in good faith any price,
schedule and other business issues that result from such modifications.
3. RIGHTS IN INTELLECTUAL PROPERTY
3.1 Prior Rights. All intellectual property rights, including without
limitation patents, patent applications, copyrights and trade secrets, owned by
a party as of the Effective Date shall remain the property of such party and no
licenses or other rights with respect to such intellectual property are granted
to the other party except as expressly set forth in this Agreement.
3.2 Developed Technology.
3.2.1 Ownership of Developed Technology. WATCHGUARD and SMART shall
jointly own the Developed Technology, with each owning an undivided one-half
interest, and except as otherwise provided herein each shall be free to
commercially exploit the Developed Technology without any duty to account to the
other for profits. Except as contemplated herein, neither party shall knowingly
take any action to place the Developed Technology into the public domain. In
the event that either party attempts to perfect its interest in the Developed
Technology with any
-2-
<PAGE>
governmental agency any place in the world by obtaining patent or copyright
protection or otherwise, such party shall specify on such application or
document filed or sent to such governmental agency that the Developed Technology
is jointly owned by WATCHGUARD and SMART and such party shall provide the other
party hereto with an opportunity to review any such correspondence within a
reasonable time prior to filing or sending such correspondence to such
governmental agency. If either party receives any such correspondence regarding
the Developed Technology, it shall promptly provide a copy of such
correspondence to the other party hereto.
3.2.2 Restriction on Developed Technology. In the event that any
Developed Technology is generated hereunder, SMART agrees, for a period of one
(1) year from the Effective Date, not to sell, develop or design a product
containing the Developed Technology to, or for, a third party in competition
with WATCHGUARD in the network security marketplace.
3.3 Ownership of Derivative Works of Developed Technology.
3.3.1 Bug Fixes. If a party makes any bug fix modification(s) to
any Developed Technology during the term of this Agreement in order to correct
errors in such Developed Technology or to make such Developed Technology operate
in accordance with its documentation, such modification(s) shall be promptly
provided to the other party, and shall be jointly owned by the parties.
Modifications to the Developed Technology to enhance performance, other than bug
fixes, shall not be subject to this Sections 3.3.1.
3.3.2 Other Derivative Works. Except as set forth in Section 3.3.1,
each party shall have sole and exclusive ownership of all right, title and
interest in and to any derivative works of the Developed Technology created by
or for such party to the extent such derivative works differ from the Developed
Technology, including without limitation, any and all intellectual property
rights thereto, and such party shall have the right to apply for copyright
registrations or patent applications, as appropriate, in the United States or
any other country in the world. For purposes of this Section, derivative work
shall have the meaning set forth in 17 U.S.C. Section 101, as amended from time
to time, and include without limitation the combination of the Developed
Technology and any other property of such party.
4. PRODUCT SALES
4.1 Purchase Commitment. Pursuant to the terms and conditions contained
in this Agreement and in consideration of SMART's development of the Product,
WATCHGUARD shall purchase from SMART WATCHGUARD's
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requirements of the Product as determined by WATCHGUARD from time to time (the
"Purchase Commitment"). WATCHGUARD may terminate the Purchase Commitment
provided (i) the Product delivered by SMART has a defect rate, as calculated
below ("Defect Rate"), and such defects are solely attributable to SMART:
(a) greater than ten percent (10%) of the first consecutive three thousand
(3,000) units shipped;
(b) greater than five percent (5%) of the next consecutive three thousand
(3,000) units shipped;
(c) greater than four percent (4%) of the following consecutive three thousand
(3,000) units shipped; or
(d) greater than three percent (3%) of all units shipped thereafter ("Defect
Rate");
(ii) WATCHGUARD provides SMART with written notice of its intent to terminate
the Purchase Commitment, and (iii) SMART fails to reduce the applicable Defect
Rate within thirty (30) calendar days of its receipt of such notice. The Defect
Rate shall be calculated in increments of 1,000 units, i.e., for units 1 through
1,000, the Defect Rate may not be greater that 10%; said Defect Rate applies for
units 1,001 through 2,000 and units 2001 through 3,000; the Defect Rate for
units 3,001 to 4,000 may not be greater than 5%, and so forth. WATCHGUARD may
also terminate the Purchase Commitment if (i) SMART delivers Product to
WATCHGUARD with Defect Rates exceeding those listed above three (3) times in any
six (6) month period, and such defects are solely attributable to SMART, and
(ii) WATCHGUARD provides SMART with written notice of its intent to terminate
the Purchase Commitment.
4.2 Lead-Times and Purchase Orders. Lead-times may vary from time to
time. SMART's current minimum lead-time for delivery of Product is three (3)
months. Product lead-time is based on then current manufacturing lead-time as
well as then current raw material lead-time and allocations. As such, if there
are any changes in manufacturing lead-time as well as raw material lead-time or
allocations, then Product lead-time may change accordingly. WATCHGUARD's
initial purchase order for production versions of the Product shall, at a
minimum, cover the Purchase Commitment for the initial four (4) months. This
initial purchase order shall be provided to SMART in accordance with the terms
and conditions of this Agreement, and shall specify WATCHGUARD's requested
shipment dates and quantities of the Product for said period. After the initial
purchase order, WATCHGUARD shall
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provide SMART with follow-on purchase orders at a minimum every four (4) months,
if and to the extent necessary, to fulfill the Purchase Commitment. Said follow-
on purchase orders shall be provided to SMART in accordance with the terms and
conditions of this Agreement, and shall specify WATCHGUARD's requested shipment
dates and quantities of the Product for a period of no less than six (6) months.
Neither the initial, nor any follow-on purchase order shall be binding on SMART
until SMART accepts it. Once accepted by SMART, each such purchase order shall
be binding on WATCHGUARD, shall be non-cancelable and shall be governed by the
terms and conditions of this Agreement, irrespective of any conflicting,
contrary or additional terms which may be set forth in such purchase order.
4.3 Forecasts. In addition to the purchase orders which WATCHGUARD is to
provide to SMART covering the Purchase Commitment, at the beginning of each
month during the term of this Agreement WATCHGUARD shall provide SMART with a
rolling forecast of WATCHGUARD's anticipated requirements for the Product for
the fifth (5th), sixth (6th) and seventh (7th) months following such month.
Such forecasts are estimates only and are not binding on WATCHGUARD.
4.4 Product Price. The price for the Product shall be as set forth in
Exhibit C and shall be in United States dollars. The Product price shall not
include charges for transportation, insurance, special packaging, marking,
applicable sale or use taxes, value added taxes, export or import licenses,
fees, taxes, duties and the like, the costs of which shall be paid by WATCHGUARD
in addition to the Product price.
4.5 Payment. All payments owed by WATCHGUARD to SMART for the Product
shall be made in United States dollars net thirty (30) calendar days after the
applicable Product shipment date.
4.6 Shipment, Title and Risk of Loss. All Product sold hereunder shall
be delivered to WATCHGUARD Ex Works (Incoterms 1990) SMART's manufacturing
facility. In the absence of written instructions from WATCHGUARD, SMART shall
select the common carrier but shall not thereby assume any liability in
connection with the shipment of Product, nor shall the common carrier be
construed to be the agent of SMART. Title of the Product shall pass from SMART
to WATCHGUARD when the Product is made available by SMART to the common carrier
or to WATCHGUARD if the Product is to be picked up by WATCHGUARD, and as of and
after that time, WATCHGUARD shall bear any and all risk of loss of or damage to
the Product.
4.7 Rescheduling. WATCHGUARD may reschedule each shipment of Product
ordered pursuant to this Agreement not more than once, provided that
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WATCHGUARD gives SMART at least thirty (30) calendar days written notice in
advance of the original scheduled shipment date (the "Original Scheduled
Shipment Date"), and that the rescheduled shipment date is no later than sixty
(60) calendar days after the Original Scheduled Shipment Date.
4.8 Limited Warranty. Except as otherwise provided herein, SMART
warrants that any Product sold pursuant to this Agreement shall be free from
defects in material and workmanship, and shall materially conform to the Product
specifications specified in Exhibit A to this Agreement, or hereafter agreed to
by the parties in a written instrument executed by an authorized officer of
SMART, for a period of one (l) year from the initial date SMART delivers said
Product to WATCHGUARD. SMART and WATCHGUARD shall work together in good faith
to develop acceptable test procedures and test criteria for the Product. After
the earlier of the first three (3) months of production or three thousand
(3,000) Products manufactured, SMART warrants that the Product failure rate
attributable solely to SMART shall not be higher than ten percent (10%) of, in
the aggregate, any consecutive one thousand (1,000) units shipped by SMART,
i.e., one hundred (100) units or more. Thereafter, SMART warrants that the
Product failure rate attributable solely to SMART shall not be higher than five
percent (5%) of, in the aggregate, any consecutive one thousand (1,000) units
shipped by SMART, i.e., fifty (50) units or more. WATCHGUARD must report
failure mechanisms to SMART with all accompanying data to assist SMART to cure
said failure. SMART and WATCHGUARD shall work together in good faith to
determine the cause of any failures and to modify the test procedures to cure
any problems. The warranty contained in this Section 4.8 does not cover
malfunctions, failures or defects resulting from misuse, abuse, accident,
neglect, improper or inadequate maintenance, alteration, modification, improper
installation or repairs by any party other than SMART. The warranty extends
only to the original purchaser, WATCHGUARD, and may not be assigned. The
liability of SMART, and the remedies available to WATCHGUARD, under this limited
warranty shall be limited to replacing, or repairing, or refunding the purchase
price of (at SMART's sole discretion and option) any defective Product which is
returned to SMART in accordance with the Warranty Return Procedure specified
below. EXCEPT AS SET FORTH IN THIS SECTION, SMART MAKES NO WARRANTIES OF ANY
KIND, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND EXPRESSLY DISCLAIMS ANY SUCH
WARRANTIES INCLUDING WITHOUT LIMITATION ANY EXPRESS, STATUTORY OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
4.9 Warranty Return Procedure. Prior to shipping any Product back to
SMART, WATCHGUARD shall ensure that such Product is defective, and shall obtain
a Return Material Authorization ("RMA") number from SMART.
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WATCHGUARD shall include the RMA number on the outside packaging of such
returned Product, and shall also include with such returned Product a written
statement bearing the RMA number and specifying the defect for which the Product
is being returned. WATCHGUARD shall pay the shipping costs for returning the
Product to SMART, and shall assume any and all risk of loss of or damage to said
Product during shipping. If SMART elects to repair or replace the Product, SMART
shall pay the shipping costs to return said Product to the location from which
it was returned by WATCHGUARD, but WATCHGUARD shall bear any and all risk of
loss of or damage to said Product at all times after said Product is made
available by SMART to the common carrier or to WATCHGUARD if said Product is to
be picked up by WATCHGUARD. Any Product which has been returned, but which SMART
determines not to be defective, or which has defects resulting from misuse,
abuse, accident, neglect, improper or inadequate maintenance, alteration,
modification, improper installation or repairs by any party other than SMART,
shall be returned to WATCHGUARD at WATCHGUARD's sole expense and risk. Title to
any Product returned under warranty shall at all times remain with WATCHGUARD
unless and until SMART either replaces such Product, or credits WATCHGUARD's
account for the price of such Product in lieu of repair or replacement, at which
time title to said Product shall pass to SMART. Any repair or replacement of any
Product hereunder shall not extend the warranty period for said Product.
5. CONFIDENTIALITY
Each party hereto agrees that all trade secrets, intellectual property,
code, inventions, algorithms, schematics, test vectors, lists of suppliers,
know-how and ideas and all other business, technical and financial information
it obtains from the other party which is identified in writing or orally as
"Confidential" and/or "Proprietary," or which would logically be considered
"Confidential" and/or "Proprietary," is the confidential and proprietary
property (the "Confidential Property") of the disclosing party. Except as
expressly permitted herein, the receiving party (i) shall hold in strictest
confidence and not use for any purpose (except as contemplated hereunder) or
disclose to any party (other than employees or agents on a need-to-know basis)
any Confidential Property of the disclosing party, (ii) shall take reasonable
protective measures (no less than the measures it takes to protect its own
Confidential Property) to safeguard such Confidential Property, and (iii) shall
bind in writing any and all of its employees or agents with access to such
Confidential Property to the terms and conditions of this Section 5. All
Confidential Property disclosed hereunder shall remain the exclusive property of
the disclosing party. Upon termination or expiration of this Agreement or upon
written request, any and all Confidential Property disclosed hereunder shall be
promptly returned to the disclosing party. The restrictions hereunder shall
survive the termination or expiration of this Agreement. Each party
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acknowledges that the breach of this Section 5 would cause immediate and
irreparable harm to the other party and agrees that in the event of such breach,
said non-breaching party shall be entitled, in addition to any other available
right or remedy, to seek equitable relief without the necessity of proving
actual damages and without the necessity of posting a bond or other security.
The receiving party shall not be obligated under this Section 5 with respect to
Confidential Property the receiving party can document:
5.1 is or has become readily publicly available without restriction
through no fault of the receiving party or its employees or agents; or
5.2 is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information; or
5.3 was rightfully in the possession of the receiving party without
restriction prior to its disclosure by the other party; or
5.4 is independently developed by employees or consultants of the
receiving party without access to such Confidential Property; or
5.5 is required to be disclosed by law, a government agency or order of a
court, provided that the receiving party provides prompt written notice of such
disclosure so as to afford the disclosing party an opportunity to intervene and
prevent or limit the disclosure.
6. INFRINGEMENT
6.1 Notification of Third Party Infringement. Each party shall inform
the other promptly in writing of any alleged infringement by a third party of
any Developed Technology of which such party becomes aware, and of any available
evidence thereof. WATCHGUARD shall have the right, but shall not be obligated,
to prosecute at its own expense all infringements of the Developed Technology
and, in furtherance of such right, SMART hereby agrees that WATCHGUARD may
include SMART as a party plaintiff in any such suit, without expense to SMART.
The total cost of any such infringement action commenced solely by WATCHGUARD
shall be borne by WATCHGUARD. No settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without the prior
written consent of an authorized representative of SMART, which consent shall
not be unreasonably withheld. Any recovery of damages by WATCHGUARD for each
such suit may be retained entirely by WATCHGUARD; provided, however that SMART
may at its option elect to pay up to half of the expenses of any such suit and
in such case any recovery of damages shall be applied first in satisfaction of
any unreimbursed
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expenses and legal fees of both parties and then divided between WATCHGUARD and
SMART, in each case on a pro rata basis according to the percentage of expenses
borne by each party prior to the recovery.
6.2 SMART Option to Prosecute Infringement. If within one (1) month
after having been notified of any alleged infringement, WATCHGUARD shall have
been unsuccessful in persuading the alleged infringer to desist and shall not
have brought and shall not be diligently prosecuting an infringement action, or
if WATCHGUARD shall notify SMART at any time prior thereto of its intention not
to bring suit against any alleged infringer, or if the statute of limitation is
about to end, then, and in those events only, SMART shall have the right, but
shall not be obligated, to prosecute at its own expense any action for
infringement of the Developed Technology, and in such event SMART shall be
entitled to retain for itself all recoveries and SMART may, for such purposes
use the name of WATCHGUARD as a party plaintiff.
6.3 Declaratory Judgment Actions. In the event that a declaratory
judgment action alleging invalidity or non-infringement of any of the Developed
Technology shall be brought against either or both of WATCHGUARD or SMART, said
party shall give notice to the other of any such action and the parties shall
cooperate in good faith to determine how best to defend such action. If the
parties cannot agree on how to defend any such action, either party may on its
own defend any action brought against it, provided that no settlement, consent
judgment or other voluntary final disposition may be entered into without the
prior written consent of an authorized representative of the other party, which
consent shall not be unreasonably withheld.
6.4 Cooperation in Prosecuting Actions. In any infringement suit as
either party may institute or defend to enforce or defend the Developed
Technology pursuant to this Agreement, the other party hereto shall, at the
request and expense of the litigating party cooperate in all respects and, to
the extent possible, have its employees and independent contractors testify when
requested and make available, under appropriate protective orders and other
safeguards, relevant records, papers, information, samples, specimens and the
like.
7. INDEMNITY AGAINST INFRINGEMENT
7.1 SMART's Indemnity Obligation. Except as otherwise provided herein,
SMART shall indemnify, defend and hold harmless WATCHGUARD and its subsidiaries
from and against (i) any and all claims, demands, actions, suits, litigation,
proceedings and the like alleging that the use or sale of the Product infringes
upon or
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misappropriates any third party's patent, trademark, trade secret, copyright,
mask work or other intellectual property rights ("IP Claims"), and (ii) any and
all liens, liabilities, judgments, damages, costs, expenses (including
reasonable attorney's fees) and the like arising out of or related to any IP
Claim covered under this Section 7.1; provided, however, that the foregoing
indemnity and defense obligation is conditioned on each of the following: (i)
prompt written notice by WATCHGUARD to SMART of any IP Claim for which indemnity
is claimed hereunder, (ii) complete control of the defense and settlement
thereof by SMART, and (iii) complete cooperation by WATCHGUARD in such defense
at SMART's expense. SMART shall have no obligation whatsoever pursuant to this
Agreement or otherwise (i) for or with respect to IP Claims arising out of or
related to designs, instructions, specifications or intellectual property not
developed by SMART or not furnished by SMART including without limitation
WATCHGUARD's contribution to the Developed Technology, (ii) for or with respect
to IP Claims arising out of or related to the combination of the Product with
any hardware, products, equipment, materials, text, graphics, software or the
like supplied by a party other than SMART, (iii) for or with respect to IP
Claims arising out of or related to the modification of the Product by a party
other than SMART, (iv) for or with respect to IP Claims arising out of or
related to WATCHGUARD's failure to substitute any replacement Product, or part
thereof, supplied by SMART pursuant to Section 7.3 herein, or (v) for any
settlement entered into without the prior written consent of an authorized
representative of SMART. Notwithstanding the foregoing, WATCHGUARD may defend
and/or settle any IP Claim for which SMART materially fails to perform its
indemnity obligation under this Section 7.1 without adversely affecting
WATCHGUARD's indemnity rights under this Section 7.1.
7.2 WATCHGUARD's Indemnity Obligation. Except as otherwise provided
herein, WATCHGUARD shall indemnify, defend and hold harmless SMART and its
subsidiaries from and against (i) any and all IP Claims arising out of or
related to designs, instructions, specifications or intellectual property
developed by WATCHGUARD or furnished by WATCHGUARD including without limitation
WATCHGUARD's contribution to the Developed Technology, (ii) any and all IP
Claims arising out of or related to the combination of the Product with any
hardware, products, equipment, materials, text, graphics, software or the like
supplied by a party other than SMART, (iii) any and all IP Claims arising out of
or related to the modification of the Product by a party other than SMART, and
(iv) any and all liens, liabilities, judgments, damages, costs, expenses
(including reasonable attorney's fees) and the like arising out of or related to
any IP Claim covered under this Section 7.2; provided, however, that the
foregoing indemnity and defense obligation is conditioned on each of the
following: (i) prompt written notice by SMART to WATCHGUARD of
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any IP Claim for which indemnity is claimed hereunder, (ii) complete control of
the defense and settlement thereof by WATCHGUARD, and (iii) complete cooperation
by SMART in such defense at WATCHGUARD's expense. WATCHGUARD shall have no
obligation whatsoever pursuant to this Section 7.2 for any settlement entered
into without the prior written consent of an authorized representative of
WATCHGUARD. Notwithstanding the foregoing, SMART may defend and/or settle any IP
Claim for which WATCHGUARD materially fails to perform its indemnity obligation
under this Section 7.2 without adversely affecting SMART's indemnity rights
under this Section 7.2.
7.3 Injunctive Actions. If during the course of any IP Claim that SMART
is required to indemnify WATCHGUARD hereunder the use or sale of the Product is
finally enjoined, SMART shall, at SMART's option and expense, use commercially
reasonable efforts to do one of the following (in addition to its obligations
under Section 7.1 herein): (i) procure for WATCHGUARD the right to use or sell,
as applicable, the Product, (ii) replace the Product or the affected part
thereof with equivalent non-infringing technology, (iii) modify the Product or
the affected part thereof to make it non-infringing but equivalent, or (iv)
within thirty (30) calendar days of SMART's receipt of said Product, refund to
WATCHGUARD an amount equal to the price paid by WATCHGUARD for said Product less
any prior discounts or credits granted to WATCHGUARD and less an allowance for
use and obsolescence (computed by amortizing WATCHGUARD's purchase price for
said Product evenly over a five (5) year period commencing upon the shipping
date from SMART to WATCHGUARD of said Product) and damage, if any.
7.4 Limitation of Indemnity. THE INDEMNITY CONTAINED IN THIS SECTION 7
STATES THE ENTIRE LIABILITY OF EITHER PARTY TO THE OTHER WITH RESPECT TO ANY AND
ALL MISAPPROPRIATION OR INFRINGEMENT BY THE PRODUCT, OR ANY PARTS THEREOF, OF
ANY PATENTS, TRADEMARKS, TRADE SECRETS, COPYRIGHTS, MASK WORKS OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY AND IS EXPRESSLY IN LIEU OF ALL
WARRANTIES OR REPRESENTATIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, IN
REGARD THERETO. THE REMEDIES OF THE PARTIES SHALL BE LIMITED TO THOSE PROVIDED
HEREIN TO THE EXCLUSION OF ANY AND ALL OTHER REMEDIES.
8. LIMITATION OF LIABILITY
EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN SECTION 7 AND EXCEPT AS ARISING
OUT OF OR RELATED TO THE PURCHASE
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COMMITMENT SET FORTH IN SECTION 4, NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PARTY FOR ANY INCIDENTAL, INDIRECT, SPECIAL, CONSEQUENTIAL, EXEMPLARY OR
RELIANCE DAMAGES, LOSSES OR EXPENSES (INCLUDING WITHOUT LIMITATION LOSS OF
PROFIT, OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES) RELATING TO OR
ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED, AND WHETHER BASED ON CONTRACT,
TORT, EQUITY OR ANY OTHER THEORY OF LIABILITY WHATSOEVER, EVEN IF SUCH PARTY WAS
NOTIFIED OR OTHERWISE AWARE OF THE POSSIBILITY OF SUCH DAMAGES, LOSSES OR
EXPENSES. THE LIMITATIONS CONTAINED IN THIS SECTION SHALL APPLY NOTWITHSTANDING
ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED UNDER ANY TERM
OF THIS AGREEMENT. IN NO EVENT SHALL SMART'S TOTAL LIABILITY TO WATCHGUARD
EXCEED THE AGGREGATE AMOUNT PAID BY WATCHGUARD TO SMART FOR THE PRODUCT.
9. TERM AND TERMINATION
9.1 Term. This Agreement shall become effective as of the Effective Date
and shall continue until terminated as provided in this Section 9.
9.2 Termination. This Agreement may be terminated immediately upon
written notice by either party in the event the other party (i) institutes or
there is instituted against it any proceeding under any bankruptcy, protection
of rights of creditors or insolvency laws, (ii) institutes or there is
instituted against it any proceeding for liquidation or winding up, (iii)
becomes insolvent, (iv) makes an assignment for the benefit of creditors, (v)
has a receiver appointed with respect to any substantial part of its assets or
business, (vi) ceases to function as a going concern or to conduct its operation
in the normal course of business, (vii) fails to provide reasonable adequate
assurances of future performance of its obligations under this Agreement within
twenty (20) calendar days following a demand from the other party for such
assurances, or (vii;) fails to perform any of the obligations imposed upon it
under the terms and conditions of this Agreement so as to be in material breach
hereunder and fails to cure such breach within thirty (30) calendar days after
written notice from the non-breaching party. In addition, this Agreement may be
terminated by mutual written agreement between the parties.
9.3 Termination by WATCHGUARD. WATCHGUARD shall be entitled to terminate
this Agreement upon written notice to SMART and payment of a buy-out fee (the
"Buy-Out Fee") as calculated below. If WATCHGUARD has purchased and
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paid for ten thousand (10,000) or fewer Products from SMART, the Buy-Out Fee
shall be [ * ]. If WATCHGUARD has purchased and paid for more than ten thousand
(10,000) Products from SMART, the Buy-Out Fee shall be [ * ].
9.4 Rights After Termination. No termination or expiration of this
Agreement shall (i) relieve either party from any obligations hereunder which
have accrued on or before the effective date of such termination or expiration
including without limitation any obligation to pay to the other party any sum
owed pursuant to this Agreement, (ii) affect any rights of either party with
respect to any breach of this Agreement, or (iii) cancel any purchase order for
the Product placed by WATCHGUARD and accepted by SMART pursuant to this
Agreement. If this Agreement terminates or expires, the provisions of Section 1
"Definitions," Section 3 "Rights in Intellectual Property," Section 4.5
"Payment," Section 4.6 "Shipment, Title and Risk of Loss," Section 4.8 "Limited
Warranty," Section 4.9 "Warranty Return Procedure," Section 5 "Confidentiality,"
Section 6 "Infringement," Section 7 "Indemnity Against Infringement," Section 8
"Limitation of Liability," Section 9 "Term and Termination" and Section 10
"General Provisions" shall survive and continue unless they otherwise expire in
accordance with their terms. In addition if this Agreement is terminated as a
result of WATCHGUARD's material breach of this Agreement, but not otherwise, the
provisions of Section 4.1 "Purchase Commitment" shall survive and continue
unless terminated by SMART.
10. GENERAL PROVISIONS
10.1 Integration. This Agreement, the exhibits hereto and the documents
referenced herein, if any, constitute the entire understanding, express or
implied, oral or written, between WATCHGUARD and SMART with respect to the
subject matter hereof and supersede any and all prior agreements, discussions
and understandings, express or implied, oral or written, between WATCHGUARD and
SMART with respect to the subject matter hereof. Each party hereto represents
and warrants to the other that it is entering into this Agreement based on the
terms and conditions contained herein and that it is not entering into this
Agreement because of other terms and conditions, including without limitation
representations, covenants, inducements and promises, not contained herein.
10.2 Conflicting Terms. The parties hereto agree that the terms and
conditions contained in either party's printed or electronic documents shall not
apply to the purchase and/or sale of the Product and that the terms and
conditions set forth herein shall govern all such transactions; provided,
however, that the terms and conditions typed or hand written on the face of a
purchase order, acknowledgment or other document relating to the Product
quantities, prices, ship-to locations and
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[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
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shipment dates shall, if accepted by both parties hereto, also apply to all such
transactions and shall augment the terms and conditions set forth herein to the
extent that such terms and conditions are not inconsistent with this Agreement.
10.3 Force Majeure. Other than the obligation to pay any amount owed
hereunder, neither party hereto shall be in default or liable for any delay or
failure to comply with this Agreement if such delay or failure is due to causes
beyond its control for the shorter of the period such causes are beyond its
control or six (6) months, provided that such party notifies in writing the
other party of the existence of such causes.
10.4 Assignment and Delegation. Neither party hereto shall sell,
transfer or assign any of its rights hereunder (other than the right to receive
payments), or delegate or subcontract any of its obligations hereunder without
the prior written consent of an authorized representative of the other party;
provided, however, that upon written notice to the other party either party
hereto may sell, transfer or assign its rights hereunder, and delegate or
subcontract its obligations hereunder, without obtaining the prior written
consent of an authorized representative of the other party, to a successor to
its business by reason of merger, the sale of substantially all of its assets or
other form of acquisition, provided that such assignee agrees in writing to be
bound by this Agreement. Any act in derogation of the foregoing shall be null
and void. Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
10.5 Choice of Law. The parties hereto agree that this Agreement shall
not be construed, enforced or governed by the United Nations Convention on
Contracts for the International Sale of Goods; rather this Agreement is entered
into in the State of California and shall be construed, enforced and governed
solely in accordance with the laws of the State of California without giving
effect to any choice of law provisions thereof.
10.6 Jurisdiction and Venue. The jurisdiction and venue of any action
with respect to the subject matter of this Agreement shall be either (i) the
state or federal courts for the County of Santa Clara or the County of Alameda
in the state of California or (ii) the state or federal courts for the County
of King in the state of Washington, and each of the parties hereto submits
itself to the jurisdiction and venue of either such courts for the purpose of
any such action.
10.7 Notice. Any notice, consent or request required or permitted to be
given under or in connection with this Agreement shall be in writing and shall
be considered
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to be given when placed in registered or certified mail, postage prepaid,
addressed to the party for whom it is intended at the address written above and
to the attention of the person executing this Agreement or at such other address
or to such other person as SMART or WATCHGUARD may designate to the other party
in accordance with this Section 10.7 from time to time. Any notice or request
required or permitted to be given under or in connection with this Agreement if
given otherwise than by registered or certified mail shall be considered to be
given when delivered.
10.8 Severability. If any term or provision of this Agreement is held to
be illegal, invalid, unenforceable or in conflict with any law of any
governmental entity with jurisdiction over this Agreement, this Agreement shall
continue in force and be interpreted and modified as necessary to give best
effect to the intentions of the parties as expressed herein to the fullest
extent permissible.
10.9 Taxes. WATCHGUARD shall pay any and all taxes and charges assessed
in connection with this Agreement including without limitation sales, use and
excise taxes. This does not include any federal, state or local income taxes
imposed on SMART or any other or similar taxes based on SMART's gross or net
income.
10.10 Export Controls. This Agreement is expressly made subject to any
laws, regulations, orders or other restrictions on the export from the United
States of America of any technology, products incorporating technology or
information pertaining thereto which may be imposed from time to time by the
Government of the Untied States of America or any agency thereof.
Notwithstanding anything contained in this Agreement to the contrary, WATCHGUARD
shall not export or re-export, directly or indirectly, any technology, products
incorporating technology or information pertaining thereto to any country for
which the Government of the United States of America or any agency thereof
requires an export license or other governmental approval at the time of export
or re-export without first obtaining such license or approval.
10.11 Import and Export. SMART shall provide all information under its
control which is necessary or useful for WATCHGUARD to obtain any import or
export licenses required for WATCHGUARD to receive or ship the Product.
WATCHGUARD shall pay any and all import or export licenses, fees, taxes, duties
and the like.
10.12 United States Government Contract Provisions and Clauses. In the
event any Products purchased hereunder are sold, or are incorporated into
products that are sold, under a United States Government contract, any and all
provisions or clauses required to be passed on to SMART pursuant to said
contract are hereby
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rejected by SMART and shall not be deemed included herein or binding on SMART
unless and until specifically accepted in a writing executed by an authorized
representative of SMART.
10.13 Headings. Headings used herein are for reference only and shall
not affect the interpretation of the terms and conditions of this Agreement.
10.14 Waivers and Amendments. The rights and obligations of the parties
under this Agreement may be amended, changed, modified, waived or discharged
(either generally or in a particular instance, either retroactively or
prospectively, and either for a specified period of time or indefinitely) only
by a written instrument effecting such amendment, change, modification, waiver
or discharge signed by an authorized representative of the party against whom
enforcement is sought.
10.15 Delays or Omissions. The parties hereto agree that no delay or
omission to exercise any right, power or remedy accruing to any party upon any
breach or default of the other party under this Agreement shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein, or of any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. The parties further agree that any waiver, permit,
consent or approval of any kind or character of any breach or default under this
Agreement must be in a writing signed by an authorized representative of the
party against whom enforcement is sought and shall be effective only to the
extent specifically set forth in such a writing.
10.16 Relationship of the Parties. In fulfilling its obligations under
this Agreement, each party shall be acting as an independent contractor.
Nothing contained in this Agreement shall be deemed or construed as creating any
other relationship between the parties including without limitation that of a
joint venture or a partnership. The employees of each party shall not be
considered the employees of the other party for any purpose. Neither party nor
its employees shall have the authority to bind or make commitments on behalf of
the other party for any purpose, nor shall either party or its employees hold
itself or themselves out as having such authority. Each party shall assure that
its employees or other persons whose services it may require comply with all of
the terms and conditions of this Agreement.
10.17 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument; provided, however, that this Agreement shall be
of no force
-16-
<PAGE>
or effect until executed by both parties. Facsimile signature pages shall be
considered originals.
10.18 Mediation. If any dispute arises out of or is related to this
Agreement, the parties hereto agree first to try in good faith to settle the
dispute by mediation. In the event of such a dispute, either party may initiate
the mediation by so requesting, in a writing delivered to the other party.
Within ten (10) calendar days of such a request for mediation, the parties
hereto shall confer for the purpose of selecting a mutually agreeable mediator.
If the parties hereto have not been able to agree upon a mediator within twenty
(20) calendar days of the request for mediation, either party may request that
the Judicial Arbitration and Mediation Services (JAMS) appoint a mediator. Said
mediation shall take place in the County of Santa Clara, California.
10.19 Litigation Expenses. The prevailing party in any action or
proceeding to enforce or interpret any part of this Agreement shall be entitled
to recover its reasonable expenses including without limitation attorney's fees
(including fees on any appeal).
10.20 Exhibits. The following exhibits which are attached hereto are by
this reference made a part hereof: (i) Exhibit A - Product, (ii) Exhibit B -
Statement of Work, and (iii) Exhibit 3 - Price.
10.21 No Third Party Beneficiaries. The parties hereby acknowledge that
this Agreement is made solely and exclusively for the benefit of the parties
hereto and with no intent to benefit any third party.
10.22 Basis of the Bargain. EACH PARTY HERETO RECOGNIZES AND AGREES THAT
THE WARRANTY DISCLAIMERS AND LIABILITY AND REMEDY LIMITATIONS CONTAINED IN THIS
AGREEMENT ARE MATERIAL BARGAINED FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE
BEEN TAKEN INTO ACCOUNT AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE
GIVEN BY EACH PARTY UNDER THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO
ENTER INTO THIS AGREEMENT.
10.23 Read and Reviewed. Each party hereto represents and warrants to
the other that (i) it has read, reviewed and understands the entire contents of
this Agreement, and (ii) it has engaged, as it sees fit, legal counsel to review
and advise it regarding this Agreement.
-17-
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Development and
Supply Agreement to be executed by its duly authorized representative as of the
date first set forth above.
WATCHGUARD TECHNOLOGIES, INC. AND ITS SMART MODULAR TECHNOLOGIES, INC.
SUBSIDIARIES
By: /s/ Christopher G. Slatt By: /s/ Ajay Shah
--------------------------- ---------------------------
Name: Christopher G. Slatt Name: Ajay Shah
------------------------- -------------------------
Title: President and CEO Title: President and CEO
------------------------ ------------------------
-18-
<PAGE>
EXHIBIT A
PRODUCT
PC-compatible CPU board with IDE Flash disk, three 10/100 Ethernet ports,
and a single PCI expansion slot. No ISA or floppy connectors. Approx. size
9.5" x 8.7".
A. CPU
[ * ]
B. Chipset
[ * ]
C. Memory
[ * ]
D. Ethernet
[ * ]
E. Real Time Clock
[ * ]
F. Ports and Connectors
[ * ]
G. LEDs
[ * ]
H. Power Supply
[ * ]
I. Environmental
[ * ]
- ----------
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
-19-
<PAGE>
EXHIBIT B
STATEMENT OF WORK
1. Engineering Specifications - [by: Jan. 7, 1998]
. List of the features and functionality provided by the proposed design
. Outline of the key specifications
. Implementation guidelines
. Design Review I
2. Architecture Design - [by: Feb. 20, 1998]
. Schematic entry in Viewlogic of CPU system
. BIOS Specifications and Adaptation
. Netlist generation for PCB design
. Bill Of Materials -- FINAL
. Design Review 2
3. PCB Design- [by: Feb. 27, 1998]
. Placement of components and connectors
. Design Review 3
. Routing
. Generation of PCB Fab Data
. Design Review 4
4. Prototype PCB Fabrication and materials procurement - [by: March 6, 1998]
. 10 prototypes
5. Prototype PCB Assembly - [by: April 15, 1998]
. Assembly of the prototype board
6. Development of the Diagnostic Software - [by: April 15, 1998]
7. Design verification and testing - [by: April 30, 1998]
. Design Review 5
8. Manufacturing release - [by: May 31,1998]
. Complete changes
. Generate ECO
-20-
<PAGE>
. Design Review 6
After the prototype Products are delivered, SMART will provide ongoing
Engineering Development and Support of the Product as may be reasonably
requested by WATCHGUARD. For such work exceeding six (6) weeks' effort, SMART
may provide a scheduled statement of work for such Engineering Development and
Support, which will be negotiated by both parties.
For all Engineering work completed by SMART, there will be a set of
Documentation Deliverables to WATCHGUARD which fully and accurately describe the
Product and include, as appropriate:
1. Schematic Drawings.
2. Printed Circuit Board Layout in Gerber format.
3. Surface mount device placement in ASCII format.
4. Bill of Materials: components, quantity and source.
5. Product Verification Test Reports (Design/Prototype/Product test
results).
6. Summary Manufacturing Test Procedures.
These deliverables are subject to WATCHGUARD review and acceptance, which
will not be unreasonably withheld.
SMART will cooperate with WATCHGUARD and its industrial design firms and
product assemblers (the "Project Contributors") and coordinate SMART's
development and supply activities under this Agreement with the work performed
by the Project Contributors.
-21-
<PAGE>
EXHIBIT C
PRICE
<TABLE>
<CAPTION>
Quantity of Products Purchased* Product price per unit
------------------------------- ----------------------
<S> <C>
10,000 or more [ * ]
</TABLE>
* In the event that WATCHGUARD purchases fewer than ten thousand (10,000)
units of Product by July 1, 1999, SMART may charge WATCHGUARD a restocking fee
("Restocking Fee") that shall be computed as follows:
[ * ]
WATCHGUARD shall pay SMART the Restocking Fee in U.S. dollars within thirty
(30) calendar days of invoice therefor.
1. As used in this Agreement, "Product Lot Size Quantities" means the
number of units ordered for a specific shipment date on any purchase order.
Product Lot Size Quantities greater than or equal to 250 units shall not incur a
manufacturing setup charge. Product Lot Sizes Quantities less than 250 units
shall incur a manufacturing setup charge of [ * ] per lot. The minimum Product
Lot Size Quantity shall be 50 units.
2. The above Product prices per unit are based on estimated April 1, 1998
market costs of the Microprocessor, PCI chipset, Flash memory, DRAM and Ethernet
chipset used in the assembly of the Product (collectively the "Components"). If
at any time during the term of this Agreement the aggregate market cost of the
Components increases or decreases greater than ten percent (10%), then, at
either party's request, the Product prices per unit shall be reviewed at the
beginning of each calendar quarter starting July 1, 1998, and adjusted by the
parties in good faith to reflect the change in the cost of the Product. If the
parties mutually agree upon a modification of the Product prices, this Exhibit C
shall be amended to reflect such modified Product prices.
- ----------
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
-22-
<PAGE>
EXHIBIT 10.9
TO
WatchGuard Technologies, Inc.'s
Registration Statement on Form S-1
"[ * ]" = omitted, confidential material, which material has been
separately filed with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
<PAGE>
OEM Master License Agreement Number: 0897-SEA-O-MLA-1
RSA DATA SECURITY(TM)
OEM MASTER LICENSE AGREEMENT
THIS OEM MASTER LICENSE AGREEMENT ("Agreement"), effective as of the later
date of execution ("Effective Date"), is entered into by and between RSA Data
Security, Inc., a Delaware corporation ("RSA"), having a principal address at
100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Seattle Software Labs, a Delaware corporation
- ---------------------------------------------
(Name and jurisdiction of incorporation)
316 Occidental Avenue South
- ---------------------------------------
(Address)
Suite 300
- ---------------------------------------
Seattle, WA 98104
- ---------------------------------------
OEM Legal Contact:
Don Lenhart 206 521 8373
-------------------------------------
(name, telephone and title)
OEM Billing Contact:
Shari Elsoe, Controller 206 521 8366
-------------------------------------
(name, telephone and title)
OEM Technical Contact:
Chris Boeccio 206 521 8348
-------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Don Lenhart, VP Strategic Dev. 206 521 8373
--------------------------------------------
(name, telephone and title)
Territory:
[_] North America (United States and Canada)
[X] Worldwide, subject to Section 10.7
Separate Maintenance Agreement: YES [X] NO [_]
1. DEFINITIONS
The following terms when used in this Agreement shall have the following
meanings:
1.1 "Bundled Product(s)" means one or more of the products or product
groups described on a License/Product Schedule attached hereto and referencing
this Agreement which has been or will be developed by OEM and which incorporates
in the OEM Product in any manner any portion of the RSA Object Code. A Bundled
Product must represent a significant functional and value enhancement to the
Licensed Software such that the primary reason for an End User Customer to
license such Bundled Product is other than the right to receive a license to the
Licensed Software included in the Bundled Product.
1.2 "Distributor" means a dealer or distributor in the business of
reselling Bundled Products to End User Customers, directly or through one or
more Distributors, by virtue of authority of OEM. Bundled Products resold by a
Distributor shall bear OEM's trademarks and service marks and shall not be
privately labeled by such Distributor or other parties. A Distributor shall
have no right to modify any part of the Bundled Product.
1.3 "End User Customer" means a person or entity licensing RSA Object Code
as part of a Bundled Product from OEM or a Distributor solely for personal or
internal use and without right to license, assign or otherwise transfer such
Bundled Product to any other person or entity.
1.4 "Interface Modification" means a modification to the RSA Source Code
constituting and limited to hooks, ports or interfaces and similar modifications
necessary to permit the Licensed Software to operate in accordance with the User
Manual in OEM Products.
1.5 "License/Product Schedule" means a schedule substantially in the form
of Exhibit "A" hereto completed and executed with respect to a Bundled Product
and specifying the Licensed Software, Field of Use limitation (if any), license
and maintenance fees, and other matters with respect to such Bundled Product. A
License/Product Schedule can be amended pursuant to
<PAGE>
Section 10.5 with respect to a specified Bundled Product; and additional Bundled
Products may be added to this Agreement by executing an additional
License/Product Schedule referencing this Agreement. All such License/Product
Schedules are incorporated in this Agreement by this reference.
1.6 "Field of Use" means a use, method of incorporation or product purpose
limitation with respect to the Licensed Software for Bundled Product specified
on the License/Product Schedule for such Bundled Product.
1.7 "Licensed Software" means those portions of the RSA Software which
perform the algorithm(s) specified on page 2 of a License/Product Schedule
hereto as having been licensed by OEM with respect to a particular Bundled
Product.
1.8 "New Release" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.9 "New Version" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.10 "OEM Product" means any product developed by OEM into which the
Licensed Software is to be incorporated to create a Bundled Product.
1.11 "RSA Object Code" means the Licensed Software in machine-readable,
compiled object code form.
1.12 "RSA Software" means RSA proprietary software quantified on a
License/Product Schedule hereto and as further described in the User Manuals
associated therewith. "RSA Software" shall also include all modifications and
enhancements (including all New Releases and New Versions) to such programs as
may be provided by RSA to OEM pursuant to this Agreement or a maintenance
agreement between RSA and OEM.
1.13 "RSA Source Code" means the mnemonic, high level statement versions
of the Licensed Software written in the source language used by programmers.
1.14 "Territory" means those geographic areas specified on page 1.
1.15 "User Manual" means the most current version of the user manual
and/or reference manual customarily supplied by RSA to OEMs who license the RSA
Software.
2. LICENSES
2.1 License Grant. During the term and within the Field of Use limitation
(if any) specified in the applicable License/Product Schedule, RSA hereby grants
OEM a non-exclusive, non-transferable license to:
2.1.1 use, if a source code license is specified in a License/Product
Schedule, a single copy of the RSA Source Code on a single central processing
unit accessed by one user at a time to: (i) modify the RSA Source Code solely
to create Interface Modifications; (ii) compile the RSA Source Code to create
object code; and (iii) maintain Bundled Products and support End User Customers.
2.1.2 (i) incorporate the RSA Object Code into an OEM Product to
create a Bundled Product; (ii) reproduce and have reproduced the RSA Object Code
as incorporated in a Bundled Product as reasonably needed for inactive backup or
archival purposes and, if an internal use license is specified in a
License/Product Schedule, for distribution in the Territory solely to employees
of OEM and solely for use by such employees for OEM's internal business
purposes; and (iii) reproduce, have reproduced, and license or otherwise
distribute the RSA Object Code as incorporated in a Bundled Product in the
Territory.
2.1.3 (i) use the User Manual to support End User Customers; (ii)
modify and incorporate portions of the User Manual in Bundled Product document;
and (iii) reproduce, have reproduced and distribute in the Territory such
portions of the User Manual as incorporated in Bundled Product documentation.
2.2 Limitations On Licenses. The licenses granted in Section 2.1 are
further limited as follows:
2.2.1 Limitation on Distributees. The RSA Object Code shall be
licensed or otherwise distributed only to (i) Distributors and (ii) End User
Customers.
<PAGE>
2.2.2 No Exposure of RSA Software. The RSA Object Code may only be
accessed by the functionality of the Bundled Product in which it is included,
and a Bundled Product shall not make the RSA Object Code directly accessible to
End User Customers or to products other than the Bundled Product.
2.2.3 No Standalone Product or Services. OEM may not in any way
sell, lease, rent, license, sublicense or otherwise distribute the RSA Software
or any part thereof or the right to use the RSA Software or any part thereof to
any person or entity except as part of a Bundled Product. Unless a specific
grant of rights is included in the applicable License/Product Schedule, neither
OEM nor any Distributor or End User Customer may use the Bundled Product to
operate a service bureau or other revenue-generating service business.
2.2.4 License Restricted to Licensed Software and Field of Use. OEM
may use or incorporate into a Bundled Product only that portion of the RSA
Software which is identified as Licensed Software in the applicable
License/Product Schedule. The RSA Object Code must be incorporated in a Bundled
Products, and may only be reproduced, licensed or distributed in accordance with
the Field of Use limitation, if any, specified in the applicable
Licensed/Product Schedule.
2.2.5 Prohibited Activities. OEM shall not modify (except to create
Interface Modifications), translate, reverse engineer, decompile or disassemble
the RSA Software or any part thereof, and shall prohibit Distributors and End
User Customers from doing the same.
2.2.6 RSA Root Keys. OEM may include the RSA/VeriSign, Inc. root
keys (the "RSA Root Keys") in any Bundled Product in which a hierarchy root key
is utilized or incorporated, provided that any such incorporation must make the
RSA Root Keys functional within the Bundled Product and as accessible as any
other hierarchy root key within the Bundled Product.
2.3 Title.
2.3.1 In RSA. Except for the limited licenses expressly granted in
Section 2.1 and as further limited by Section 2.2, RSA does not by this
Agreement grant to OEM any right, title or ownership interest in and to the RSA
Software or in any related patents, trademarks, copyrights or proprietary or
trade secret rights.
2.3.2 In OEM. Except as expressly provided below, OEM does not by
this Agreement grant to RSA any right, title or ownership interest in and to any
Interface Modifications created by OEM as may be authorized hereunder or any
related patents, copyrights or proprietary or trade secret rights of OEM;
provided, however, that OEM hereby agrees that it will not assert against RSA
any of such patents, copyrights or proprietary or trade secret rights with
respect to any ports or interfaces developed by RSA without reference to the
source code of OEM's Interface Modifications.
3. LICENSE FEES
3.1 License Fees. In consideration of RSA's grant to OEM of the limited
license rights hereunder, OEM shall pay to RSA the amounts set forth below (the
"License Fees"):
3.1.1 Source Code License Fees. If RSA is granting to OEM RSA Source
Code license rights as indicated on a License/Product Schedule, OEM shall pay to
RSA the source code License Fees specified on such License/Product Schedule upon
execution of such License/Product Schedule.
3.1.2 Object Code License Fees. In consideration of RSA's grant to
OEM of the RSA Object Code license rights for the Bundled Products described in
each License/Product Schedule, OEM shall pay to RSA the object code License Fees
specified on each such License/Product Schedule in accordance with the terms
contained therein.
3.2 Taxes. All taxes, duties, fees and other governmental charges of any
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the License Fees or any
aspect of this Agreement shall be borne by OEM and shall not be considered a
part of a deduction from or an offset against License Fees.
3.3 Prepayment of License Fees. OEM shall prepay License Fees in the
amount set forth in a License/Product Schedule, if any, upon execution of the
License/Product Schedule. In no event shall such prepayment be refundable. If
OEM has prepaid License Fees with respect to a Bundled Product, all of such
prepaid amounts may be offset against License Fees accrued at a rate of fifty
cents ($0.50) for each dollar ($1.00) of License Fees accrued until the
prepayments are
<PAGE>
exhausted. OEM shall show the application of prepaid License Fees in the
licensing reports provided to RSA pursuant to Section 3.7.
3.4 Use of Net Sales Price. If a License Fee based on Net Sales Price is
specified in a License/Product Schedule, the "Net Sales Price" means the gross
amount of all cash, in-kind or other consideration receivable by OEM at any time
in consideration of the licensing or other distribution of the Bundled Products,
excluding any amounts receivable by OEM for sales and use taxes, shipping,
insurance and duties, and reduced by all discounts, refunds or allowances
granted in the ordinary course of business. For the purposes of determining Net
Sales Price, the amount of in-kind or other non-cash consideration receivable by
OEM shall be deemed to have a dollar value equal to the standard price (as
listed in OEM's published price schedule on the date of the grant of the license
or the sale in question) for such Bundled Product, less all cash paid.
3.5 Terms of Payment. Object code License Fees payable on an on-going
basis shall accrue with respect to Bundled Products licensed or otherwise
distributed by OEM or Distributors, as applicable, upon the date of invoice of
the Bundled Product to an End User Customer or Distributor. License Fees due
RSA hereunder shall be paid by OEM to the attention of the Software Licensing
Department at RSA's address set forth above on or before the thirtieth (30th)
day after the close of the calendar quarter during which the License Fees
accrued. A late payment penalty on any License Fees not paid when due shall be
assessed at the rate of one percent (1%) per thirty (30) days, beginning on the
thirty-first (31st) day after the last day of the calendar quarter to which the
delayed payment relates.
3.6 U.S. Currency. All payments hereunder shall be made in lawful United
States currency and shall in no case be refundable. If OEM receives payment in
foreign currencies, the amount of its License Fees to RSA shall be calculated
using the closing exchange rate published in The Wall Street Journal, Western
Edition, on the last business day such journal is published in the calendar
quarter immediately preceding the date of payment.
3.7 Licensing Report. A report in reasonably detailed form setting forth
the calculation of License Fees due from OEM and signed by a responsible officer
of OEM shall be delivered to RSA on or before the thirtieth (30th) day after the
close of each calendar quarter during the term of this Agreement, regardless of
whether License Fee payments are required to be made pursuant to Section 3.5.
The report shall include, at a minimum, the following information (if applicable
to the method of calculating License Fees designated in a License/Product
Schedule) with respect to the relevant quarter: (i) the total number of
copies/units of Bundled Products licensed or otherwise distributed by OEM and
Distributors (indicating the names and versions thereof); (ii) if applicable,
the total Net Sales Price invoiced to Distributors and End User Customers; and
(iii) total License Fees accrued.
3.8 Audit Rights. RSA shall have the right, at its sole cost and expense,
to have an independent certified public accountant conduct during normal
business hours and not more frequently than annually, an audit of the
appropriate records of OEM to verify the number of copies, units of Bundled
Products licensed or otherwise distributed by OEM and OEM's calculation of
License Fees. If the License Fees accrued are different than those reported,
OEM will be invoiced or credited for the difference, as applicable. Any
additional License Fees, along with the late payment penalty assessed in
accordance with Section 3.5, shall be payable within thirty (30) days of such
invoice. If the deficiency in License Fees paid by OEM is greater than five
percent (5%) of the License Fees reported by OEM for any quarter, OEM will pay
the reasonable expenses associated with such audit, in addition to the
deficiency.
3.9 Evaluation Copies. OEM may deliver copies of Bundled Products to
prospective End User Customers on a trial basis for evaluation purposes only
(each, an "Evaluation Copy') provided that each such prospective End User
Customer has received a written or electronic trial license prohibiting the End
User Customer from copying, modifying, reverse engineering, decompiling or
dissassembling the RSA Object Code or any part thereof. All Evaluation Copies
licensed shall contain a feature which disables the Evaluation Copy no later
than sixty (60) days after delivery to the prospective End User Customer. No
License Fees shall be reportable or payable with respect to Evaluation Copies
unless and until the Evaluation Copy is replaced with or converted to a standard
Bundled Product or the End User Customer is invoiced for the Bundled Product,
whichever occurs first.
4. LIMITED WARRANTY
4.1 Limited Warranty. During the initial ninety (90) -day term of each
License/Product Schedule RSA warrants that the Licensed Software specified in
such License/Product Schedule will operate in material
<PAGE>
conformance to RSA's published specifications for the Licensed Software. RSA
does not warrant that the RSA Software or any portion thereof is error-free.
OEM's exclusive remedy, and RSA's entire liability in tort, contract or
otherwise, shall be correction of any warranted nonconformity as provided in
Section 4.2 below. This limited warranty and any obligations of RSA hereunder
shall not apply to any Interface Modifications or any nonconformities caused
thereby and shall terminate immediately if OEM makes any modification to the RSA
Software other than Interface Modifications.
4.2 Error Correction. In the event OEM discovers an error in the Licensed
Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed Software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no work around or only a difficult work around; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers no
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA Software.
4.3 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS
SECTION 4, THE RSA SOFTWARE IS PROVIDED "AS IS" WITHOUT ANY WARRANTY WHATSOEVER,
RSA DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER
WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS, RSA DISCLAIMS ANY
WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN OEM WITH RESPECT TO THE RSA
SOFTWARE. OEM SHALL NOT, AND SHALL TAKE ALL MEASURES NECESSARY TO INSURE THAT
ITS AGENTS AND EMPLOYEES DO NOT, MAKE OR PASS THROUGH ANY SUCH WARRANTY ON
BEHALF OF RSA TO ANY DISTRIBUTOR, END USER CUSTOMER OR OTHER THIRD PARTY.
5. ADDITIONAL OBLIGATIONS OF OEM
5.1 Bundled Product Marketing. OEM is authorized to represent to
Distributors and End User Customers only such facts about the RSA Software as
RSA states in its published product descriptions, advertising and promotional
materials or as may be stated in other non-confidential written material
furnished by RSA.
5.2 Customer Support. OEM shall, at its expense, provide all support for
the Bundled Products to Distributors and End User Customers.
5.3 License Agreements. OEM shall cause to be delivered to each
Distributor and End User Customer a license agreement which shall contain, at a
minimum, substantially all of the limitations of rights and the protections for
RSA which are contained in Sections 2.2, 5.4, 7, 10.7 and 10.8 of this
Agreement. OEM shall use commercially reasonable efforts to enforce the terms
of such agreements.
5.4 Proprietary Rights.
5.4.1 Copyright Notices; Licensee Seals. OEM agrees not to remove or
destroy any proprietary, trademark or copyright markings or notices placed upon
or contained within the RSA Source Code, RSA Object Code, User Manuals or any
related materials or documentation. OEM further agrees to insert and maintain:
(i) within every Bundled Product and any related materials or documentation a
copyright notice in the name of OEM; and (ii) within the splash screens, user
documentation, printed product collateral, product packaging and advertisements
for the Bundled Product, product packaging and advertisements for the Bundled
Product, the RSA "License Seal" from the form attached as Exhibit B to this
Agreement and a statement that the Bundled Product contains the RSA Software.
5.4.2 Trademarks. By reason of this Agreement or the performance hereof,
OEM shall acquire no rights of any kind in any RSA trademark, trade name, logo
or product designation under which the RSA Software was or is marketed and OEM
shall not make any use of the same for any reason except as expressly authorized
by this Agreement or otherwise authorized in
<PAGE>
writing by RSA. OEM shall cease to use the markings, or any similar markings, in
any manner on the expiration or other termination of this Agreement.
6. CONFIDENTIALITY
6.1 Confidentiality. Each party acknowledges that in its performance of
its duties hereunder, the other party may communicate to it (or its designees)
certain confidential and proprietary information of such party, including the
RSA Software (in the case of RSA) and know-how, technology, techniques, and
business, product, and marketing plans of each such party (collectively, the
"Know-How"), all of which are confidential and proprietary to, and trade secrets
of, the disclosing party. The receiving party agrees to hold the Know-How
disclosed to it and, in the case of OEM the RSA Software, within its own
organization and shall not, without the specific written consent of the
disclosing party or as expressly authorized herein, utilize in any manner,
publish, communicate, or disclose any part of the disclosing party's Know-How or
the RSA Software (in the case of OEM) to third parties. This Section 6.1 shall
impose no obligations on either party with respect to any Know-How which: (i) is
in the public domain at the time disclosed by the disclosing party; (ii) enters
the public domain after disclosure other than by a breach of the receiving
party's obligations hereunder or by a breach of another party's confidentiality
obligation; or (iii) is shown by documentary evidence to have been known by the
receiving party prior to its receipt from he disclosing party. Each party will
take such steps as are consistent with its protection of its own confidential
and proprietary information (but will in no event exercise less than reasonable
care) to insure that the provisions of this Section 6.1 are not violated by its
End User Customers, Distributors, employees, agents or any other person.
6.2 Source Code. OEM acknowledges the extreme importance of the
confidentiality and trade secret status of the RSA Source Code and OEM agrees,
in addition to complying with the requirements of Section 6.1 as it relates to
the RSA Source Code, to: (i) only use the RSA Source Code at the address set
forth on page 1 hereof or such alternate location specified in the applicable
License/Product Schedule; (ii) inform any employee that is granted access to all
or any portion of the RSA Source Code of the importance of preserving the
confidentiality and trade secret status of the RSA Source Code; and (iii)
maintain a controlled, secure environment for the storage and use of the RSA
Source Code.
6.3 Publicity. Neither party will disclosed to third parties, other than
its agents and representatives on a need-to-know basis, the terms of this
Agreement or any exhibits hereto (including without limitation any
License/Product Schedule) without the prior written consent of the other party,
except (i) either party may disclose such terms to the extent required by law;
(ii) either party may disclose the existence of this Agreement; and (iii) RSA
shall have the right to disclose that OEM is an OEM of the RSA Software and that
any publicly-announced Bundled Product incorporates the RSA Software.
7. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO
THE OTHER FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES
ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST
PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS INFORMATION, EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. REGARDLESS OF
WHETHER ANY ACTION OR CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE:
(I) EXCEPT FOR RSA'S OBLIGATIONS ARISING UNDER SECTION 8, UNDER NO CIRCUMSTANCES
SHALL RSA'S TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED
THE TOTAL AMOUNT PAID BY OEM HEREUNDER, AND (II) EXCEPT FOR OEM'S LIABILITY
RESULTING FROM BREACH OF SECTIONS 2 AND 6, UNDER NO CIRCUMSTANCES SHALL OEM'S
TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THREE (3)
TIMES THE TOTAL AMOUNT PAYABLE BY OEM TO RSA HEREUNDER.
8. INTELLECTUAL PROPERTY INDEMNITY
8.1 Duty to Defend. RSA agrees that it shall, at its own expense, defend,
or at its option settle, any action instituted against OEM, and pay any award or
damages assessed or settled upon against OEM resulting from such action, insofar
as the same is based upon a claim that any Licensed Software used within the
terms of this Agreement and the applicable License/Product Schedule infringes
any United States patent, copyright or trade secret or a claim that RSA has no
right to license the Licensed Software hereunder, provided that OEM gives RSA:
(i) prompt notice in writing of such action (ii) the
<PAGE>
right to control and direct the investigation, preparation, defense and
settlement of the action; and (iii) reasonable assistance and information.
8.2 RSA Options. If, as a result of any binding settlement among the
parties or a final determination by a court of competent jurisdiction, any of
the Licensed Software is held to infringe and its use is enjoined, or if RSA
reasonably determines in its sole discretion that the Licensed Software may
become subject to an injunction, RSA shall have the option to: (i) obtain the
right to continue use of the Licensed Software; (ii) replace or modify the
Licensed Software so that it is no longer infringing; or (iii) refund the
License Fees paid by OEM hereunder less depreciation for use assuming straight
line depreciation over a five (5) -year useful life and terminate the Agreement.
8.3 Exclusions. Notwithstanding the foregoing, RSA shall have no
liability under this Section 8 if the alleged infringement arises from (I) the
use, in the manner specified in the relevant User Manual, of other than the
current unaltered (including Interface Modifications) release of the Licensed
Software, or (II) combination of the Licensed Software with other equipment or
software not provided by RSA, if such action would have been avoided but for
such use or combination.
8.4 Exclusive Remedy. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
AGREEMENT, THE FOREGOING STATES RSA'S ENTIRE LIABILITY AND OEM'S EXCLUSIVE
REMEDY FOR PROPRIETARY RIGHTS INFRINGEMENT.
9. TERM AND TERMINATION
9.1 Term. The license rights granted hereunder shall be effective with
respect to each License/Product Schedule as of the date thereof and shall
continue in full force and effect for each item of Licensed Software for the
period set forth on the applicable License/Product Schedule unless sooner
terminated pursuant to the terms of this Agreement.
9.2 Termination. Either party shall be entitled to terminate this
Agreement at any time on written notice to the other in the event of a material
default by the other party and a failure to cure such default within a period of
thirty (30) days following receipt of written notice specifying that a default
has occurred.
9.3 Insolvency. Upon (i) the institution of any proceedings by or against
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceeding are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or the appointment of a
receiver, liquidator or trustee, of any of either party's property or assets; or
(iii) the liquidation, dissolution or winding up of either party's business;
then and in any such events this Agreement may immediately be terminated by the
other party upon written notice.
9.4 Termination for Convenience. The parties acknowledge and agree that
OEM may at any time delay, interrupt or cease use of the Licensed Software, but
this Agreement and all the terms and conditions contained herein or any
applicable License/Product Schedule shall continue in full force, including any
obligations to make quarterly reports. OEM may elect to terminate this
Agreement upon ninety (90) days written notice at it is expressly understood
that such termination shall not discharge any payment obligations accrued as of
the date of such termination or entitle OEM to a refund of any amounts
previously paid to RSA.
9.5 Effect of Termination. Upon the expiration or termination of this
Agreement (or the license rights under a particular License/Product Schedule),
OEM shall cease making copies of, using or licensing the RSA Software, User
Manual and Bundled Products, excepting only such copies of Bundled Products
necessary to fill orders placed with OEM prior to such expiration or
termination. OEM shall destroy all copies of the RSA Software, User Manual and
Bundled Products not subject to any then-effective license agreement with an End
User Customer and all information and documentation provided by RSA to OEM
(including all Know-How), other than such copies of the RSA Object Code, the
User Manual and the Bundled Products as are necessary to enable OEM to perform
its continuing support obligations in accordance with Section 5.2, if any.
Notwithstanding the foregoing, if OEM has licensed RSA Source Code hereunder,
for a period of one (1) year after the date of expiration or termination of the
license rights granted under this Agreement for any reason other than as a
result of default or breach by OEM, OEM may retain one (1) copy of the RSA
Source Code and is hereby licensed for such term to use such copy solely for the
purpose of supporting End User Customers. Upon the expiration of such one (1)-
year period, OEM shall return such single copy of the RSA Source Code to RSA or
certify to RSA that the same has been destroyed. Any expiration or termination
shall not discharge any
<PAGE>
obligation to pay License Fees which have accrued or are owing as of the
effective date of such expiration or termination.
9.6 Survival of Certain Terms. The following provisions shall survive any
expiration or termination: 2.2, 2.3, 3.8, 4.3, 6, 7, 9 and 10.
10. MISCELLANEOUS PROVISIONS
10.1 Governing Law and Jurisdiction. This Agreement will be governed by
and construed in accordance with the laws of the State of California,
irrespective of its choice of law principles. All disputes arising out of this
Agreement will be subject to the exclusive jurisdiction and venue of the
California state courts and the United States District Court for the Northern
District of California, and the parties consent to the personal and exclusive
jurisdiction of these courts. The parties agree that the United Nations
Convention on Contracts for the International Sale of Goods shall not apply to
this Agreement.
10.2 Binding upon Successors and Assigns. Except as otherwise provided
herein, this Agreement shall be binding upon, and inure to the benefit of, the
successors, representatives, administrators and assigns of the parties hereto.
Notwithstanding the generality of the foregoing, this Agreement shall not be
assignable by OEM, by operation of law or otherwise, without the prior written
consent of RSA, which shall not be unreasonably withheld; provided, however,
that RSA may withhold its consent to the assignment of this Agreement with
respect to any License/Product Schedule providing for a paid-up License Fee.
Any such purported assignment or delegation without RSA's written consent shall
be void and of no effect.
10.3 Severability. If any provision of this Agreement is found to be
invalid or unenforceable, such provision shall be severed from the Agreement and
the remainder of this Agreement shall be interpreted so as best to reasonably
effect the intent of the parties hereto. It is expressly understood and agreed
that each and every provision of this Agreement is intended by the parties to be
severable and independent of any other provision and to be enforced as such.
10.4 Entire Agreement. This Agreement and the exhibits and schedules
hereto constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereto and supersede all prior and
contemporaneous agreements, representations and understandings between the
parties.
10.5 Amendment and Waivers. Any term or provision of this Agreement may
be amended, and the observance of any term of this Agreement may be waived, only
by a writing signed by the party to be bound.
10.6 Notices. Any notice, demand, or request with respect to this
Agreement shall be in writing and shall be effective only if it is delivered by
hand or mailed, certified or registered mail, postage prepaid, return receipt
requested, addressed to the appropriate party at its address set forth on page
1. Such communications shall be effective when they are received by the
addressee; but if sent by certified or registered mail in the manner set forth
above, they shall be effective not later than ten (10) days after being
deposited in the mail. Any party may change its address for such communications
by giving notice to the other party in conformity with this Section.
10.7 Export Compliance and Foreign Reshipment Liability. THIS AGREEMENT
IS EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS
ON THE EXPORT FROM THE UNITED STATES OF AMERICA OF THE RSA SOFTWARE OR BUNDLED
PRODUCTS OR OF INFORMATION ABOUT THE RSA SOFTWARE OR BUNDLED PRODUCTS WHICH MAY
BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT OF THE UNITED STATES OF AMERICA.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, OEM SHALL
NOT EXPORT OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY RSA SOFTWEAR OR BUNDLED
PRODUCTS OR INFORMATION PERTAINING THERETO TO ANY COUNTRY TO WHICH SUCH EXPORT
OR REEXPORT IS RESTRICTED OR PROHIBITED, OR AS TO WHICH SUCH GOVERNMENT OR ANY
AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
10.8 Federal Government License. OEM and each of OEM's Distributors shall
in all proposals and agreements with the United States government or any
contractor of the United States government identify and license the Bundled
Product, including the RSA Object Code incorporated therein, as follows: (i)
for acquisition
<PAGE>
by or on behalf of civilian agencies, as necessary to obtain protection as
"commercial computer software" and related documentation in accordance with the
terms of OEM's or such Distributor's customary license, as specified in 48
C.F.R. 12.212 of the Federal Acquisition Regulations and its successor
regulations; or (ii) for acquisition by or on behalf of units of the Department
of Defense, as necessary to obtain protection as "commercial computer software"
as defined in 48 C.F.R. 227.7014(a)(I) of the Department of Defense Federal
Acquisition Regulation Supplement (DFARS) and related documentation in
accordance with the terms of OEM's or such Distributor's customary license, as
specified in 48 C.F.R. 227.7202.1 of DFARS and its successor regulations.
10.9 Remedies Non-Exclusive. Except as otherwise expressly provided, any
remedy provided for in this Agreement is deemed cumulative with, and not
exclusive of, any other remedy provided for in this Agreement or otherwise
available at law or in equity. The exercise by a party or any remedy shall not
preclude the exercise by such party of any other remedy.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the last signature below.
OEM:
SEATTLE SOFTWARE LABS, INC.
By: /s/ CG Slatt
----------------------------------
Printed Name: Christopher G. Slatt
------------------------
Title: President & CEO
-------------------------------
Date: 14 August 1997
-------------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
----------------------------------
Printed Name: D. James Bidzos
------------------------
Title: President
-------------------------------
Date: 8/26/97
-------------------------------
<PAGE>
License/Product Schedule Number: 0897-SEA-O-LPS-1
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
Seattle Software Labs
- --------------------------------------------------------
OEM Master License Agreement Number:
- --------------------------------------------------------
0797-SEA-O-MLA-1 (the "Agreement")
- --------------------------------------------------------
Date of OEM Master License Agreement:
August , 1997
- --------------------------------------------------------
This License/Product Schedule Amends Schedules Dated:
N/A
- --------------------------------------------------------
Term of Agreement for this Bundled Product:
Perpetual
- --------------------------------------------------------
Bundled Product:
OEM's "WatchGuard VPN" software firewall product currently known as "WatchGuard
VPN Remote Office," a security add-on module which filters data in firewall-to-
firewall communications and Windows 95 platform client-to-firewall
communications.
- --------------------------------------------------------------------------------
RSA Software:
BSAFE v.3.0 (provided by RSA on UNIX platform)
- --------------------------------------------------------------------------------
OEM may obtain copies of the RSA Software on other platforms as may be generally
available at RSA's then current published price list, each additional platform
version of which will be covered RSA Software under this Licensed/Product
Schedule.
Delivery of RSA Software to OEM:
- --------------------------------------------------------------------------------
One (1) copy of each of the RSA Object Code, the RSA Source Code (if licensed
hereunder) and the User Manual for the RSA Software identified above:
[_] has been received by OEM, or
[X] will be delivered by RSA as soon as practicable,
but not later than ten (10) business days after the date of execution of this
License/Product Schedule.
<PAGE>
LICENSE FEES
- ------------
Source Code License Fee for this License/Product Schedule:
[ * ].
Object Code License Fees for this License/Product Schedule:
Fixed Dollar License Fee for Bundled Product using only the Currently
Licensed Symmetric Algorithms:
[ * ] for each copy/unit of the Bundled Product.
Prepayment of License Fees for this License/Product Schedule:
[ * ] payable upon execution of this License/Product Schedule.
Present Annual Maintenance Fee for this License/Product Schedule: [ * ].
SPECIAL TERMS AND CONDITIONS
The following Special Terms and Conditions shall apply to the Bundled Products
covered by this License/Product Schedule:
1. No Service Bureau. Section 2.2.3 of this Agreement is amended in its
entirety to read as follows:
No Standalone Product. OEM may not in any way sell, lease, rent,
license, sublicense or otherwise distribute the RSA Software or any part
thereof or the right to use the RSA Software or any part thereof to any
person or entity except as part of a Bundled Product.
2. Amendments. The following amendments shall apply to the specified
provisions of the Agreement for the bundled Products covered by this
License/Product Schedule as follows:
a. Section 6.3. Section 6.3 is amended by the deletion of the term "RSA"
after the term "(III)" and replacing it with the phrase "either party".
b. Section 3.8. Section 3.8 is amended by the addition of the following
sentence at the end of the section:
Any information found or developed in the course of such audit shall be
treated as Confidential Information in accordance with Section 6
Confidentiality unless otherwise approved by OEM provided, however,
that any such Confidential Information may be used during court
proceedings stemming from performance of this Agreement.
c. Section 3.9. Section 3.9 is amended by the deleting of the second
sentence of the section, and replacing it with the following sentences:
OEM shall distribute its Evaluation Copies of the Bundled Product by
incorporating the software component of the Bundled Product into and
made part of the hardware component of the Bundled Produce ("Hardware
Evaluation Copies"). OEM shall recall the Hardware Evaluation Copies
within sixty (60) days of distribution. The software component of the
Bundled Product shall not operate except as part of the hardware
component of the Bundled Product.
d. Section 7(i). Section 7(i) is amended by Insertion of the following
term before the term "8": "6 WHICH IS LIMITED TO HEREIN TO A CLAIM BY
OEM FOR ACTUAL DAMAGES), AND".
3. One (1) Year Private Labeling and Limited Sublicensing Option. OEM shall
have the option for One (1) Year from the date of execution of this
Agreement to exercise the rights as set forth herein (the "Option"). OEM
may exercise the Option by notify RSA in writing at least Thirty (30) Days
prior to such election.
a) Private Labeling. Notwithstanding anything to the contrary in Section
1.2 of the Agreement, OEM may authorize a Distributor to private label
End User Hardware Products and End
- ----------
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE>
User Software Products for redistribution to End User Customers by such
Distributor; provided, OEM indicates in its quarterly reports delivered
pursuant to Section 3.7 of the Agreement the identity of any
Distributor so authorized and the name of the privately labeled Bundled
Product so affected. It is understood and agreed that a Distributor
authorized to private label may not otherwise, however, modify the
Bundled Product or incorporate it into another product for
redistribution or resale. The parties agree that the License Fee for
private label rights under the Option shall be Fifty Dollars ($50.00)
per copy/unit of the Bundled Product.
b. Limited Rights to Sublicense. Notwithstanding the provisions of Section
2.2.1 of the Agreement, if the Option is exercised by OEM, RSA further
hereby grants to OEM a non-exclusive, non-transferable, non-assignable
license during the term of this License/Product Schedule to sublicense
its rights granted in Section 2.1, as limited by Sections 2.2 and 2.3,
of the Agreement with respect to the RSA Object Code as part of the
Bundled Products to OEM's licensees in the Territory (each, an "OEM
Sublicensee") for use only (i) in their own products in which
substantial functionality or value is added to the Bundled Products so
that such products are not a substitute for the RSA Software, or (ii)
in their own privately-labeled products consisting of the Bundled
Products with no modifications other than minor packaging changes
(collectively, "Sublicensee Products"). All sublicenses permitted under
this paragraph shall be subject to all of the following conditions: (i)
all such sublicenses will be granted in a signed writing containing at
a minimum all of the restrictions set forth in Exhibit "A-1" attached
hereto, and RSA shall be an express third party beneficiary of such
sublicense agreements; (ii) OEM shall use its best efforts to enforce
the provisions of such sublicenses as they relate to RSA and the RSA
Software; (iii) the Sublicensee Products shall incorporate the Licensed
Functionality of the RSA Object Code in such a way so as to ensure that
the security functions of the RSA Object Code may only be accessed by
the functionality of the Sublicensee Product in which it is included so
that the RSA Object Code shall not be directly accessible to End User
Customers or to software products other than the Sublicensee Products;
(iv) the OEM Sublicensees to whom such rights are sublicensed shall
have no further right to sublicense such rights; (v) on or before the
date that OEM grants any sublicense hereunder, OEM shall submit to RSA
an Exhibit "A" Extension in the form attached as Exhibit "A ___" for
the applicable OEM Sublicensee along with prepaid License Fees in the
amount of [ * ]; (vi) OEM shall report to RSA in its reports delivered
pursuant to Section 3.5 of the Agreement the number of copies of
Sublicensee Products which are distributed by all OEM Sublicensees, and
shall pay RSA License Fees pursuant to Section 3.3 of the Agreement
based on the number of copies distributed applying the same Fixed
Dollar License Fees referred to above for the Bundled Products; and
(vii) any rights of any OEM Sublicensee sublicensed by OEM shall
survive only so long as both the Amendment and the sublicense between
OEM and such OEM Sublicensee remain in effect.
THE PROVISIONS OF THIS LICENSE/PRODUCT SCHEDULE ARE PROVIDED AS A BASIS
OF DISCUSSION BETWEEN OEM AND RSA AND WILL BECOME BINDING UPON THE
PARTIES ONLY IF (1) OEM HAS EXECUTED A OEM MASTER LICENSE AGREEMENT AND
HAVE INDICATED THEIR ACCEPTANCE OF THE TERMS CONTAINED IN THIS
LICENSE/PRODUCT SCHEDULE BY THEIR SIGNATURES BELOW ON OR BEFORE AUGUST
15, 1997; AND (2) RSA HAS EXECUTED THE OEM MASTER LICENSE AND THIS
LICENSE/PRODUCT SCHEDULE.
OEM:
SEATTLE SOFTWARE LABS, INC.
By: /s/ C.G. Slatt
-------------------------------------
Printed Name: Christopher G. Slatt
---------------------------
Title: President & CEO
----------------------------------
Date: 14 August 1997
----------------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
-------------------------------------
Printed Name: D. James Bidzos
---------------------------
Title: President
---------------------------------
Date: 8/26/97
-----------------------------------
<PAGE>
EXHIBIT "A-1"
MANDATORY SUBLICENSE TERMS
All sublicense agreements for the license of the RSA Object Code in the
Bundled Product by OEM to OEM Sublicensees will include all of the following
restrictions:
I. The OEM Sublicensee will receive no greater rights with respect to the
Bundled Product that those permitted in Section 2.1 of the Agreement as limited
by Sections 2.2 and 2.3 of the Agreement.
II. The OEM Sublicensee will agree not to remove or destroy any
proprietary, trademark or copyright markings or confidentiality legends placed
upon or contained within the Bundled Product or any related materials or
documentation.
III. If applicable, the OEM Sublicensee will agree that any sublicense of
the Bundled Product to the United States Government or an agency thereof will
state that such software is subject to limited rights in technical data and
restricted rights applicable to commercial computer software developed entirely
at private expense and that any associated documentation will include a
restricted rights legend conforming to the Federal Acquisition Regulations
(FARs) or the Department of Defense Federal Acquisition Regulations Supplement
(DFARS), as applicable, then in effect that apply to software developed entirely
at private expense.
IV. The OEM Sublicensee will agree not to export or reexport any Bundled
Product or any part thereof or information pertaining thereto to any country for
which a U.S. government agency requires an export license or other governmental
approval without first obtaining such license or approval.
V. The OEM Sublicensee will agree that, except for the limited licenses
granted under the license agreement, OEM and its licensors will retain full and
exclusive right, title and ownership interest in and to the Bundled Product and
in any and all related patents, trademarks, copyrights or proprietary or trade
secret rights.
VI. OEM will have the right to terminate the license for the OEM
Sublicensee's breach of a material term. The OEM Sublicensee will agree that,
upon termination of the license, the OEM Sublicensee will return to OEM all
copies of the object code and documentation for the Bundled Product or certify
to OEM that the OEM Sublicensee has destroyed all such copies, except that the
OEM Sublicensee may retain one (1) copy of the object code for the Bundled
Product solely for the purpose of supporting the OEM Sublicensee's existing
licensees.
VII. The OEM Sublicensee will agree, to the extent permitted by applicable
law, not to reverse compile, disassemble or modify the Bundled Product.
VIII. The OEM Sublicensee will agree not to distribute the Bundled Product
or any part thereof except pursuant to a license agreement meeting the
requirements in Section 5.3 of the Agreement.
IX. The sublicense agreement will state that in no event will OEM or its
licensors be liable for indirect, incidental, special, consequential or
exemplary damages arising out of or related to the Bundled Product, including
but not limited to lost profits, business interruption or loss of business
information, even if such party has been advised of the possibility of such
damages.
EXHIBIT B
<PAGE>
LICENSEE SEALS AND TRADEMARKS
RSA Licensee Seal:
Licensees are also permitted to use the following RSA trademarks, as applicable,
in ads, product packaging, documentation or collateral materials, provided that
they use the correct trademark designator, depicted below, and identify RSA as
the owner of the mark.
RC2(R) Symmetric Block Cipher, RC4(R) Symmetric Stream Cipher
RC5(TM) Symmetric Block Cipher
BSAFE(TM), TIPEM(TM)
RSA Public Key Cryptosystem(TM)
MD(TM), MD2(TM), MD4(TM), MD5(TM)
RSA reserves the right to update this Exhibit "B" from time to time upon
reasonable notice to licensee.
<PAGE>
LICENSED SOFTWARE AND FIELD OF USE RESTRICTION FOR THIS BUNDLED PRODUCT
<TABLE>
<CAPTION>
SOURCE RIGHT TO INCLUDE
CODE OBJECT CODE IN FIELD OF USE DESCRIBE FIELD OF
LICENSE BUNDLED PRODUCT RESTRICTION USE RESTRICTION
<S> <C> <C> <C> <C> <C> <C> <C>
BSAFE YES NO YES NO YES NO
RSA Public Key Cryptosystem [ ] [X] [ ] [X] [ ] [X]
Diffie-Hellman Key Negotiation [ ] [X] [ ] [X] [ ] [X]
Bloom-Shamir Secret Sharing [ ] [X] [ ] [X] [ ] [X]
Data Encryption Standard (DES) [X] [ ] [X] [ ] [X] [ ] */
Extended Data Encryption Standard (DESX) [X] [ ] [X] [ ] [X] [ ] */
Triple DES (3DES) [X] [ ] [X] [ ] [X] [ ] */
RC2 Variable-Key Size Symmetric Block [X] [ ] [X] [ ] [X] [ ] */
Cipher
RC4 Variable-Key Size Symmetric [X] [ ] [X] [ ] [X] [ ]
Stream Cipher
RC5 Variable-Key Size Symmetric Block [X] [ ] [X] [ ] [X] [ ] */
Cipher
MD Hashing Algorithm [X] [ ] [X] [ ] [X] [ ] */
MD2 Hashing Algorithm [X] [ ] [X] [ ] [X] [ ] */
MD5 Hashing Algorithm [X] [ ] [X] [ ] [X] [ ] */
Secure Hashing Algorithm (SHA) [X] [ ] [X] [ ] [X] [ ] */
Digital Signature Algorithm (DSA) [X] [ ] [X] [ ] [X] [ ] */
TIPEM (all set forth below) [ ] [X] [ ] [X] [ ] [X]
RSA Public Key Cryptosystem
Data Encryption Standard (DES)
RC2 Variable Key Size Symmetric Block
Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
BCERT [ ] [X] [ ] [X] [ ] [X]
</TABLE>
__________
*/ Solely for privacy in firewall-to-firewall and Windows platform client-to-
firewall communications using the Bundled Product.
<PAGE>
RSA DATA SECURITY(TM)
MAINTENANCE AND SUPPORT AGREEMENT
OEM Master License: 0897-SEA-O-MLA-1 Date: August 13, 1997
---------------- ---------------
License/Product Schedule: 0897-SEA-O-LPS-1 Date: August 13, 1997
---------------- ---------------
THIS MAINTENANCE AND SUPPORT AGREEMENT ("Agreement"), effective as of the
later date of execution ("Effective Date"), is entered into by and between RSA
Data Security, Inc., a Delaware corporation ("RSA"), having a principal address
at 100 Marine Parkway, Suite 500, Redwood City, California 94065, and the entity
named below ("OEM"), having a principal address as set forth below.
OEM:
Seattle Software Labs, a corporation
- ----------------------------------------
(Name and jurisdiction of incorporation)
316 Occidental Avenue South
- ----------------------------------------
(Address)
Suite 300
- ----------------------------------------
Seattle, WA 98104
- ----------------------------------------
OEM Legal Contact:
Don Lenhart, VP 206 521 8373
-------------------------------------
(name, telephone and title)
OEM Billing Contact:
Shari Elsoe, Controller 206 521 8366
-------------------------------------
(name, telephone and title)
OEM Technical Contact:
Chris Boscelo 206 521 8348
-------------------------------------
(name, telephone and title)
OEM Commercial Contact:
Don Lenhart, VP Strategic Development. 206.521.8373
---------------------------------------------------
(name, telephone and title)
Initial Maintenance Fee: [ * ]
1. DEFINITIONS
All capitalized terms used in this Agreement shall have the meaning set
forth in the OEM Agreement and License/Product Schedule, unless an alternate
definition is set forth below. In the event of any inconsistency, the
definitions set forth in this Agreement shall be controlling, but only for the
purposes of interpreting or construing this Agreement.
1.1 "License/Product Schedule" means the schedule identified and having
the effective date set forth above which specifies the RSA Software, Licensed
Software, use limitations (if any), License Fees, and other matters with respect
to the Bundled Product licensed under such License/Product Schedule.
1.2 "New Release" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number only to the right of the decimal point (e.g., Version 2.2 to Version
2.3).
1.3 "New Version" means a version of the RSA Software which shall
generally be designated by a new version number which has changed from the prior
number to the left of the decimal point (e.g., Version 2.3 to Version 3.0).
1.4 "OEM Agreement" means the agreement identified and having the
effective date as set forth above and which specifies the terms and conditions
of license of the RSA Software, as further defined in the License/Product
Schedule.
1.5 "RSA Object Code" means the Licensed Software in machine-readable,
compiled object code form.
1.6 "RSA Software" means RSA proprietary software identified as RSA
Software on the License/Product Schedule.
- ----------
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE>
1.7 "RSA Source Code" means the mnemonic, high level statement versions of
the Licensed Software written in the source language used by programmers.
2. MAINTENANCE AND SUPPORT SERVICES
2.1 General. This Agreement sets forth the terms under which RSA will
provide maintenance and support to OEM for the RSA Software licensed to OEM
under the License/Product Schedule identified on the first page hereof, which
use is governed by the terms of the OEM Agreement and such License/Product
Schedule. The use of and license to any software provided to OEM hereunder
shall be governed by the terms of the OEM Agreement and License/Produce
Schedule.
2.2 Support and Maintenance. RSA agrees to provide the maintenance and
support specified in this Agreement and OEM agrees to pay RSA's then-current
annual support and maintenance fee ("Maintenance Fee").
2.3 Additional Charges. In the event RSA is required to take actions to
correct a difficulty or defect which is traced to OEM errors, modifications,
enhancements, software or hardware, then OEM shall pay to RSA its time and
materials charges at RSA's rates then in effect. In the event RSA's personnel
must travel to perform maintenance or on-site support, OEM shall reimburse RSA
for any reasonable out-of-pocket expenses incurred, including travel to and from
OEM's sites, lodging, meals and shipping, as may be necessary in connection with
duties performed under this Section 2 by RSA.
2.4 Maintenance Provided by RSA. For periods for which OEM has paid the
Maintenance Fee, RSA will provide OEM with the following services:
2.4.1 Telephone Support. RSA will provide telephone support to OEM
during RSA's normal business hours. RSA may provide on-site support reasonably
determined to be necessary by RSA at OEM's location specified on page 1 hereof.
RSA shall provide the support specified in this Section 2.4.1 to OEM's employees
responsible for developing Bundled Products, maintaining Bundled Products, and
providing support to End User Customers. No more than two (2) OEM employees may
obtain such support from RSA at any one time. On RSA's request, OEM will
provide a list with the names of the employees designated to receive support
from RSA. OEM may change the names on the list at any time by providing written
notice to RSA.
2.4.2 Error Correction. In the event OEM discovers an error in the
Licensed Software which causes the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit to RSA
a written report describing such error in sufficient detail to permit RSA to
reproduce such error. Upon receipt of any such written report, RSA will use its
reasonable business judgment to classify a reported error as either: (i) a
"Level 1 Severity" error, meaning an error that causes the Licensed Software to
fail to operate in a material manner or to produce materially incorrect results
and for which there is no workaround or only a difficult workaround; or (ii) a
"Level 2 Severity" error, meaning an error that produces a situation in which
the Licensed Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Software suffers not
material impact. RSA will acknowledge receipt of a conforming error report
within two (2) business days and (A) will use its continuing best efforts to
provide a correction for any Level 1 Severity error to OEM as early as
practicable; and (B) will use its reasonable efforts to include a correction for
any Level 2 Severity error in the next release of the RSA software.
2.4.3 New Releases and New Versions. RSA will provide OEM
information relating to New Releases and New Versions of the RSA Software during
the term of this Agreement. New Releases will be provided at no additional
charge. New Versions will be provided at RSA's standard upgrade charges in
effect at the time. Any New Releases or New Versions acquired by OEM
<PAGE>
shall be governed by all of the terms and provisions of the OEM Agreement.
2.5 Lapsed Maintenance. If this Agreement has lapsed, OEM may obtain a
license of a New Release of the applicable RSA Software or any service which is
provided as a part of maintenance and support by becoming current on Maintenance
Fees as provided in Section 3.1 to the date such New Release is licensed or such
service is provided.
3. MAINTENANCE AND SUPPORT FEES
3.1 Maintenance and Support Fees. In consideration of RSA's providing the
maintenance and support services described herein, OEM agrees to pay RSA the
initial Maintenance Fee set forth on the first page hereof. Such amount shall
be payable for the first year upon the execution of this Agreement and for each
subsequent year in advance of the commencement of such year. The Maintenance
Fee may be modified by RSA for each renewal term by written notice to OEM at
least ninety (90) days prior to the end of the then-current term. If OEM elects
not to renew this Agreement for successive terms (as provided in Section 6.1
below) OEM may re-enroll only upon payment of the annual Maintenance Fee for the
coming year and for all Maintenance Fees that would have been paid had OEM not
ceased maintenance and support.
3.2 Taxes. All taxes, duties, fees and other governmental charges of any
kind (including sales and use taxes, but excluding taxes based on the gross
revenues or net income of RSA) which are imposed by or under the authority of
any government or any political subdivision thereof on the Maintenance Fees or
any aspect of this Agreement shall be borne by OEM and shall not be considered a
part of, a deduction from or an offset against Maintenance Fees.
3.3 Terms of Payment. Maintenance Fees due RSA hereunder shall be paid by
OEM to the attention of the Software Licensing Department at RSA's address set
forth above on or before the thirtieth (30th) day after the Effective Date and,
in the case of renewal terms, prior to the each anniversary thereof. A late
payment penalty on any Maintenance Fees not paid when due shall be assessed at
the rate of one percent (1%) per thirty (30) days.
3.4 U.S. Currency. All payments hereunder shall be made in lawful United
States currency.
4. CONFIDENTIALITY
4.1 Confidentiality. The parties agree that all obligations and
conditions respecting confidentiality, use of source code and publicity in
Section 6 of the OEM Agreement shall apply to the parties' performance of this
Agreement.
5. USE LIMITATIONS; TITLE; INTELLECTUAL PROPERTY INDEMNITY; LIMITATION OF
LIABILITY
Any an all RSA Software provided to OEM pursuant to this Agreement shall
constitute RSA Software under the OEM Master License Agreement. As such, the
parties respective interests and obligations relating to the RSA Software,
including but not limited to license and ownership rights thereto, use
limitations (if any), intellectual property indemnity and limitation of
liability, shall be governed by the terms of the OEM Agreement and the
License/Product Schedule.
6. TERM AND TERMINATION
6.1 Term. This Agreement shall commence on the Effective Date hereof and
shall remain in full force and effect for an initial period of one (1) year,
unless sooner terminated in accordance with this Agreement. Upon expiration of
the initial period and each successive period, this Agreement shall
automatically renew for an additional one (1) year period, unless either party
has notified the other of its intent to terminate as set forth in Section 6.2.3
herein.
<PAGE>
6.2 Termination.
6.2.1 Either party shall be entitled to terminate this Agreement at
any time on written notice to the other in the event of a material default by
the other party of this Agreement and a failure to ______ such default within a
period of thirty (30) days following receipt of written notice specifying that a
default has occurred.
6.2.2 This Agreement shall automatically terminate in the event that
the OEM Agreement is terminated in accordance with its terms.
6.2.3 This Agreement may also be terminated by OEM for any or no
reason by providing written notice of such intent at least ninety (90) days
prior to the end of the then-current term. RSA may cease to offer support and
maintenance for future maintenance terms by notice delivered to OEM ninety (90)
days or more before the end of the then-current maintenance term.
6.2.4 Upon (i) the institution of any proceedings by or against
either party seeking relief, reorganization or arrangement under any laws
relating to insolvency, which proceeding are not dismissed within sixty (60)
days; (ii) the assignment for the benefit of creditors, or upon the appointment
of a receiver, liquidator or trustee, of any of either party's property or
assets; or (iii) the liquidation, dissolution or winding up of either party's
business, then and in any such events this Agreement may immediately be
terminated by the other party upon written notice.
6.3 Survival of Certain Terms. The following provisions shall survive any
expiration or termination: 2.2, 2.3, 4.2, 6 and 7.
7. MISCELLANEOUS PROVISIONS
This Agreement incorporates by this reference Section 10 of the OEM
Agreement in its entirety.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
of the later signature below.
OEM:
SEATTLE SOFTWARE LABS, INC.
By: /s/ C.G. Slatt
----------------------------------
Printed Name: Christopher G. Slatt
------------------------
Title: President & CEO
-------------------------------
Date: 14 August 1997
--------------------------------
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
---------------------------------
Printed Name: D. James Bidzos
------------------------
Title: President
-------------------------------
Date: 8/26/97
-------------------------------
<PAGE>
AMENDMENT NUMBER ONE TO
OEM MASTER LICENSE AGREEMENT
THIS AMENDMENT NUMBER ONE TO OEM MASTER LICENSE AGREEMENT (the
"Amendment"), effective as of the date of the later signature below, is entered
into between RSA Data Security, Inc., a Delaware corporation ("RSA"), and
WatchGuard Technologies, Inc., a Delaware corporation ("OEM").
RECITALS
A. RSA and OEM, under its previous name, "Seattle Software Labs, Inc."
entered into that certain OEM Master License Agreement No. 0897-SEA-O-MLA-1
dated as of August 26, 1997 (the "Agreement"), pursuant to which RSA granted to
OEM certain limited rights in the RSA Software.
B. Subsequently, OEM has changed its name to WatchGuard Technologies,
Inc.
C. The parties now wish to amend the Agreement as set forth in this
Amendment.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used and not otherwise defined in this
Amendment shall have the meanings designated in the Agreement.
2. Replacement Exhibit "A". RSA and OEM agree that License/Product
Schedule No. 0897-SEA-O-LPS-1 (initial Exhibit "A") to the Agreement dated
August 26, 1997 is hereby replaced in its entirety with License/Product Schedule
No. 0398-WAT-O-LPS-2 (Exhibit "A") attached to this Amendment.
3. Effect of Amendment. This Amendment is an amendment to the Agreement
effective as of the date of the later signature hereto. In the event of any
inconsistency between the terms of this Amendment and the Agreement, the terms
of this Amendment shall be controlling. Except as expressly amended above, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment and the attached
Exhibit "A" to be executed by their duly authorized representatives.
OEM:
WATCHGUARD TECHNOLOGIES, INC. RSA DATA SECURITY, INC.
By: /s/ C.G. Slatt By: /s/ Albert E. Sisto
-------------------------- ----------------------------
Printed Name: C.G. Slatt Printed Name: Albert E. Sisto
---------------- ------------------
Title: President & CEO Title: Chief Operating Officer
----------------------- -------------------------
Date: March 25, 1998 Date: March 26, 1998
------------------------ --------------------------
<PAGE>
License/Product Schedule Number: 0398-WAT-O-LPS-2
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
WatchGuard Technologies, Inc. (formerly Seattle Software Labs, Inc.)
OEM Master License Agreement Number:
0897-SEA-O-MLA-1
Date of OEM Master License Agreement:
August 26, 1997
This License/Product Schedule Amends Schedules Dated:
August 26, 1997 and supersedes it in its entirety as of the effective date of
this License/Product Schedule No. 0398-WAT-O-LPS-2.
Term Agreement for this Bundled Product:
Perpetual
Bundled Products:
OEM's software VPN firewall product currently known as "WatchGuard Security
Management System" which runs on OEM's hardware product currently known as
"WatchGuard Firebox." No right is granted herein for a Bundled Product which is
an add-on module.
RSA Software:
BSAFE v. 3.0 and BCERT v. 1.0 for UNIX
OEM may obtain copies of the RSA Software on other platforms as may be generally
available at RSA's then current published list price, each additional platform
version of which will be covered RSA Software under this License/Product
Schedule.
Delivery of RSA Software to OEM:
One (1) copy of each of the RSA Object Code, the RSA Source Code (if licensed
hereunder) and the User Manual for the RSA Software identified above:
[X] consisting of BSAFE v. 3.0 has been received by OEM, and
[X] consisting of BCERT v. 1.0 will be delivered by RSA as soon as
practicable, but not later than ten (10) business days after the date of
execution of this License/Product Schedule.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated March 26,
1999 except as to Note 11, as to which the date is April , 1999, in the
Registration Statement (Form S-1 No. 333-00000) and related Prospectus of
WatchGuard Technologies, Inc. for the registration of shares of its
common stock.
Seattle, Washington
April , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 11 to the financial statements.
ERNST & YOUNG LLP
Seattle, Washington
April 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 603 1,712
<SECURITIES> 0 0
<RECEIVABLES> 1,720 4,555
<ALLOWANCES> (124) (1,064)
<INVENTORY> 218 2,156
<CURRENT-ASSETS> 2,579 7,809
<PP&E> 468 1,470
<DEPRECIATION> (96) (330)
<TOTAL-ASSETS> 3,303 9,032
<CURRENT-LIABILITIES> 1,921 7,690
<BONDS> 0 0
0 0
6,129 13,204
<COMMON> 55 3,064
<OTHER-SE> 0 (1,466)
<TOTAL-LIABILITY-AND-EQUITY> 3,303 9,032
<SALES> 4,975 10,678
<TOTAL-REVENUES> 5,098 11,379
<CGS> 1,610 3,925
<TOTAL-COSTS> 7,884 16,454
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 62 (119)
<INCOME-PRETAX> (4,334) (9,119)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,334) (9,119)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,334) (9,119)
<EPS-PRIMARY> (17.17) (11.34)
<EPS-DILUTED> (17.17) (11.34)
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the financial statements of WatchGuard Technologies, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period from February 14, 1996
(date of inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998, and have issued our report thereon dated March 26, 1999, except
as to Note 11, as to which the date is April , 1999 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Seattle, Washington
March 26, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 11 to the financial statements.
ERNST & YOUNG LLP
Seattle, Washington
April 19, 1999
